Bankruptcy debt limit changes

Changes to insolvency legislation which come into force from 1 October 2015, may result in 20% less personal insolvencies each year and limit creditors’ abilities to recover debts.

Under the Insolvency Act 1986, the current minimum level of debt for which a person may be made bankrupt is £750. The original intention of this limit was to stop bankruptcy being used disproportionately as a debt collection tool for very low value debts. The threshold has, however, not been adjusted for inflation over the last 30 years and following a Government consultation, this threshold will rise to £5,000 from 1 October. The Insolvency Service estimates that this may lead to 2,000 fewer creditor petition bankruptcies per year.

Whilst these changes have been welcomed by debt relief charities, this is perhaps not welcome news for creditors who already face difficulties enforcing judgments for sums under £5,000. High Court Enforcement Officers and bailiffs have very limited powers and often fail to find assets to seize. The Data Protection Act 1998 can also make it hard to find out the information required for attachment of earnings or third party debt orders. Bankruptcy proceedings were often used as a tool to get to hidden assets as part of the enforcement process. The solution may be for creditors to aggregate the debts owed to achieve the new threshold of £5,000 and also share the costs associated with petitioning for a debtor’s bankruptcy.

The changes will be seen as welcome news by some as the threshold also applies to petitions issued by a debtor. Whatever the case may be, creditors who have outstanding debts of less than £5,000 may wish to issue a creditor’s petition before 1 October.

The Department for Business, Innovation and Skills has also introduced changes to the eligibility for Debt Relief Orders. From 1 October 2015, the maximum debt limit for Debt Relief Orders will increase from £15,000 to £20,000 and the debtor’s asset limit will increase from £300 to £1,000. Again, whilst these changes may be welcomed by debt relief charities, the consequences for creditors may not be. Debt Relief Orders have proven to be a useful addition to personal insolvency management since their introduction and they are sure to increase in popularity with debtors as a result of the increase in the bankruptcy threshold.

It is worth noting that the limits for statutory demands in corporate insolvency or winding up petitions will not be affected by these changes to the Insolvency Act and the threshold for these remains at £750.