Bankruptcy threshold to increase sevenfold

The government has announced proposals under which the minimum level of debt over which a creditor can petition for an individual’s bankruptcy will rise from £750 to £5,000 – that’s a jump of nearly 700%.  The change is set to come into effect on 1 October 2015.

Many will welcome the move as a means of preventing ruthless creditors from bankrupting people over relatively small debts.  Indeed, Business Minister, Jo Swinson’s stated aim is to reserve bankruptcy “for those with sizeable debts”.  It is right that there should be a rise in the threshold; the £750 level is out of sync with inflation.  However, does such a large hike balance sufficiently the interests of debtors and creditors?  The bankruptcy petition (or threat of one) can be an effective tool for individuals and small and medium sized enterprises to recover debts from debtors who are refusing to pay what they owe.  The proposed rule change will remove the availability of this tool for the recovery of any debt lower than £5,000.

The potential difficulties for creditors could be made more acute by the fact that this change is set to take effect shortly after the government’s proposed hike in Court fees – under changes to the law which are due to come into force on 1 March 2015, claims worth £10,000 or more are to attract a Court fee of 5% of the value of the claim* meaning that it will cost a claimant a whopping £10,000 to issue a claim worth £200,000.

Might we see a flood of claims being issued and bankruptcy petitions being presented before 1 March 2015 and 1 October 2015 respectively?

There is a risk that, together, these changes could have a crippling effect on the ability of individuals and small and medium sized enterprises to recover their debts.  Ironically, such individuals and small and medium sized enterprises could themselves be pushed into insolvency.

*Court fees are to be capped at £10,000 for claims which exceed £200,000 in value.

Article written by Jonathan Fozard, Solicitor in our Dispute Resolution Team

If you are a creditor faced with debtors who are refusing to pay, Carter Lemon Camerons might be able to help you.  Contact our Dispute Resolution Team for more information.