Out-Law News 2 min. read

Threshold for triggering bankruptcy proceedings will be raised to £5,000, UK government confirms


Creditors will only be able to enforce bankruptcy proceedings against an individual in England and Wales once that person is at least £5,000 in debt, the government has confirmed.

The first increase to the threshold since it was set at £750 almost 30 years ago is expected to take effect in October, subject to parliamentary approval; along with changes to the debt relief order (DRO) regime.

Those with debt of no more than £20,000 will be able to enter the DRO regime, which is a low-cost alternative to bankruptcy. It was previously only available to those with less than £300 in assets who owe a maximum of £15,000.

Giles Frampton, president of insolvency trade body R3, welcomed the changes.

"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," he said. "The changes will make it much easier for indebted individuals to deal with their debts effectively."

"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," he said.

Frampton said that the new threshold was "far higher" than many in the industry had expected. In last year's consultation on the proposed changes, the Insolvency Service used a threshold of £2,000 as an illustrative example. The threshold would now be £1,700 if it had risen in line with inflation since its introduction.

Creditors can apply to a court to have an individual declared bankrupt if that individual has debts above the threshold. Insolvency practitioners can also present petitions to court against individuals in financial difficulty who break the terms of an individual voluntary agreement, while individuals can apply to declare themselves bankrupt if they are unable to pay their debts. Bankruptcy is the most serious form of individual debt recovery action in England and Wales, and court fees are associated with the procedure.

Unlike bankruptcy, a DRO is an administrative rather than court-based procedure. DROs came into force on 6 April 2009 and apply in England and Wales only. The procedure was designed to provide debt relief to individuals excluded from existing procedures because their low income and asset levels prevented them from entering bankruptcy or paying off those debts. Only those debts included in the DRO are protected from enforcement by creditors and are discharged after the DRO ends, which is usually after 12 months.

Once the changes are in force, DROs will become available to those with assets of no more than £1,000 plus a vehicle, itself worth no more than £1,000; provided that their debt is no more than £20,000. The maximum surplus income a person can have to qualify for a DRO will remain at £50 per month. The government said that the changes would allow approximately 3,600 more people a year to enter into a DRO, while continuing to restrict their availability to those with "very low realisable assets and therefore no realistic ability to repay their debts".

"Struggling with unresolvable debt can cause immense stress for families," said Jo Swinson, the business minister. "These changes will ensure that our debt relief schemes are updated so that they still meet their original goal of providing access to those who need them. They also ensure that bankruptcy, which has the most significant consequences, is reserved for those with sizeable debts."

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