Having Your Cake and Eating it: Debt Relief Orders and the Public Purse

Part V of the Tribunals, Courts and Enforcement Act 2007 and the Insolvency Act 1986 gives an applicant the right to apply for a debt relief order ('DRO').

Section 251(A) of the Insolvency Act 1986 provides:

"An individual who is unable to pay his debts may apply for an order under this Part ('a debt relief order') to be made in respect of his qualifying debts."

It is intended to give debt relief to people in England and Wales who owe relatively little money, have little or no disposable income and no assets to repay what they owe and cannot afford to make themselves bankrupt. A DRO has implications different to that of a person subject to a bankruptcy order. Most importantly, one is to obtain protection form creditors, whereas the other is to preserve assets for a bankrupt's creditors.

An applicant must satisfy the following criteria to apply for a DRO, the applicant must:

be unable to pay his/her debts have debts of less than £15,000 and be able to provide details of his/her secured and unsecured debts have available income of less than £50 a month have assets worth less than £300 or less including money in bank accounts or building societies. The applicant must not:

be an undischarged bankrupt; have petitioned for his own bankruptcy; be subject to a creditors' petition for bankruptcy; be currently involved in an Individual Voluntary Arrangement be subject to a Bankruptcy Restriction Order. Section 251G provides:

"(1) A moratorium commences on the effective date for a debt relief order in relation to each qualifying debt specified in the order ('a specified qualifying debt').

(2) During the moratorium, the creditor to whom a specified qualifying debt is owed -

(a) has no remedy in respect of the debt, and

(b) may not -

(i) commence a creditor's petition in respect of the debt, or

(ii)otherwise commence any action or other legal proceedings against the debtor for the debt, except with the permission of the court and on such terms as the court may impose.

(5) Nothing in this section affects the right of a secured creditor of the debtor to enforce his security."

The recent test case of R (Cooper and Payne) v Secretary of State for Work and Pensions [2010] EWHC 2162 (Admin) addressed the question of whether recovery of 'accidental' - as opposed to fraudulently obtained - overpayments of benefits during a DRO moratorium was unlawful. It should be noted that the circumstances of the two Claimants were different: one had failed to declare a...