A New Dawn for Personal Bankruptcy?
1st October 2015
You may or may not be aware, but as of the 1st October 2015, the minimum debt level required to go bankrupt has been increased from £750 (where it had been since the introduction of the 1986 Insolvency Act) to £5,000. There are those that argue that with the cumulative effect of inflation, the bankruptcy threshold did need to rise significantly to bring it in line with the spirit of the original legislation – however, £750 in 1986 would probably be a little over £2,000 in today’s money. So why the increase over and above a correction for inflation and what does this mean for those struggling with unmanageable debt, and what are the implications for creditors trying recover outstanding debts?
In April 2009, Debt Relief Orders (DRO) came into force for those struggling with lower levels of unmanageable debt (the maximum level of debt you can have under a DRO has recently been increased to £20,000, but there are strict criteria in respect of disposable income and assets – see here for more information). A DRO is to all intents and purposes “bankruptcy light” whereby court involvement is bypassed and as a result, the fees due by the debtor are significantly reduced. It would therefore appear that anyone considering petitioning for their own bankruptcy would in all likelihood be relatively unaffected by this change.
It is a very different situation for creditors looking to recover outstanding debts. The threat of bankruptcy by way of issuing a Statutory Demand has long been an invaluable tool in the armoury of the debt recovery industry. Giving someone 21 days to pay a debt in full or face bankruptcy proceedings is often highly effective when dealing with uncooperative or elusive debtors.
We always make it quite clear to clients that creditors are under no obligation to “do a deal” and will in some cases refuse a settlement and move to bankruptcy in the full knowledge that they will get nothing. The reasoning for this is quite straightforward – it sends a strong message to the market that if you do borrow money and don’t pay it back, the consequences can be severe (let’s face it, if a bank developed a reputation for always “doing a deal”, it wouldn’t be too long before everyone would jump on the bandwagon and attempt to negotiate a settlement even if they could afford to pay in full – the result being that the bank wouldn’t stay in business for very long).
Needless to say, the debt recovery industry is concerned that the dramatic rise in the threshold for bankruptcy will dent their ability to recover lower level debts. To play devil’s advocate if I may, I would like to see some data to see how cost effective bankruptcy is when dealing with debts in the £750 to £5,000 range given the legal fees etc involved.
So, why such a big increase given that it is well beyond any correction for inflation? Some industry lobbyists did recognise a need for an increase and seemed to agree that £3,000 would be a more appropriate figure. Perhaps the powers that be want to wait another 30 years before looking at this issue again? Maybe there are some new regulations in the pipeline to provide creditors more debt recovery tools? Possibly, it is a further incentive to tighten up risk assessment even further when looking at providing credit – having said that, I believe great improvements have been made in this area since 2008 and the last thing we need to do is to limit the provision of credit by banks etc even further as that will have a direct impact on economic growth.
Like most changes in legislation, I guess we will all just have to play the waiting game and see how things develop over the coming months. I am again reminded of the ancient Chinese curse “may you live in interesting times”….
Please be advised that all views expressed in these posts are those of the author and not of James Rosa Associates ltd.