Bankruptcy threshold rise to hit councils’ ability to bring in tax debts

Local councils and housing associations are likely to be among the hardest hit by the forthcoming hike to the minimum threshold for a creditor’s bankruptcy petition.

It was announced in January that from October 2015, creditors must be owed a minimum of £5,000 before they can start bankruptcy proceedings to pursue that debt. The current minimum is just £750.

Figures released by the Insolvency Service show that 15% of bankruptcy orders were made for debts of less than £5,000 last year (year end 31 March 2014), 785 of the 5,235 total creditor petitions for bankruptcy.

The sharp increase in the bankruptcy threshold will make it far harder for creditors to recover money owed. Enforcing through other means, such as charging orders, is often unsuitable as the local authority has to wait for the debtor to sell their property before the debt is repaid.

These figures highlight the impact that the unexpected steep rise in the bankruptcy threshold is likely to have, with public sector bodies having a crucial tool for debt recovery taken away. Some are likely to be forced to write off a substantial number of small debts.

Putting someone into bankruptcy for low value debts can be disproportionate as there serious consequences for individuals. However, these changes to the bankruptcy threshold will ultimately leave taxpayers to foot the bill for those who run up debts intentionally.

Call for a public sector carve-out to new bankruptcy rules

We think policymakers should urgently consider a public sector carve-out to the new bankruptcy rules, allowing bodies such as councils and housing associations to pursue debts of a lower value in order to stem their losses from cumulative smaller bad debts.

The concern is that ‘serial debtors’ may see council tax in particular as ‘optional’ if they know that the local authority has limited means to pursue them.

If local authorities cannot recoup their bad debts then the shortfall will have to be made up from elsewhere – most likely through council tax hikes or cut-backs to services.

Please email Mike Finch or Adrian Brook if you would like more information.