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 *, 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. Obtaining payment through other means, such as County Court Judgements, is often unsuitable due to the cumbersome nature of the process and the lower prospects of a successful recovery.

Creditors such as local authorities and housing associations, which often suffer numerous small debts, are likely to be hit particularly hard by the change.

Michael Finch, Partner says: “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

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.

Michael Finch adds: “Without the ability to use bankruptcy proceedings as part of their recovery programmes, creditors such as local authorities will now struggle to recoup any payment on these 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.”

* Year end March 31 2014

Michael Finch

Related links

Restructuring & Insolvency