The Government yesterday announced its plans for a new scheme that would allow struggling debtors to have a ‘payment holiday’ on their unsecured debts, in which a court order would freeze payments to creditors for a period of time. These Enforcement Restriction Orders, or EROs, would prevent penalty charges, charging orders, and ordinary repayment demands for up to one year.
There are a number of conditions. The debtor must have a clear reason for their inability to pay – loss of job, sudden illness and divorce being obvious examples. Simple mismangement of debt will not qualify a debtor for an ERO. Debtors will also have to prove that they will be able to afford the repayments at the end of the ERO. Certain debts, such as student loans and mortgage repayments, will be excluded, but there is no limit to the level of debt that can be included in the ERO. A side benefit of the proposal is that it is predicted to hit the Payment Protection Insurance industry hard. PPI has become notorious for being over-priced, mis-sold, and generally being an unnecessary insurance product.
The chief drawback is that interest on debts is not frozen. It is also not yet clear whether or not people will be restricted from taking more credit while under an ERO. People who unwisely enter into these Restriction Orders may suffer from the same fate as debtors who mismanage their consolidation loans, and just end up with more debt at the end of it.
Still, these proposals are to be welcomed. The sudden loss of income due to illness or loss of work is one of the classic ‘tipping points’ that pushes people into the debt spiral and towards insolvency. Rather than borrowing more to service their debts, debtors will have a chance to get their finances in order and address their debt problems sensibly. Debt Management Plans can provide a solution for moderate to low levels of debt, but they are informal and lack the legal protection offered by the EROs. Regulated and legally binding measures targeted at lower levels of debt could reduce the number of people forced into formal insolvency.
The bad news is that the EROs aren’t expected to come in until 2010 – too late for the thousands of debtors who will have slipped into insolvency by then. But it is a positive step that the government is prepared to provide legal protection for those who have fallen into debt through no fault of their own, and who just need a little time to make things right.