Debtors' Gain is Creditors' Loss

Imminent reforms to bankruptcy rules could see declaration replaced by negotiation in a number of cases.

The word bankruptcy strikes fear into the hearts of many. It is the most infamous and feared of the insolvency processes.

For the last 30 years the bankruptcy threshold has been a mere £750. This has meant that creditors have been able to easily threaten or issue bankruptcy proceedings, with all the misery and stigma they entail, for relatively low amounts of debt.

After years of campaigning against this inappropriately low threshold, the Insolvency profession is at last welcoming Government intervention.

Size is everything

From October 1st, Government reforms will raise the bankruptcy threshold to £5000. The Government aims to reserve bankruptcy, with its significant consequences, for those with sizable debts. This will bring relief to many thousands of debtors who owe small amounts and will force creditors to work with debtors to agree flexible plans for repayment.

In addition to the threshold increase, the Government is also reforming alternative regimes for the management of small debts. One of these is a Debt Relief Order (DRO). The DRO is a low-cost administrative rather than a court based procedure. It is designed to support financial rehabilitation by giving debtors protection from their debts for a period of 12 months. This gives debtors the opportunity to address their debt issues and plan repayment. The Government plans to relax the thresholds at which people are eligible to enter the DRO regime. The maximum level of debt to enter a DRO has been increased from £15,000 to £20,000 and allowable assets have been increased from a maximum value of £300 to £1000 plus a vehicle worth no more than £1000.

Winners & losers

The Government estimates that these changes will allow thousands more low-level debtors to benefit.

Whilst these changes will bring great relief to debtors, they will not be welcomed by creditors, who will be forced to consider other ways of pursuing low-value debts. Creditors chasing debt of less than £5,000 will have to rely on an informal repayment agreement with the debtor or formal proceedings through the small claims court.

With the proposed changes not coming in to force until October, it’s possible that there may be a flurry of creditors rushing to threaten or serve bankruptcy proceedings while they still can.

If you need advice on debt matters MLG Associates are always available for a free initial consultation.

Alternatively, there are a number of charities that offer free debt advice:

Citizen’s Advice Bureau

Debt Advice Foundation

National Debtline

StepChange Debt Charity