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The Bankruptcy Debt Threshold

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To be made bankrupt, a court has to issue a bankruptcy order which can occur for the following reasons:

  1. the debtor applies to court if they are unable to pay their debts and want to declare themselves bankrupt;
  2. the creditors apply to make the individual bankrupt if owed £750.00 or more;
  3. an insolvency practitioner applies to make the debtor bankrupt because they broke the terms of their Individual Voluntary Arrangement (“IVA”).

There were a total of 20,318 bankruptcy orders in 2014, 17.3% less than in 2013. The number of bankruptcy orders has decreased each year since 2009 and was at its lowest level since 1998. The current level of debt, £750.00, was determined in 1986.

A Debt Relief Order (“DRO”) is an alternative to bankruptcy and their use has decreased for the second year in a row. There were a total of 26,688 DROs in 2014, which was a 3.1% decrease compared to the amount in 2013. DROs were introduced on 6 April 2009 and since their introduction have provided relief from debt for over 140,000 people.

To be eligible for a DRO the debtor needs to satisfy the following criteria:

An IVA is a further alternative to bankruptcy and was responsible for 53% of all individual insolvencies in 2014.

The Department for Business Innovation and Skills began a consultation on how the process of DROs can be improved and whether a change to the bankruptcy debt threshold should be made; the consultation closed on 9 October 2014.
The consultation outlined some potential issues resulting from the bankruptcy debt threshold of £750.00 which include:

It is reported that if the bankruptcy debt threshold had risen annually in line with inflation it would now be £1,700.00 rather than £750.00. The Insolvency Service’s analysis suggests that a threshold set at £2,000.00 would have removed 3% of all cases in 2013/14 and a £3,000.00 threshold would have taken 8% out of the bankruptcy process.

Business Minister Jo Swinson has announced that the following changes will be made:

The DRO asset limit will be raised to £1,000.00 plus a vehicle (worth not more than £1,000).
These changes will be subject to Parliamentary scrutiny before coming into force in October 2015.

The changes should allow 3,600 more people a year with problem debt to enter into a DRO which is thought of as a low cost alternative to bankruptcy for those with very low assets and income and debt which they are unable to pay.

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