Sceptics see debt restriction as a treatment not a cure

They are billed as the UK’s answer to American Chapter 11 rules ­ but for individuals ­ so why is the insolvency profession not keen on enforcement restriction orders?

EROs have been designed by the government to provide court protection from creditors to those who have encountered a sudden or unforeseen change in their financial circumstances, and are likely to recover in a short period of time.

The proposal, which is likely to come into force in April 2009, will mean that debtors can apply to the courts to restrict creditors from seeking payment, but cannot stop creditors from accruing interest.

Mark Sands, KPMG insolvency partner, said: ‘It is a headline grabbing idea ­ but it is not going to address the majority of problems, merely appealing to a niche market’.

Sands added that there was a danger that the EROs would either be ‘horrendously complicated or open to abuse’.

The ERO will allow debtors to restrict charges on personal loans, credit cards and other debts for up
to a year, but does not cover government student loans, fines, secured debts, business loans or maintenance fees.

The enforcement orders are aimed at debtors who have recently been made redundant, lost their job or have suffered an illness but are likely to recover financially within a year, and are similar to bankruptcy procedures with the same charges being exempt in both cases.

Insolvency practitioners were left wondering whether this would affect a wide enough group of debtors and whether or not they were being offered something that wasn’t on the market already.

There are also fears that creditors facing a liquidity crisis will make their lending criteria even tighter as the scales tip in the debtors favour. As a debtor cannot accrue charges from creditors, they can still be charged interest, sparking concerns that interest rates will increase further.

‘Lenders could in the future make their interest higher and charges lower and the debtor will not fully understand what they are being charged for,’ Sands s aid.

The ERO is under development by the Ministry of Justice, which has not yet announced the fees involved in filing for the restriction, or how the promise that the financial circumstances would change in the future would be guaranteed.

Sands added that the ERO was ‘only treating the symptom rather than addressing the root cause of debt’.