Up until the beginning of 2009, where an individual had serious unsecured debt and little or no disposable income to be able to repay this, one of the only solutions which they could have employed to resolve the problem would have been bankruptcy. Once declared bankrupt, all unsecured debt would have been taken away from the individual and the pressure of paying their creditors would have been released.

Unfortunately, one of the problems which has long been identified with the bankruptcy process is that it is relatively expensive. To declare oneself bankrupt at the local court will cost c£500 (a court fee of £160 and administration charge of £330). In addition, if professional help is required to complete the bankruptcy application form (which is advisable and normally the case), this will normally cost between £350-£500 from a reputable advisor. Given these charges, the bankruptcy process is often unaffordable for those who have very little spare cash but arguably are in the most need of the solution.

In recognition of the issue with, in April 2009, the Government introduced into a new solution for individuals called a Debt Relief Order. The Debt Relief Order is intended to work in exactly the same way as bankruptcy. However, it is designed to help the poorest people resolve their debt problems.

A Debt Relief Order works in the same way as bankruptcy in the sense that once it is granted, all debts are taken away from the individual. It is highly unlikely that they will be asked to pay anything towards the debt. After on one year, anything that remains unpaid is written off by the creditors leaving the individual to get on with their life debt free.

Unlike bankruptcy, the individual does not need to apply for a debt relief order at court. Instead, the process is run by the Insolvency Service in partnership with approved debt counsellors. An approved counsellor will review the individual’s circumstances and complete the necessary application form on their behalf. The application is then sent to the official receiver for processing. The official receiver is able to authorise the order without getting the authority of the court thus saving expensive fees. The official receiver will then inform all creditors that the Debt Relief Order is in place.

The great news about the debt relief order is that although the individual will still have to pay a fee to cover the cost of the debt councillor and the official receiver, this will be c£100 compared to the £500-£1000 which may be charged for the bankruptcy process.

However, because debt relief orders have been introduced into the law with the focus of helping the very poorest individuals, not everyone will be eligible to take advantage of them. There are some key criteria which must be met before an application can be considered which are as follows:

• The individual must be insolvent – ie unable to repay their debts
• Total unsecured debt must be less than £15,000
• Total surplus income (after reasonable household expenses) must be less than £50 per month.
• Total personal assets must not equal more than £300 (although a car can be worth up to £1000)

I believe that the theory behind the introduction of debt relief orders is correct. There are many individuals in extremely difficult financial circumstances who are just unable to take advantage of bankruptcy because of the associated cost. However I suspect that due to the strict acceptance criteria, the cross section of people in financial difficulty who are actually able to take advantage of this new legislation will be relatively small. It is possible that the banks believe this too given that there has been very little discussion of the new orders in the press since their introduction in April 09.
Given this, I fear the impact that debt relief orders will have on resolving the countries debt problem will be minimal.