On 6 August 2014, the Insolvency Service (IS) published a call for evidence in order to consider how the debt relief order (DRO) process can be improved and whether a change to the bankruptcy petition limit should be made.
The call for evidence considers the following issues:-
- Whether the existing DRO limits for assets (under £300), liabilities (less than £15,000) and income (surplus less than £50 pm) are appropriate and, if not, what should the levels be set at
- Whether access for vulnerable debtors to DROs can be improved
- Whether DROs have given people a fresh start and financial rehabilitation
- Whether the £750 limit for a creditor petitioning for bankruptcy is set at the correct level.
A creditor (or group of creditors) must be owed a sum equal to, or in excess of, the bankruptcy limit in order to present a bankruptcy petition. This limit was introduced nearly three decades ago, in 1986, and is currently set at £750. Whilst the costs involved in presenting a petition (comprising the Official Receiver’s deposit and court fees) have risen over the years, the bankruptcy limit remains unchanged.
Business Minister, Jo Swinson, has stated:
“Bankruptcy has serious consequences and there is a strong argument that bankrupting someone for a debt of £750 is no longer fair or reasonable, especially when there are often alternative cheaper ways for those owed money to seek repayment.”
According to the IS, if the limit had risen annually in line with inflation it would now be £1,700. A threshold set at £2,000 would have removed 400 petitions last year (or 3% of all cases in 2013/14), while a £3,000 threshold would have taken 1,000 cases (8%) out of the bankruptcy process.
In order to petition for their own bankruptcy, a debtor must pay an upfront fee of £705, made up of the Official Receiver’s deposit of £525 and court fee of £180, of which the latter can be waived in hardship cases. This means that, somewhat ironically, bankruptcy is not affordable for many of the most vulnerable debtors. DROs were introduced five years ago in response to this problem and give those with very few assets or income and a relatively low level of debts a simple and cost-effective alternative to bankruptcy.
Since they were introduced, over 140,000 debtors have received debt relief via a DRO and the consultation has requested evidence in order to review the regime and consider how it can be improved.
Dan French, partner in the Corporate Recovery team at Gateley, commented:
“The £750 threshold was set at a time when the average wage was just £6,000 and a pint of beer cost 75p. Given that a bankruptcy petition has such severe repercussions for the individual affected, it is right that the threshold should be reviewed and, if appropriate, increased, to avoid abuse of process by those collecting relatively trivial sums. Conversely, with DROs, which were introduced to provide some protection for the poorest in our society, care must be taken not to move this lifeline out of the reach of those who need it the most.”
The consultation closes on 9 October 2014 and can be found on the IS website (https://www.gov.uk/government/consultations/insolvency-proceedings-review-of-debt-relief-orders-and-the-bankruptcy-petition-limit).