Increasing number of councils forced to step up bankruptcy actions against council tax defaulters

An increasing number of local authorities are being forced to step up bankruptcy actions against council tax defaulters, with council tax debt in England rising to more than £2.5 billion, shows our research.

32% of local authorities in Great Britain used Bankruptcy Orders to recover council tax arrears last year, having risen substantially from the 20% forced take this action against debtors in 2009/10* (see graph below).

Based on information provided by local authorities, we estimate that councils petitioned to make 1,100 tax defaulters bankrupt in 2013/14.

An even higher proportion of councils in England and Wales now use the less-severe option of Charging Orders, through which an unsecured debt becomes secured on a residential property, allowing a local authority to receive payment from the proceeds of a sale or remortgage. 48% of local authorities used Charging Orders last year, compared to 26% in 2009/10.

Almost half of councils use charging orders, while a third now use bankruptcy orders

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Many local authorities scaled back their debt collection efforts at the start of the recession to give struggling taxpayers financial breathing room, although the rising level of council tax debt has started to threaten front-line services in some areas.

Statistics from the Department for Communities and Local Government last year showed that the level of council tax arrears across the UK has risen from £2.2 billion to £2.5 billion since 2009/10, including £105 million of arrears in Birmingham and £98 million in Liverpool.

Last year, Citizens Advice reported that Council Tax debt is now the most common debt problem the charity advises on.

Michael Finch states: “Council tax debts are now approaching unsustainable levels, and local authorities are no longer able to stand by while defaults continue to mount.

“As the economy recovers, local authorities are suffering more and more with ‘serial debtors’ – a hardcore of people who have no intention of paying council tax or clearing their debts. That leaves councils with very few options other than petitioning for them to be made bankrupt.

“Serial debtors cannot be allowed to threaten service provision for the overwhelming majority of honest taxpayers.”

Sharp rise in bankruptcy threshold threatens councils’ ability to collect

A sharp upcoming increase in the bankruptcy threshold will make it far harder for creditors to recover money owed.

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 £750.

This will remove local authorities’ most efficient tool to recover council tax debt, leaving only the much less-effective Charging Orders.

Explains Michael Finch: “Charging Orders mean that councils are at the front of the creditor queue in case a debtor sells their property, but that is likely to mean a very long wait and this too depends on the debtor owning a property.

“There is a strong case for public sector carve-out for the new bankruptcy threshold, to make sure that local authorities are not prevented from bringing in the vast quantities of small debts they suffer from serial debtors.”

* Year end March 31 2014, based on a sample of 190 local authorities

Contacts

Mike Finch