Increase in bankruptcy threshold to £5000
Friday 16th January 2015
The Government has announced an intention to increase the bankruptcy threshold from £750 to £5000 from October 2015. Currently a creditor can petition for a debtor’s bankruptcy so long as the debt is over £750. This low threshold has allowed unscrupulous creditors to threaten bankruptcy for low value debts via a statutory demand, even if they had no intention of making the debtor bankrupt. Whilst this is bad practice and an abuse of process, many creditors use statutory demands as a matter of course instead of alternative methods like a monetary county court claim. The increase in the threshold will see less of this practice. Good for debtors; not for creditors.
The extensive consultation prior to the announcement concluded that petitioning for bankruptcy for such low value debts was disproportionate. There is some truth in this: petitioning can be expensive and often results in no recovery. The other side of the coin is that if debtors are unable to pay a small sum, they are clearly insolvent and bankruptcy may allow them the opportunity to start again with a clean slate. That is where Debt Relief Orders (‘DROs’) come in to play. DROs are still relatively new, having been introduced in 2009. We may see an increase in their use from October.
As a result of the increased threshold, I recommend that credit control departments and recovery teams review internal procedures to consider whether any changes are required. If businesses are using Statutory Demands for low value debts, this practice will have to stop and they’ll need to employ alternative tactics to encourage payment. Training should also be given on DROs, especially for those teams that recover business debt from individuals, where DROs are currently less common.