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Why £5,000? - The Creditor Bankruptcy Petition Level

Back in January 2015, the government published its proposals to lift the creditor petition threshold for bankruptcy to £5,000 and the Debt Relief Order limits to £1,000 for debts and £20,000.

We welcomed these changes at the time (our comments here; details on what we’d called for are here and here), but we were a little unsure at how exactly the government had decided upon the new levels. At the time, the government only published a summary of responses to its ‘call for evidence’ on the issue rather than any particularly detailed commentary.

For those of you, like us, wondering exactly what the government’s reasoning was, we’ll point you in the direction of the parliamentary debate on the statutory instruments introducing the changes back in March 2015. Here are the key bits (on the creditor bankruptcy petition at least):

Toby Perkins (Labour’s shadow insolvency minister): I welcome much of what the Minister is setting out, but can she expand a bit on how the £5,000 figure was arrived at? It is a substantial increase on £750. She will be aware that the profession, although welcoming the proposals, was surprised that the Government had decided to move the threshold quite so high. Will she tell us a little more about the representations that she has had and why the Government ultimately decided to go so much higher?

Jo Swinson (the insolvency minister):  I am happy to do so. It is worth putting it in context: as has been mentioned, the sum of £750 has not been changed since 1986, so it is clearly out of date. In the consultation, we asked for views in an open way asked what people thought the figure should be. We received lots of case studies in response that demonstrated the issue. A level of £5,000 will also bring bankruptcy into line with the limit for civil administration orders. In its response to the consultation, StepChange cited that 14% of the debt problems that it saw involved individual debts of more than £5,000, and thought that that was the right level for the ultimate sanction of bankruptcy. It was basically about considering the weight of the evidence submitted to the consultation. There is a degree of future-proofing involved as well: the level had not been changed since 1986, so we wanted a level that would be robust and appropriate for a fair amount of time. The new level has been generally welcomed, and I hope that the Committee will share that view.

TP: While the Minister was speaking, I checked on Google – so the answer must be correct – what £750 back in 1986 is worth today. The answer is £1,984.65 – so roughly £2,000 [Ed: R3 called for £3,000, as per the Kempson review, to ensure the threshold matched the cost of the petition process; an above-inflation increase would also future-proof the limit for a while). It makes perfect sense now, in 2015, to update the figure set in 1986; a debt of £750 in 1986 is not the same as a £750 debt now. None the less it underlines my point that, notwithstanding inflation, this is a substantial increase – more than 150% – on what it would have been even after inflationary impacts are put into play. I think the industry was surprised, as I was, that the Government decided to go up to £5,000. The right hon. Member for East Yorkshire (Ed: Greg Knight, Con) made the point that, although we recognise why the Government want to make the change, we should ensure that people who are lawfully owed money are not prevented from taking steps to get it back.

JS: I am sure the hon. Gentleman is right that Google would be a reliable source – it often is – in calculating what £750 in 1986 would be worth today, which is about £2,000. He is right that we recognise that the level needs to be raised, responding to concern about the use of the credible threat of bankruptcy by unscrupulous creditors. Citizens Advice said that was problematic, so it suggested not only a limit of at least £5,000, but that consideration be given to applying a higher limit, because of the potential effect of a bankruptcy order.

The Money Advice Trust said:

“On balance we would favour a limit of £5,000. This would deter creditors from threatening bankruptcy when they do not really mean it.”

Some in the legal profession also supported £5,000, with Judge Britton mentioning that that was the same limit as applied to civil administration orders. Some others—Judges Hickman, Perusko and Burgher—argued for a petition limit to increase to £10,000 to bring it into line with the limit for the small claims court, which can now deal with cases worth up to £10,000. They described the small claims procedure as “intentionally cheap and cheerful”. I am not sure that quite accords with the experience of my right hon. Friend the Member for East Yorkshire. However, that gives a flavour of some of the consultation responses and why we have decided to go for £5,000.”

Notes to editors:

  • R3 is the trade body for Insolvency Professionals and represents the UK’s Insolvency Practitioners.

  • R3 comments on a wide variety of personal and corporate insolvency issues. Contact the press office, or see for further information.

  • R3 promotes best practice for professionals working with financially troubled individuals and businesses; all R3 members are regulated by recognised professional bodies
  • R3 stands for 'Rescue, Recovery, and Renewal' and is also known as the Association of Business Recovery Professionals.