Businesses that work on a trust basis with their customers, providing goods and services upfront, may find that trust exploited from 6 April with the introduction of Debt Relief Orders (DROs)
DROs are designed to allow low income borrowers with an alternative, and many argue easier, way to rid themselves of their debts avoiding much of the expense and hassle of going bankrupt.
Louisa Kearns, Debt Recovery Manager at Wake Smith & Tofields argues that the process will make it too easy for consumers to escape debt and that many firms who have traditionally worked on a trust basis will be adversely affected:
"DROs will make it much easier for people to rid themselves of their debts without having to go near a bankruptcy court or deal with the traditional hassles of filing for bankruptcy. This poses significant risk for firms who work on a trust basis, providing services or carrying out work prior to receiving payment, where the client has already invested time, effort and resources into the transaction.
"Clients who often undertake work before receiving payment - which can be as wide ranging from accountants to plumbers - could be adversely affected by the introduction of DROs. Businesses need be aware of the change as this presents significant risk to their cash flow, potentially forcing smaller businesses to close if they cannot get credit to cover the shortfall."
DROs will provide an alternative to bankruptcy for people with less than £15,000 unsecured debt, less than £300 in assets and have less than £50 per month disposable income after meeting all essential expenditure.
Louisa added: "It is imperative in the current economic climate that businesses carry out credit checks and consult the Insolvency Service to check if their customer or client is subject to a DRO. Unfortunately, you can't take steps to prevent a debtor obtaining a DRO, but by doing the checks and taking the steps advised the impact may not be as great."
Top Tips from Wake Smith & Tofields:
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Get payment up front for goods or services;
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Carry out a credit check using one of the many services available online;
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Carry out Insolvency Checks - seek legal advice where necessary;
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Seek legal advice - if a business discovers that a client or debtor has been the subject of a DRO but they have not been notified or included they can raise objections to the official receiver and this may result in the DRO being revoked and the business free to pursue the debtor.
