The government’s planned increases in the debt limits for debt relief orders (DRO) were widely expected but the seven-fold increase in the bankruptcy threshold is a step too far.
The government is increasing the maximum amount of debt that can be covered by a DRO from £15,000 to £20,000, while the DRO asset limit rises to £1,000 from £300. In addition, the government is increasing the minimum debt level for creditors to begin bankruptcy proceedings from £750 to £5,000. The increases will be effective from October 2015, subject to parliamentary approval.
DROs have proved popular since being introduced in 2009. They are initiated by the debtor and help people with limited assets to proactively deal with their debts.
Turning to the increase in the bankruptcy minimum debt threshold, that this is significantly higher than the insolvency industry had anticipated. The original £750 minimum debt level, set back in 1986, would today equate to around £1,700 after adjusting for inflation.
£5,000 is a lot of credit for people to take on without fear of any action being brought against them. Whilst the threshold certainly needed updating, I believe the government has got the balance wrong and more weight should be placed on creditors’ interests.
When the changes come into effect, creditors will find it more difficult to pursue people who are persistently refusing to pay what they owe. Instead, they will need to consider obtaining and enforcing a court judgment which can be more cumbersome and expensive.
The government should think carefully about unintended consequences. The increase in the creditor petition threshold will undoubtedly remove the deterrent of bankruptcy particularly in relation to consumer debt such as credit cards and loans. This will shift more bad debt risk onto creditors, which in turn could precipitate another credit squeeze.
Restructuring and Insolvency team