Insolvency Made Clear: A Guide for Debtors

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Alternatives To Bankruptcy Box 3: WHAT IF THE DEBTOR NEARLY QUALIFIES FOR A DRO? A debtor with £1,001 of assets cannot apply for a DRO. From the debtor’s perspective, this is highly regrettable. If they qualified for the DRO, they would keep up to £1,000. If they do not qualify then they may be made bankrupt and so lose their £1,001 in the various legal fees concerned. What can the debtor do? It is a criminal offence to make a false representation in the application (s251O of the Act). It is a criminal offence to make a gift or transfer of property within two years of making an application (s251Q). A person is not guilty if they had no intention to defraud or conceal the state of affairs (s251Q(3)). It is likely to be a criminal offence to give the £1 to a friend before applying for a DRO. It is not a criminal offence to spend the £1, provided it is not done to defraud the creditors. If the money was spent on something of lasting value, this would remain the property of the debtor and count towards their assets. However, if the purchase was on food or at the cinema, nothing of value would remain afterwards. The intention of the debtor is critical. It would be a criminal offence to deliberately go to a restaurant so that their creditors do not receive the money. It is not a criminal offence if an individual feels hungry and decides to spend a few extra pounds at a restaurant. The key difference is whether or not the debtor has the motive of defrauding their creditors. The criminal offences applicable to DROs are similar as for bankruptcy, and so see Chapter 7 for more detail. If a debtor has assets of over £1,000, and debts of over £20,000, it may be possible to repay the debts until the debts fall below the critical level of £20,000. This is a sensible strategy for the debt since it allows them to keep at least £1,000. Care should be taken when repaying debts to ensure it does not constitute a preference. In practice, this means the primary motivation should not be to allow a particular creditor to be in a better position (and certainly not a connected creditor, such as a family member). A debtor who repays their landlord because they are concerned about being evicted would not be giving a preference. If a debtor increases their assets or income to above the minimum set out above, the Official Receiver can revoke the DRO. This commonly happens because the debtor receives a windfall (say, they receive an inheritance which takes them over the £1,000 limit) or because the debtor starts a new job which increases their disposable monthly income. This creates a perverse incentive not to be 9
Insolvency Law Made Clear – A Guide For Debtors promoted (and perhaps, not be employed at all). However, the effect is only a year and a relatively small increase in assets is unlikely to trigger a review by the Official Receiver. If the income arises after the DRO year, then the debtor can keep it without needing to repay their earlier debts. If a debtor qualifies for a DRO, a DRO is likely to be an even better outcome than an IVA. This is because there is no need to repay the debts: the slate is wiped clean automatically. It is also because a DRO does not require creditor approval. No creditor will choose to approve a DRO: it guarantees zero return and bars them from recovering their debt. A DRO can be challenged, but in practice, unless the creditor believes that the debtor has substantially more than £1,000 of assets, it will not be value for money for them to do so. Note the use of a DRO when negotiating an IVA: if the debtor is in a poor financial position, they may be able to use the threat of a DRO to ensure that they keep at least a few hundred pounds of assets left to themselves. A debt relief order can lead to a debt relief restriction order or undertaking: these are equivalent to bankruptcy restriction orders, for which see Chapter 9. The six organisations that can submit DROs all have websites which are written for the ordinary user and can be consulted for more information about the process. Stop press There is currently a consultation to raise the thresholds to make it easier to obtain a DRO. This would increase the total amount of debt allowable to £30,000 (from £20,000); increase the value of assets owned by the individual to £2,000 (from £1,000); and increase the level of surplus income to £100 (from £50) per month. 1.3 County Court Administration Orders A County Court Administration Order (CCAO) is another insolvency procedure where the County Court takes control of the debtor’s finances. It is rarely used. There were fewer than 150 of these orders made in 2019. Under s112 of the County Courts Act 1984, where a debtor is unable to pay a County Court judgment of less than £5,000, the court may make an order providing for the administration of their estate. This typically is the payment of the debt by instalment, or the debt may be written off after a certain time. Since the debt must be less than £5,000, the creditor could not present a bankruptcy petition in any event. The debtor needs to complete form N92, which can be found at https://www.gov.uk/ government/publications/form-n92-application-for-an-administration-order. 10
Page 1 and 2: INSOLVENCY LAW MADE CLEAR A GUIDE F
Page 3 and 4: Published June 2021 ISBN 978-1-9163
Page 6: Acknowledgments I owe special thank
Page 9 and 10: Insolvency Law Made Clear - A Guide
Page 20 and 21: Preface: the effects of the pandemi
Page 22 and 23: Legal terms defined ‘The Act’:
Page 24 and 25: Legal Terms Defined A ‘dispositio
Page 26 and 27: Legal Terms Defined a bankruptcy or
Page 28 and 29: Legal Terms Defined A ‘third part
Page 30 and 31: Introduction and aim of this book T
Page 32 and 33: Introduction And Aim Of This Book A
Page 34: Part 1 BANKRUPTCY The next few chap
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Page 46 and 47: Chapter 2 Effect of bankruptcy This
Page 48 and 49: Effect Of Bankruptcy will only choo
Page 50 and 51: Effect Of Bankruptcy Box 5: HOW MUC
Page 52 and 53: Effect Of Bankruptcy by giving noti
Page 54 and 55: Effect Of Bankruptcy the seller goe
Page 56 and 57: Effect Of Bankruptcy The judge held
Page 58 and 59: Effect Of Bankruptcy Finally, the f
Page 60 and 61: Effect Of Bankruptcy to have an awk
Page 62 and 63: Effect Of Bankruptcy 2.10 Running t
Page 64 and 65: Effect Of Bankruptcy although it is
Page 66 and 67: Effect Of Bankruptcy either volunta
Page 68 and 69: Effect Of Bankruptcy 2.16 Investiga
Page 70 and 71: Effect Of Bankruptcy ‘privileged

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