Government ministers are considering increasing the level of debt that a person must owe before they can declare themselves bankrupt, or be forced into bankruptcy by their creditors. The current threshold of £750 hasn’t changed since 1986 and, according to the Insolvency Service, this is leading to a rising number of cases where people are being pushed into bankruptcy despite having a relatively small amount of debt.
The Insolvency Service has issued a Call to Evidence putting pressure on the Government to review the £750 limit, which due to inflation, no longer represents a realistic bankruptcy threshold. In turn, this is effectively giving creditors an ‘enforcement option over low level debts, which Parliament had not originally intended them to have.’
Why the lower limit needs to be higher
Insolvency experts have calculated that if the £750 threshold had kept pace with inflation, the lower limit for bankruptcy would now stand at £1,700. Other figures quoted on the Government’s website clearly illustrate the benefits of a higher threshold, with a £2,000 limit potentially reducing last year’s (2013/14) bankruptcy petitions by 3%, or 400 cases. A £3,000 limit would have slashed the number of cases by 8%, or 1,000 petitions.
The Insolvency Service has also highlighted the fact that the costs involved in the bankruptcy process can sometimes turn what was a fairly small debt into something completely unmanageable. One quoted example, featured on BBC Newsnight, saw a person who owed just £1,350 in council tax arrears end up owing £80,000 after being forced into bankruptcy.
Other cases have seen people having to sell their homes after bankruptcy fees caused their existing debts to spiral out of control. With a higher lower limit for allowing people to be made bankrupt, these situations could have been avoided.
Commenting on the Government’s decision to review the debt level, Business Minister Jo Swinson said: ‘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.’
Debt Relief Orders also under review
The Insolvency Service’s Call for Evidence also asks the Government to review Debt Relief Orders (DROs), a form of insolvency available to people who meet a set of very strict criteria, such as not being a homeowner and having little or no disposable income.
At the moment, DROs are only an option for people who owe £15,000 or less in total. The Insolvency Service wants the Government to consider increasing this threshold so that more people can benefit from a DRO and avoid bankruptcy.
Introduced five years ago, DROs accounted for a fifth of the total number of personal insolvencies (just over 27,000) reported in quarter 2 of 2014. Whilst they carry some of the same restrictions associated with bankruptcy, DROs cost just £90 in administration fees and are dealt with by an authorised intermediary working on behalf of the Insolvency Service, rather than through the courts.
Andy Gorton, bankruptcy expert and Managing Director of leading debt advice service, Bankruptcy Clinic comments: ‘I welcome this review by the Government as it should make it easier for people to access the right debt management solution for their individual needs. Of course, bankruptcy will still play an important role as the right option for people in certain circumstances to overcome their debts. It can also be a relatively quick way of getting debt-free as most people are discharged and have their debts written off after just 12 months.’
‘However, bankruptcy isn’t right for everyone. It will be good to see more people able to take advantage of alternative solutions such as DROs – which in many cases can also free people from their debts in 12 months – if the Government decides to expand the eligibility criteria.’
Have your say in the Call to Evidence
The Call to Evidence looks at four key areas. These are whether:
- The current £750 minimum level of debt owed before a bankruptcy petition can be made is too low.
- The availability of DROs to vulnerable debtors can be improved, including updating the financial limits which restrict access.
- The design and integrity of the DRO system, including whether the authorised intermediary delivery system, is working well.
- DROs are helping people break away from the cycle of problem debt in the longer term.
The Insolvency Service is currently collecting responses to its Call to Evidence and plans to publish a report of the results later in 2014. If you have, or have previously had, a DRO, you’re invited to take their online survey to describe your experience.
You can also give your feedback on any or all of the four key areas by emailing DROandBankruptcyPetitionReview@insolvency.gsi.gov.uk.