UK government consults on increasing minimum debt before creditors can trigger bankruptcy proceedings

Out-Law News | 07 Aug 2014 | 4:40 pm | 2 min. read

Creditors would not be able to force bankruptcy proceedings against individuals in England and Wales until more money was owed under plans put forward for consultation by the Insolvency Service.

Business minister Jo Swinson said that there was a "strong argument" that the current £750 threshold, which has been in place for almost 30 years, was "no longer fair or reasonable". According to research by the Insolvency Service, if the bankruptcy threshold had risen annually in line with inflation it would now be £1,700.

The Insolvency Service is also seeking views on whether debt relief orders (DROs), introduced five years ago for debtors owing less than £15,000 but lacking the means to pay it off, could be improved as part of its call for evidence.

"Bankruptcy has serious consequences and there is a strong argument that bankrupting someone for a debt of £750 is no longer fair or reasonable, especially when there are often alternative cheaper ways for those owed money to seek repayment," said Swinson.

"I'm also keen to ensure that DROs continue to meet the objective of helping the most financially vulnerable with a low-cost way out of problem debt," she said.

DROs came into force on 6 April 2009 and apply in England and Wales only. Unlike bankruptcy, a DRO is an administrative rather than court-based procedure and only protects those debts included in the DRO from action from creditors. Those debts are discharged after the DRO ends, which is usually after 12 months.

The procedure was designed to provide debt relief to individuals excluded from existing procedures because their low income and asset levels prevent them from entering bankruptcy or paying off those debts. Strict conditions governing entry to the process are intended to maintain the right of creditors to collect against debts that debtors have the means to pay.

The Insolvency Service is seeking to understand whether access for vulnerable debtors to DROs can be improved as part of its review process. As part of its call for evidence it is trying to understand whether DROs are helping individuals to break away from the cycle of problem debt in the long-term, as well as looking at how the various monetary limits which restrict access to the system and the design and integrity of the system are working in practice.

Giles Frampton, president of insolvency professional body R3, welcomed the review.

"R3 has called for DROs to be reviewed for some time and we are pleased the Insolvency Service is taking action," he said. "Although DROs are only a relatively new part of our personal insolvency landscape, personal debt issues move on so quickly that it is already time to look at them again."

"We are particularly pleased that the creditors' bankruptcy petition threshold is being looked at. This was last set in 1986 and an upwards revision is long overdue. £750 is far too low an amount of debt for somebody to be made bankrupt: were the threshold to have risen in line with inflation, it would be worth almost £2,000 now," he said.

Creditors that wish to have an individual declared bankrupt must present a petition to a court in order to be able to do so. Petitions can also be presented by insolvency practitioners against individuals in financial difficulty that break the terms of an individual voluntary agreement, and individuals can also apply to declare themselves bankrupt if they are unable to pay their debts.

According to the Insolvency Service, a bankruptcy petition threshold set at £2,000 would have removed 400 cases, or 3% of all cases brought in 2013/14, from the process last year. A £3,000 threshold would have taken 1,000 cases, or 8%, out of the bankruptcy process.