If you don’t work in the collections industry, you might be surprised to find out that you could be forced into bankruptcy for owing as little as £750.
To be frank, forcing someone into formal bankruptcy, with all the legal red tape and consequences involved, is a path that fewer and fewer creditors have been taking since 2010.
Much better to make an arrangement for payment by a debtor with a realistic plan that satisfies both parties.
Now the government has recognised this with proposals designed to make it easier for debtors to enter a less expensive debt relief order while the bankruptcy threshold rises for the first time since 1986 from £750 to £5,000.
The maximum amount that can be covered by a debt relief order will increase from £15,000 to £20,000, with effect from October 2015 and subject to parliamentary scrutiny.
Junior business minister Jo Swinson explained the government’s reasoning: ‘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.’
Eligibility for DROs will, Swinson emphasised, ‘continue to be restricted to those with very low realisable assets and therefore no realistic ability to repay their debts’. The government calculates that 3,600 more people will be able to use DROs, with asset limits raised to £1,000, plus a vehicle worth not more than £1,000, though the maximum surplus income permitted remains £50 a month.
There was a broad welcome for the proposed changes, with the British Bankers Association saying that they would ‘help people facing serious financial hardship make a fresh start faster than before’.
Protection ‘eroded by inflation’
Sounding a note of caution amid his welcoming comments, Giles Frampton, the president of R3, the Association of Business Recovery Professionals, said: ‘Insolvency solutions can often be a suitable way for heavily indebted individuals to deal with their debts but it is important that people are in the type of debt solution most appropriate for their situation. The changes will make it much easier for indebted individuals to deal with their debts effectively.
‘The rise in the creditor bankruptcy petition threshold is welcome, although £5,000 is far higher than expected. It is right that the petition be increased: £750 was an entirely inappropriate level and the protection it offered debtors had been steadily eroded by inflation over the last three decades.
‘The rise in the petition threshold will require creditors to look at other options for the pursuit of low value debts. While a bankruptcy petition is not always the most proportionate tool for this, it’s very important that the insolvency regime maintains a balance between protecting the interests of both debtors and creditors. How the new threshold works in practice should be monitored closely.’
Monitoring will be vital, as balance is what we try to achieve in the collections industry. If you need help putting the balance right, with unpaid accounts beginning to grow, then don’t hesitate to contact SJ Collections.