Bankruptcy threshold to rise to £5,000

bankruptcy

Thousands of people may no longer face being declared bankrupt under Government plans to raise the minimum threshold from £750 to £5,000.

The change, which is expected to come into force in October 2015, should mean an end to people being forced into bankruptcy for what many charities say is an unreasonably small amount.

The Government has also increased the ceilings applicable to those looking into entering into a debt relief order, with the maximum debt that can be covered rising from £15,000 to £20,000.

It's thought this alone should give some 3,600 extra people a year a lower-cost, less drastic, alternative to dealing with their problem debt than declaring bankruptcy.

Bankruptcy v debt relief

There are three basic ways to deal with insolvency: bankruptcy, individual voluntary arrangements and debt relief orders.

Bankruptcy is the most extreme of the three, and not something to be entered into lightly. Those being declared bankrupt are likely to lose all their assets - car, home, and so on - in order to pay their creditors.

It lasts 12 months, but it stays on the individual's credit record for a further six years after ending, seriously impacting their chance of being approved for services and products in the future, from bank accounts to credit cards, and much more.

Individual Voluntary Arrangements, or IVAs, are agreements made between the debtor and their creditors, whereby reduced payments towards the cost of the debt are made over five or six years. The debt is then written off.

Debt relief orders (DROs) were introduced in 2009, with the aim of helping people with low incomes or few assets write off debts of up to £15,000 (£20,000 from October), which they would otherwise have no way of paying off within a reasonable period.

There's more on the various ways of dealing with debt in our guide here.

It also costs more to be declared bankrupt than to enter into a debt relief order. Bankruptcy fees cost from £650 to £700, while DROs cost £90.

It's this situation Matt Barlow of Christians Against Poverty is referring to when he says that "more than a third of our clients... are too poor to go bankrupt", with too much debt to be allowed to enter a DRO but too little money to cover bankruptcy fees.

Out of date

At present, a creditor can launch a petition to have someone made bankrupt - and therefore recover any money they're owed - when they're owed just £750.

Think about that for a moment: Someone could lose their house because they can't pay for the sofa.

That's because the threshold hasn't been changed since 1986. If it had risen in line with inflation, it would now be around £1,700, much closer to the figure of £2,000 the Insolvency Service was first thought to be considering.

But it decided on the new threshold of £5,000 after seeking the views of industry, debt charities and other interested parties during 2014.

It's agreed the change is long overdue.

"Enforcing bankruptcy is a power that should only be available as a last resort for creditors," says Gillian Guy of Citizens Advice.

Meanwhile Joanna Elson OBE of the Money Advice Trust, the charity that runs National Debtline, says she's "pleased to see more protection from bankruptcy for people with smaller debts."

Proportional response

There have long been calls for those with smaller scale or temporary debt issues to be given more protection, and in 2010 the Office of Fair Trading had to warn credit card companies against using charging orders to recover debts as small as £600.

A few critics have said the change will make it more difficult for people to pursue traders, landlords and other individuals who refuse to pay what they legitimately owe.

But the Insolvency Service points out there are other, less radical options for recovering debts, such as the small claims court.

It's worth remembering too, that the aim isn't to make it easier for people to avoid coughing up, but to help prevent people from having their financial situation entirely derailed by one or two debts.

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