How the debtor's conduct can affect a debt relief order

A debtor's conduct can affect the outcome of their DRO application. It could result in:

• the DRO application being refused

• sanctions under insolvency law

• criminal prosecution in the most serious cases

Some types of conduct must be declared on the DRO application. Other types do not have to be declared, but could be investigated by the Official Receiver. Creditors might report concerns about the debtor's conduct to the Official Receiver which can then be investigated.[1]

The consequences of the debtor's conduct depend on:

• what the debtor has done or caused to be done

• how serious it is

• whether the debtor knew what they were doing

• whether the debtor's behaviour was dishonest or fraudulent

Fraud

A creditor who becomes aware of the debtor's fraud could report their concerns to the Official Receiver. Potential DRO applicants should consider whether applying for a DRO is likely to trigger a report from one of their creditors.

Read more about how debts incurred through fraud are treated in a DRO.

Preferences and transactions at undervalue

The debtor might have made transactions in the two years before the application date that affect their ability to have a DRO.

The DRO application could be rejected if the debtor has either:

• given away or sold their property at less than its value

• paid one creditor of a qualifying debt ahead of other creditors

A debtor prefers a creditor if they pay them ahead of other creditors of qualifying debts in the two years before the application date, or between the application date and the determination date.[2]

Lump sum payments

Lump sum payments are easy to identify as a possible preference payment. A large payment to a qualifying debt in the relevant period is likely to be viewed as a preference.

Regular instalments

Regular payments to a qualifying debt are not as obvious as lump sum payments. In practice, most debtors are unlikely to have paid their debts in a way that treats them all equally.

Making contractual payments cannot be classed as a preference. For example, the minimum payment on a credit card.

Impact of a preference on the application

A debtor who thinks they might have preferred a creditor must tell the approved intermediary dealing with the DRO application. The intermediary must then decide whether it is likely to be classed as a preference.

The intermediary must declare the transaction if they aren't sure whether it could be classed as a preference or not.

Read more about when to report a preference.

The Official Receiver has the discretion to disregard a preference when they decide whether to approve the DRO application. They will look at:

• the amount of the payment

• the timing of the payment

• the reason for the payment

• whether the payment would have altered the debtor's financial position had it not been made

The approved intermediary can submit reasons for making a preference payment at the same time as the application. A debtor who has paid a sum to avoid court action for a debt or an eviction could provide this reason as a mitigating factor.

See Annex A DRO guidance for debt advisers for more information.

Preferences are the most common reason for a DRO being refused. The Official Receiver could be more likely to decline the DRO application if the preference is paid to a friend or family member.

A debtor makes a transaction at an undervalue if they give away or sell property at less than its true value in the two years before a DRO application.

What counts as an undervalue transaction

A debtor enters into a transaction at an undervalue if they give away money or assets with nothing in return, or for significantly less than their worth.[3]

This could include the debtor making gifts or selling property cheaply to family and friends. It could also include writing off a debt they are owed.

A gift of money does not have to be a lump sum to be a transaction at an undervalue. Giving away money as a regular payment or paying a debt for someone else is classed as a transaction at an undervalue.

Impact of a transaction at undervalue on the application

A debtor who thinks they might have made an undervalue transaction must tell the approved intermediary dealing with the DRO application. The intermediary must then decide whether it is likely to be classed as an undervalue transaction.

The intermediary must declare the transaction if they aren't sure whether it could be classed as undervalue or not.

The Official Receiver has the discretion to disregard an undervalue transaction when they decide whether to approve the DRO application. They will look at:

• whether the debtor was insolvent at the time of the transfer

• why the debtor transferred the property

• when they transferred the property

• who they transferred the property to

• the value of the property and what the debtor received for it, if anything

• what the debtor has done with any funds they received

• whether the debtor got legal advice for the transfer

• whether the debtor kept any interest in the property

The DRO guidance for debt advisers contains more details about undervalue transactions.

The approved intermediary can submit reasons for making the transaction at the same time as the application.

A debt relief restrictions order extends the usual DRO restrictions for longer than the usual 12 month moratorium. It can last for up to 15 years.

The court can take into account any relevant conduct on the part of the debtor.

In particular, the court can take the following into account:[4]

• failing to keep or produce financial records that account for loss of property

• making an excessive pension contribution

• incurring debts with no reasonable expectation to pay, and trading whilst insolvent

• carrying on gambling, rash or hazardous speculation, or unreasonable extravagance

• fraud

• failing to co-operate with the Official Receiver

This is not an exhaustive list.

Preferences and transactions at undervalue

The court can take preferences and transactions at undervalue into account when deciding whether to grant the Official Receiver's application for a debt relief restrictions order.

This is in addition to the Official Receiver's power to refuse a DRO application based on a preference or transaction at undervalue.

The court could be more likely to make a debt relief restrictions order if the debtor intended to put the recipient in a better position or dispose of assets ahead of a DRO application.

The debtor might have committed a criminal offence under the Insolvency Act 1986 either before their DRO application or as part of the application process. They could be found guilty of committing an offence even if the DRO application is not approved.

Giving away assets with the intention of becoming eligible for a DRO is a serious example of an undervalue transaction that could lead to a criminal prosecution.[5]

The debtor commits an offence if they knowingly or recklessly give false information, or leave something off their application.[6]

Other examples of DRO offences include:

• concealing or falsifying documents[7]

• fraudulently disposing of property[8]

• fraudulently disposing of property obtained using credit[9]

• getting credit or engaging in business without permission during the moratorium[10]

A conviction for a DRO offence can lead to imprisonment, or a fine, or both.[11]