Insolvency: 25-34 age-group biggest user of "insolvency for the poor" scheme

Logically, the poorest people with debt but some assets would find relief in bankruptcy proceedings and those with some prospect of sorting out their financial problems with active management would use an individual voluntary arrangement (IVA).

But in the middle, there is another group: described ty The Insolvency Service, these are those who "cannot pay their debts, who have no assets, a low income, no other access to debt relief and no prospect of the situation improving." It is for these that another procedure was created, the Debt Relief Order."

The Insolvency Service is running a joint campaign with several debt advice companies to encourage young people to better understand their financial position - and not to find themselves in trouble. The Insolvency Service's press notice about the scheme quotes one such adviser (1) as saying "Many struggling 25-34 year-olds might have expected to be further up the financial ladder by now. At the same age their parents would most likely have bought their first home, have a comfortable pension lined up, and be saving for the future. For today’s 25-34 year-olds the picture is much bleaker."

The Insolvency Service publishes a pdf file (it's not available on paper) called "A Guide to Debt Relief Orders" at http://www.bis.gov.uk/assets/bispartners/insolvency/docs/publication-pdfs/droguide.pdf.

It says "The Tribunals, Courts and Enforcement Act 2007 introduced a new form of debt relief called the debt relief order. 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."

Interestingly, a "DRO" is an extra-judicial process. It is, in essence, an IVA without the intervention of the Court, created by a debtor, a debt-adviser and the Insolvency Service (which, in effect, takes the place of the Court).

That the Orders are most used by the mid-20s to mid-30s age group greats a grim picture of the financial state of that age-group in England and Wales (other parts of the UK have a different regime). It might seem almost humorous to suggest that someone can be too poor to make themselves bankrupt but that is often the case: a fee and a deposit must be paid to the Court. Those in desperate straits have been known to pawn things or even borrow money from inappropriate lenders just to raise those expenses.

But one wonders how young people find themselves in a position to qualify for a scheme that has the following criteria:

- You are unable to pay your debts.- You owe up to a maximum of GBP15,000 only (not including unliquidated orexcluded debts).- Your total gross assets must not exceed GBP300. - After taking away tax, national insurance contributions and normal householdexpenses, your disposable income must not exceed GBP50 a month.- Your place of domicile (the country legally recognised as your home) must be inEngland or Wales, or at any time in the last 3 years you must have been residentor carrying on business in England or Wales.- You must not have been subject to a previous DRO within the last 6 years.- You must not be involved in any other formal insolvency procedure at the timeyou apply for a DRO

The process is ridiculously complicated: applicants are told to go to an approved intermediary and make an application on-line. There is no channel for direct application, even at the offices of The Insolvency Service. But once it's been submitted a printed and signed copy must be posted to a dedicated unit of the Insolvency Service.

Even this is not free: there is a fee of GBP90 which must be paid in cash at one of a number of designated payment points using a bar-code generated by the intermediary. Cheques are acceptable only if they are drawn on a charity that has agreed to pay the fee. In this case, it has to be posted to a different dedicated unit of the Insolvency Service, not sent with the hard copy form. The fee is non-refundable and if the application is not accepted because of errors, it cannot be resubmitted under the same fee.

The effect of the making of a DRO is simple: "The main effect of a DRO will be to place a ‘moratorium’ period on the debts listed in your DRO. This means creditors cannot take any action to recover or enforce theirdebts against you during this period. The moratorium usually lasts for 12 months from the date of the order, although there may be exceptions, and after that time the listed debts will be discharged."

This may suggest one of the reasons that the Order is so popular amongst the specified age-group. Recent graduates who get into employment are bound to repay their student loans which often run into the tens of thousands of pounds. They are looking at a significant slice of their income for a number of years being used to repay those loans. And those are the years that they would be developing the homes and families that the debt adviser spoke about. Their parents would probably have left school and taken a job, possibly an apprenticeship, and have been earning by the time they were 20. The postponement of that earning by the idea that there should be near universal university entry has backfired with many young people finding that merely getting a degree is not a passport to greater wealth. It was a neat trick to fiddle unemployment figures.

Of course, this is not the only reason: this is the first generation that will grow up poorer, on average, than their parents due to high taxes and poor pension provision.

The Insolvency Service's figures are startling but not surprising. And this age group will continue to provide a bad-news-bulge as they age. Worse, they will not be the only such bulge.

1. Joanna Elson, Chief Executive, The Money Advice Trust