The Debt Relief Order, which came into effect on April 6, is available to borrowers with debts of less than £15,000 who cannot afford to repay them and do not own homes.
Eligible borrowers should have assets worth a maximum of £300 with the exception of a car and a disposable income of no more than £50 a month.
DROs impose a moratorium during which time creditors with debts listed in the order cannot take any action towards repayment without court permission.
Once the moratorium period has ended, borrowers are freed from the debts.
Consumers have to apply for DROs via approved brokers accredited by one of six official competent authorities.
Citizens Advice is one such competent authority.
Sue Edwards, head of consumer policy at Citizens Advice, says: “DROs will offer some light at the end of the tunnel to those on low incomes who have no assets and no hope of being able to repay their debts in their lifetime.”
Baines & Ernst, part of Paymex Group, has also been approved as a competent authority.
Nick Pearson, director of external affairs at Paymex Group, forecasts that DROs are likely to help almost 100,000 consumers but has reservations about the £15,000 debt threshold.
He says: “It is debatable whether the limit should be higher. Will that £15,000 ever be changed? If not, it will become an irrelevance in a few years.
“There are other ways of helping debt-ridden borrowers. The only difference in doing it this way is the fee. It might have been easier to reduce the bankruptcy fee and open that option up to more individuals.”
Applying for DROs costs borrowers £90 compared with the £510 bankruptcy fee.
The introduction of DROs comes amid allegations made in The Sunday Times against Lloyds Banking Group, claiming that Lloyds TSB has used scare tactics to intimidate borrowers into agreeing to high monthly repayments.
In response to the allegation, Sally Jones-Evans, director of collections and recoveries at Lloyds TSB, says it takes its responsibility to help customers who find themselves in financial difficulty seriously.
She adds: “We do not condone behaviour that goes against our policies and procedures. In an organisation as big and complex as this there is a risk of isolated cases where colleagues may act improperly. When that happens our approach is to act fast and learn lessons.”