From today, the way the personal insolvency regime works is changing in some key ways. It is going to become harder for people to made bankrupt over low value debts, and it is going to become easier for people to enter Debt Relief Orders. The reasons why these changes needed to be made are covered in detail in our Personal Insolvency Landscape series, so over here on R3 Thinks we’ll mainly focus on the basics of exactly what is happening. Having campaigned on these changes throughout 2014, we’re pleased to see them finally introduced
It will become harder for creditors to make individuals bankrupt for unpaid debts.
Until yesterday, for a creditor to ask the court to make an individual bankrupt, the individual had to owe a minimum of £750 to the creditor. From today, the minimum debt has increased to £5,000. We’d called for the minimum debt to be increased to £3,000; you can read our earlier post for why the government has opted for a higher level.
The £750 level was set in 1986 and was designed to stop people being made bankrupt over very low value debts. However, the protection this minimum debt threshold offers has been eroded by inflation. If the minimum debt had increased in line with inflation since 1986, it would have been worth almost £2,000 in 2014.
We think that the insolvency regime works best for creditors and insolvent individuals when insolvent individuals are in a procedure most appropriate for their situation. For some individuals, a Debt Relief Order or an Individual Voluntary Arrangement might be more appropriate than bankruptcy.
The changes mean there could potentially be around 2,000 fewer bankruptcies every year (there were around 20,000 total bankruptcies in 2014).
Debt Relief Orders – an alternative to bankruptcy – will become more accessible
Until yesterday, to enter a Debt Relief Order an individual had to owe under £15,000 and have under £300 of assets. From today, an individual must owe less than £20,000 and have under £1,000 of assets.
We campaigned to have these limits increased.
A Debt Relief Order is a low-cost alternative to bankruptcy. Whereas bankruptcy costs £705 in government administration and court fees to enter, Debt Relief Orders only cost £90 to enter.
Under the current rules, sometimes an individual has too many debts or assets to enter a Debt Relief Order but cannot afford the £705 to enter bankruptcy. Changing the asset and debt thresholds will help more people access the insolvency regime.
The changes mean there will be around 3,600 more Debt Relief Orders every year.
