Following a consultation process by the Insolvency Service, the Government has announced that from 1st October 2015, the minimum threshold for creditors' bankruptcy petitions will rise from £750 to £5000 and that the maximum level of debt in respect of which a Debt Relief Order (DRO) can be sought will rise from £15,000 to £20,000.

These reforms will be set out in the draft Insolvency Proceedings (Monetary Limits)(Amendment) Order 2015, and the change to the creditor bankruptcy limit set out in the draft Insolvency Act 1986 (Amendment) Order 2015.

The rise in the bankruptcy limit is the first increase in three decades and forecasts are that the numbers of people being declared bankrupt could fall sharply. Campaigners have welcomed the move, saying it would prevent creditors making people bankrupt for “unreasonably small debts”. In addition, the Government wants to ensure that bankruptcy is limited to "those with sizeable debts”. Others however fear that the change will make it more difficult for consumers to pursue tradespeople, landlords or others who are simply refusing to pay what they owe.

At the same time, the government has given a boost to one of the less drastic alternatives to bankruptcy by loosening the restrictions on who is eligible for a debt relief order (DRO) often seen as "bankruptcy lite".

The Insolvency Service said that when it asked for views, many respondents said that the amount of debt that could trigger bankruptcy was disproportionate, “as people can be put through the most serious of debt recovery action for a debt as small as £750”. It added: “There are also other ways for those owed money to recover their debts, such as action in the small claims court for sums under £10,000 or attachment to salaries”. The latter of course only applies to Councils to use for collection of arrears or for other creditors, after the obtaining of a judgment and enforcing by application for an attachment of earning order against an employed individual.

Many creditors however have expressed doubts that the current alternative of Court proceedings and the selection of a suitable - and effective - form of enforcement have the "teeth" of the threat of bankruptcy in the case of an undisputed debt.

Commenting on the increases, R3 president Giles Frampton says: “We are really pleased the Government has listened to the concerns of the insolvency profession and others about Debt Relief Orders and bankruptcy.” “Insolvency solutions can often be a suitable way for heavily indebted individuals to deal with their debts but it is important that people are in the type of debt solution most appropriate for their situation. The changes will make it much easier for indebted individuals to deal with their debts effectively.” “The rise in the creditor bankruptcy petition threshold is welcome, although £5,000 is far higher than expected. It is right that the petition be increased: £750 was an entirely inappropriate level and the protection it offered debtors had been steadily eroded by inflation over the last three decades.”

“The rise in the petition threshold will require creditors to look at other options for the pursuit of low value debts. While a bankruptcy petition is not always the most proportionate tool for this, it’s very important that the insolvency regime maintains a balance between protecting the interests of both debtors and creditors. How the new threshold works in practice should be monitored closely.”

 

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