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Nearly 30 years of inflation leads to changes to bankruptcy debt rules

The Government has announced changes to the amount of personal debt required to enter bankruptcy and extended the reach of ‘Bankruptcy Lite’ Debt Relief Orders to cover debts totalling up to £20,000.

The changes will allow approximately 3,600 more people a year with problem debt to enter into a Debt Relief Order (DRO) – a low cost alternative to bankruptcy for those with very low assets and income and debt which they are unable to pay. The maximum amount of debt that can be covered by these plans will increase from £15,000 to £20,000.

The government is also increasing the minimum level of debt for which someone owed money can force a person into bankruptcy from £750 to £5,000. The limits were last revised in 1986.

Business Minister Jo Swinson said:
"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."

The Insolvency Service sought views from industry, debt charities and other interested parties on the operation of DROs and bankruptcy debt threshold last year.

Evidence showed that DROs help some of the poorest and most vulnerable people in society make a new start and improve their mental well being. The new changes will allow more people to get resolution when faced with debts they cannot pay.

The changes will not disadvantage those owed money because eligibility for a DRO will continue to be restricted to those with very low realisable assets and therefore no realistic ability to repay their debts.

Respondents also thought that the debt that can trigger bankruptcy through the courts was disproportionate, as people can be put through the most serious of debt recovery action for a debt as small as £750. There are also other ways for those owed money to recover their debts such as action in the small claims court or attachment to salaries.

Changes announced include:

  • Bankruptcy creditor petition level to be increased to £5,000 from £750
  • DRO limits raised to £20,000 enabling some 3,600 more people with low level debt to use DROs instead of the more expensive and onerous bankruptcy process
  • DRO asset limits raised to £1,000, plus a vehicle (worth not more than £1,000)
  • The maximum surplus income a person can have to qualify for a DRO will remain at £50 per month

The changes come as a survey of DRO users showed 96% would have been unable to deal with their debts without DROs, and 79% said the process had a positive impact on their mental health.

Whilst the changes make sense for a number of good reasons, being sceptical, the consequences will be that a number of low value cases that are currently dealt with by the Insolvency Service will fall outside their responsibility. These low value cases don’t produce sufficient income for the insolvency service to cover their costs of administration. Over the last few years these low value cases have led to Insolvency Service budget deficits and an insolvent Insolvency Service!

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