A NEW way for people to handle their debt is likely to open the floodgates to an unknown number of debtors, an insolvency expert has warned.
Thousands of people could turn to the Government’s new Debt Relief Orders (DROs) as a way out of their financial difficulty, it is claimed.
DROs allow consumers with debts below £15,000 and minimal assets or surplus income to write off their debts without entering into full-blown bankruptcy proceedings.
But R3, the insolvency trade body, said it feared there would be too few resources to deal with the number of people seeking the new order.
Peter Sargent, R3 spokesman for Huddersfield, said: “We believe that the introduction of the DRO is a positive step from the Government towards combating poverty by releasing those who are trapped in impossible debt.
“This is particularly important as the recession deepens, redundancies increase and employment is increasingly difficult to find.
“Our concern is that introduction of DROs will open the gates to an unknown number of debtors.
“Time will tell just how many people this is – but estimates so far suggest 50,000 people will be given DROs in the first year alone, which will mean that personal insolvency statistics will raise by about 40% overall.”
Individuals who meet the strict criteria for a DRO will deal directly with an approved intermediary organisation, such as the local Citizens Advice Bureau. They will be helped to complete an application online to clear up to £15,000 of unsecured debt.
The responsibility of approval and regulation will lie with the Governments’ Insolvency Service – as opposed to bankruptcies, where the order is made by the courts.
Mr Sargent, of insolvency firm Begbies Traynor in Halifax, said: “We believe that there will be a backlog of people seeking this completely new procedure, who could not do anything about their debt before because filing for bankruptcy costs in the region of £500.
“It is going to put a large administrative burden on local intermediaries and regulators.
“It is crucial that those who enter a DRO understand all their options and know exactly what they are getting into. A DRO is not an easy way out, but for all intents and purposes will have the same effects as bankruptcy.
“Financial education must also be provided to rehabilitate these individuals so that they avoid getting into this position again.”
Government needed to provide extra resources to provide the level of support.