Creditors set to lose interest in Bankruptcy?

January 2015

Creditors set to lose interest in Bankruptcy?

The Department for Business Innovation and Skills has announced a number of measures designed to protect financially vulnerable people against what respondents to the Insolvency Service's Consultation on Debt Relief Orders and the Bankruptcy limit cited as “disproportionate” enforcement activities. Announcing the proposals, Business Minister Jo Swinson said “I believe that someone should only be put into bankruptcy by a creditor for a significant level of debt, especially taking into account that various other debt collection methods, such as county court judgments, are available...”

The current bankruptcy debt threshold of £750 has not changed since 1986 and although still subject to Parliamentary scrutiny, is proposed to rise to £5,000, an increase on the £3,000 recommended by consultation respondents.

Another significant amendment to the regime includes raising the financial eligibility for obtaining a Debt Relief Order ("DRO"), (a low cost alternative to bankruptcy for those with very low assets and income).  The new limit of £20,000 will allow approximately 3600 more people to take advantage of a DRO. 

The announcement has been broadly welcomed by consumer interests groups and charities such as the Money Advice Trust and the Citizens Advice Bureau who believe that the measures go some way to increasing the protection for already vulnerable consumers.

Craig Underwood Director of Optima Legal Services commenting on the proposals said “Whilst the measures are broadly welcomed from a consumer protection perspective, and it is acknowledged that the previous financial limit for bankruptcy failed to keep pace with inflation and could be used as a disproportionate instrument, we can understand the frustrations of many of our clients who will now have significant difficulties in recovering legitimate debts from persistent and often sophisticated debtors.  This comes particularly at a time when the County Court enforcement process is more expensive and far less effective than it should be, and now less effective in the absence of the threat of bankruptcy proceedings.”

“Insolvency practitioners are likely to be less welcoming of these proposals given that they will only service to accelerate the decline in bankruptcy petitions issued and orders made.”

Creditors will be required to review their internal processes, and recovery strategies ahead of the implementation to ensure compliance.