Bankruptcy threshold raised to £5k

Posted by Michael Bolt in Dealing with Debt on 27 January 2015 - Michael worked as a Credit Analyst at checkmyfile until 2015

The government has announced plans to increase the bankruptcy debt threshold, following a consultation announced by the Insolvency Service in August 2014 .

The bankruptcy debt threshold is set to be increased from £750 to £5,000, representing the first increase to the threshold in nearly three decades. If it had risen in line with inflation since its introduction, it would stand at £1,700 today.

As a result of the changes, creditors could find it increasingly hard to make people bankrupt due to the increase in the debt threshold. If an individual previously owed more than £750, it was possible to apply to make that individual bankrupt using a bankruptcy petition. A Court may then make that individual bankrupt using a bankruptcy order.

It has been suggested that the number of people being declared bankrupt could fall sharply following the increase in the threshold.

The moves have been welcomed by many campaigners, who have said that it will prevent creditors from making people bankrupt for ‘unreasonably small debts’. Others have argued that it will make it harder for consumers to pursue landlords, tradespeople or others who refuse to pay what they owe – although other routes are available for people to recover the debts that they are owed.

Following its ‘call for evidence’ from those in the insolvency industry, debt charities and other interested parties, the Insolvency Service found that many believed that the level of debt that could trigger a bankruptcy was too low.

As well as the increase in the bankruptcy debt threshold, some changes to another form of insolvency - ‘Debt Relief Orders’ (DRO’s) - have also been announced. DRO’s have been styled as a low cost alternative to bankruptcy for vulnerable people with few assets.

An increase in the amount of debt that can be included in a DRO has been announced – from £15,000 to £20,000. Additionally, the level of assets an individual can hold and still be eligible for a DRO has been increased from £300 to £1000.

The proposed changes are expected to come into effect in October following parliamentary scrutiny.

The debt advice charity, StepChange, has welcomed the reform, saying, “An increase in the DRO maximum debt threshold and a higher creditor petition limit for bankruptcy is welcome news for people struggling with debt”.

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