From October 2015, the level of debt needed to present a bankruptcy petition will increase from £750 to £5,000.
The current level of £750 has been with us since 1986 and this is the first revision of this figure since. There has been a long standing body of opinion that £750 is artificially low given the long term financial implications of bankruptcy, the harsh consequences of bankruptcy for a relatively small debt and the increasingly prolific nature of debt in our society.
The move to increase the figure by such a large margin has been welcomed by some groups who consider the change will help protect the poorest and most vulnerable in society in situations where a bankruptcy petition for a low debt is a disproportionate response.
Creditors may take a different view. A county court judgment is often not enough to convince a debtor to pay up and it is then for the creditor to look at enforcement action. The threat of a bankruptcy petition can often be enough to convince a debtor to reach a settlement. If the debtor cannot or will not pay then it is a commercial decision for the creditor as to whether to bear the cost of a petition and pursue a bankruptcy order. For debts of less than £5,000 this is no longer a method which such creditors can use and they will be left with other, often less powerful, means of enforcement. It is true that the costs of bankruptcy are a real consideration for creditors, and these costs could be considered disproportionate, but with the new threshold the choice has been removed completely.
The insolvency minister, Jo Swinson, has said in her view, someone should only be put into bankruptcy for a ‘significant level’ of debt. Whilst this view may take into account the level of the petition debt, what it fails to recognise is that this is frequently only the tip of the iceberg and there will be a range of unsecured creditors with other debts which then fall into the bankruptcy. The level of ‘significant debt’ to which she refers is often already present when the debtor's financial position as a whole is considered - the petition debt just scratches the service.
So what impact will the new threshold have? There has been a steady decline in the number of bankruptcy orders made in the past few years. This trend is set continue given that this avenue of enforcement or recovery is now denied to a creditors with a debt of less than £5000. Creditors will have to find other methods of enforcement and so will be turning to bailiffs, charging orders and other remedies. Some have suggested that a county court judgment is, in of itself, sufficient to bring about a settlement. However, experience has shown that this is unlikely to be the case.