Changes to the petition level on bankruptcies – will this help or hinder?

Discussions have been taking place regarding the level of debt required before petitioning for bankruptcy. It has now been confirmed that the proposed level will be increased from £750 to £5,000 – this is the first rise in limits since 1986.

It is expected that this rise will take place in October 2015 however this still has to undergo parliamentary scrutiny.

The industry as a whole has been in agreement for some time that £750 is no longer appropriate so a rise was inevitable. However the jump to £5,000 is in my opinion too high and leaves creditors with limited options.

Is it really appropriate that creditors may have to look at the small claims court to try to obtain payment if the debt is less than £5,000?

Creditors have sometimes used the threat of bankruptcy to force the issue of payment with the debtor, and in some cases the debtor has the ability to pay but has failed to do so –  if creditors no longer have the threat of bankruptcy, does this reduce the sanctions that they have to encourage payment?

My experience with the Courts is that they are highly unlikely to allow a bankruptcy order on such a small debt, unless other avenues have been explored first and it can be demonstrated that the debtor has either failed to engage with the creditor or tried to find a solution.

On the other hand, it is agreed that the limit of £750 is too low and when the limit was set in 1986, all other amounts were equally proportionate to the debt limit. The possibility of losing your house for the £750 amount is clearly disproportionate.

The question I would ask is, in practise, how often does a creditor actually petition based on a petition debt of £750? My experience is that this does not happen often, whether that is because the creditor does not want to incur the costs associated with petitioning based on that level of debt or whether by virtue of the Courts being unwilling to allow proceedings to go ahead I cannot say, but in all my years dealing with insolvency I have not seen a petition debt listed totalling £750.

My experience of creditors’ petitioning for a debt of a few thousand pounds does occur and the reality is that this level of debt is enough to impact on a small business and can in turn result in the failure of that business or that individual. Therefore I think the Insolvency Service and the Parliamentary Committee needs to consider the impact of not having the bankruptcy option available to creditors for debts lower than £5,000.

I would hope that while the level of the petition debt is increased from its current level, that the amount expected in October 2015 is reviewed and decreased accordingly, but clearly we will need to await the scrutiny and see whether others feel the same as I do.

For further advice, please contact Lynn Marshall on 0191 285 0321 or email lynn.marshall@taitwalker.co.uk.

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