Anyone striving to cope with their debts can welcome the news that the minimum bankruptcy threshold is being raised from £750 to £5000, as the government seeks to reserve insolvency orders for individuals with greater amounts of debt.
The amount of debt one can take on before being declared bankrupt was last changed in 1986, and with more and more people borrowing, the government has declared that the time is right to provide households with a little extra leeway, and the reforms are to be implemented from October.
Whilst announcing the decision, Jo Swinson, LibDem business minister, said: ìStruggling with unresolvable debt can cause immense stress for families. These changes will ensure that our debt relief schemes are updated so that they still meet their original goal of providing access to those who need them.î
ìThey also ensure that bankruptcy, which has the most significant consequences, is reserved for those with sizeable debts.î
Ms Swinsonís announcement brings relief to the masses of debt campaigners and charities whoíve long campaigned for changes to be made to the perceived distorted nature of bankruptcy. Clamour has long existed over how creditors only need to be owed £750 by an individual before they can petition a court to make said individual bankrupt.
Restrictions imposed on bankrupt individuals include the inability to act as a director of their company, manage a company without the courtís permission and the obligation to inform the majority of people you do business with that you are bankrupt. The word has inherently negative connotations, implying an individual is financially unviable and to an extent, untrustworthy ñ facets that are clearly debilitating to business ventures for any individual. Thus, that a debt of only £750 could lead to an individual being forced to declare bankruptcy is an actuality which has been long contested.
The Insolvency Service, the state-owned agency which consulted with policymakers on the reforms, noted that: ìThere are also other ways for those owed money to recover their debts, such as action in the small claims court or attachment to salaries.î
Giles Frampton, president of R3, the insolvency trade body, said: “Insolvency solutions can often be a suitable way for heavily indebted individuals to deal with their debts but it is important that people are in the type of debt solution most appropriate for their situation. The changes will make it much easier for indebted individuals to deal with their debts effectively.
“The rise in the creditor bankruptcy petition threshold is welcome, although £5,000 is far higher than expected. It is right that the petition be increased: £750 was an entirely inappropriate level and the protection it offered debtors had been steadily eroded by inflation over the last three decades.”
The government also announced reforms to be made to debt relief orders (DROs), a more cost-effective alternative of dealing with insolvency. At present DROs can be applied for by individuals who do not own their home with debts under £15,000 and assets worth up to £300. However, from October these limits will be raised to £20,000 and £1000 respectively.
DROs are essentially for those who are in no position to pay off their debts, as they have less than £50 a month spare income and under £300 worth of assets. Only costing around £90 following a courtís approval, compared with the £700 odd an individual who declares bankruptcy must part with, the extension to the minimum threshold for DRO eligibility will benefit a number of borrowers too poor for either bankruptcy or a DRO.
Matt Barlow CEO at debt charity Christians Against Poverty said: “Currently, more than a third of our clients, many of whom are vulnerable, are too poor to go bankrupt. They have too much debt to access a debt relief order and they have too little money to afford bankruptcy fees. They are stuck – literally too poor to go bankrupt, which struck us as a real injustice.
“We had campaigned for the limit to rise to £30,000 which would have seen more than half of our clients able to afford this debt solution. However, the line had to be drawn somewhere and £20,000 is a good start.”
The number of insolvents has been on a steady decline since the turn of the decade, with increasing employment, low interest rates and a steadier economic climate all contributing factors to this end. Quarter 4 for 2014 yielded almost a 5% decrease in insolvencies on the same period in the previous year.