Government plans increase to bankruptcy threshold
The Government have announced plans to increase the level of debt required for a creditor to issue a bankruptcy petition against individuals. Under new proposals to be introduced in October 2015, the current threshold of £750 is to be increased to £5,000.
On first look, an increase of £4,250 may seem small change to some, but take into account that the last time the threshold was revised was nearly three decades ago, it is a fairly dramatic shift. In fact, had the threshold increased alongside inflation during this period, the level of debt required to issue a bankruptcy petition would not have even reached half the amount now proposed. Perhaps now bankruptcy is far too easy to achieve since the £750 threshold was originally set.
So, what is the significance of these proposals?
Initially, it is not hard to conceive that many creditors will not welcome the news – ultimately the increased threshold may result in smaller debts being harder to recover. No longer eligible to bring a bankruptcy petition, creditors may be forced to issue mores claims through the Small Claims County Court, where in the main any legal fees would be unrecoverable from the debtor and it taking longer to receive the monies owed to them. That aside, it may also encourage more repayment arrangements being agreed directly with the debtor – once again, this will only help to defer the payment of monies owed.
On the other hand, the proposal will be welcomed by debtors, especially where the potential consequences of bankruptcy are considered. The result of bankruptcy upon an individual can be severe, from the negative perception it will have in the public eye to the ability for a person to run or manage a company. For some, the fact that the eligibility for bankruptcy has been so low has put those in the most financial distress at risk of these consequences for too long. Only now has the increase to £5,000 ensured that bankruptcy eligibility begins to apply to only those individuals with a far greater level of debt.
Together with these plans, the Government has further announced reforms to the eligibility of Debt Relief Orders (DROs), which are generally considered as a cost effective solution for those individual with considerable financial constraints. If applied for and obtained, a DRO can ensure that a creditor would be unable to obtain their debt from a debtor for a period of time, until the order is lifted. Furthermore, once an order has been lifted, debtors may be discharged from these debts. Eligibility for DROs have been possible for individuals who owe a debt up to £15,000, have assets of no more than £300 and have a surplus income of £50 a month. Under the reforms, the amount of debt will increase to £20,000 and assets to £1,000. As a result, under these new rules, an alternative to bankruptcy will be widened to favour many more people. Certainly, for those who have traditionally thought of self-bankruptcy to manage their debts, but been unable to meet the expense of the Court fee, this is an affordable alternative. A DRO could cost as little as £50, in comparison to a several hundred pound fee for declaring yourself bankrupt.
Only once the proposal have been introduced will the affects be truly realised, but what is for sure is that creditors and debtors attitudes alike will no doubt change. Although greater protection may well be afforded to those with debts, the ability for creditors, especially small businesses, to recover their debts quickly and efficiently will be damaged.
If you require assistance on recovering a debt owed from a company or individual, or alternatively need advice on the type of debt solution that is most appropriate to you, Andrew King heads up the firm’s Dispute Resolution department and will be happy to discuss your options with you. You can contact Andrew on 01494 773377 or by email at email@example.com.
This article is for guidance purposes only and is not to be relied upon as legal advice. It offers guidance on bankruptcy provisions in general terms and does not address any specific exclusions that might apply.