On 1 October 2015 the bankruptcy level will increase from £750 to £5,000.
The bankruptcy level is the minimum amount that a creditor must be owed by an individual before a bankruptcy petition in relation the individual can be lodged at court.
How much of a difference will this change make?
In my view, not much. The costs to a petitioning creditor to pursue bankruptcy are in the region of £1,500 to £2,000 and as far as the underlying debt is concerned, the petitioning creditor remains unsecured.
While the costs of the petition are recoverable as an expense of the bankruptcy in priority to debts owing to other unsecured creditors, these will not be paid until conclusion of the bankruptcy and only then if there are sufficient assets to pay those costs.
The petitioning creditor must also pay a deposit of £750 used to pay the trustee in bankruptcy’s fees if those fees cannot be recovered from assets in the bankruptcy.
Unless a creditor is owed significantly more than £2,000, the costs of petitioning for the debtor’s bankruptcy do not justify the benefits to the petitioning creditor. Even if those costs are recovered it will not be for some time and their recovery is uncertain. The debtor needs to have sufficient assets to make this an effective debt recovery exercise.
It is almost impossible to assess at the point of petitioning for bankruptcy of an individual how much the total owing to all creditors really is and how much money the trustee in bankruptcy will be able to recover for the benefit of those creditors.
Of 3,308 people seeking advice on bankruptcy from the Citizens Advice Bureau between April 2013 and March 2014, 71% reported personal debts in excess of £15,000. I would be surprised if there were a significant number of people being declared bankrupt with debts as low as £750.
Trends and Future
The current bankruptcy level has remained since the Insolvency Act 1986 first came into force. During the course of the intervening almost 30 years inflation has meant that £750 is not as significant a sum as it once was. There have also been substantial changes to the court procedure and court fees for the issuing of proceedings (including insolvency proceedings) have significantly increased.
According to statistics provided by the Insolvency Service, individual insolvencies have been in a relatively steady decline for the past five years, particularly since the introduction of Debt Relief Orders in 2009. According to data released by the Financial Conduct Authority, lending to consumers, which had been increasing rapidly in the lead up to the financial crisis, has plateaued during roughly the same period.
Stricter consumer credit should lead to fewer individuals becoming unable to repay their debts so the downward trend in bankruptcies ought to continue. This year’s increase of the bankruptcy level is in my view simply a long overdue update, bringing the legislative rules closer to the commercial reality.
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