Government plans large increase in bankruptcy threshold

In January 2015, the Government announced plans to increase the bankruptcy threshold to £5,000. At present, individuals can be the subject of a bankruptcy petition over debts as small as £750, with this threshold having remained unchanged since 1986.

At the same time, the requirements for entering into a Debt Relief Order (DRO) will be relaxed, with the aim of making a DRO a viable and less damaging alternative to bankruptcy for many more people. The maximum debt that can be covered under a DRO will rise from £15,000 to £20,000; and the maximum value of assets that a DRO holder can have will rise from £300 to £1,000. If the individual owns a vehicle of up to £1,000 in value, then this does not need to be included in the asset limit. The requirement for DRO holders to have no more than £50 per month of income left after essential expenses have been accounted for is expected to remain unchanged.

The Government estimates that 3,600 more people will be able to enter a DRO each year as a result of the changes.

The proposals have been driven by a consultation exercise carried out by the Insolvency Service, where several debt charities and other organisations expressed a wish to make changes of this type.

Firms who currently offer debt management solutions need to be aware of the likely changes to the DRO requirements. This type of debt arrangement allows an individual to have their debts and interest frozen for 12 months, and to have their debts written off if their financial position has not improved by the end of this period.

Business Minister Jo Swinson MP said of the proposals:

“Struggling 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. They also ensure that bankruptcy, which has the most significant consequences, is reserved for those with sizeable debts.”

A spokesperson for debt charity StepChange welcomed the announcement by 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.”

The plans will require new legislation to be drafted and passed by Parliament, and the best estimate at present is that the new rules might become law in October 2015. The changes will only affect England and Wales, as insolvency legislation is the responsibility of the devolved administrations in Scotland and Northern Ireland.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.