The news in January of this year that the government planned to increase the bankruptcy petition threshold to £5,000 (subject to parliamentary scrutiny) from 1 October was greeted with mixed reaction. On the one hand, it was welcomed in that the threshold of £750 which had been in place since 1986 was wildly out of date. On the other, amid very real concerns from creditor groups and those who represent creditors that it would condemn creditors claiming amounts up to £5,000 to the lottery of the small claims procedure, it was questioned why the government went for that figure, rather than the level of £3,000 suggested by R3 and others. Was it just because the government like round numbers? Until now, we had no clear explanation.

This link to the R3 website provides a more reasoned explanation for the hike to £5,000, first published on 1 September 2015. I for one am still not sure I buy the thinking, and if anything I suspect this is as much as anything about a policy of slashing bankruptcy numbers to reduce government spending on the Insolvency Service still further. However, ostensibly the blame for the new level seems to be laid towards suggestions received from debt charities and from 4 (seemingly non-insolvency, and all District) Judges, as well as the perceived need to ‘future proof’ the threshold. That in itself to me seems to be odd. Whilst I can see that it may alleviate pressure on debt advisors in the short term, will individuals truly have fewer debt problems in the longer term if they can incur credit of £4,999 without fear of bankruptcy, or will this not at some level increase people’s tendency to incur more credit? Why should the government assume that they need to set a level now which will hold good for 30 years? Is the pressure on the legislative timetable really so great? Did the last administration not rush this one through quickly enough in the run up to the general election?

There is nothing in the new information release to suggest that any creditor group wanted the level to increase so much. My very real concern, allied to that I express whenever government decides to hike court issue fees massively, is that businesses will soon work out they cannot truly afford to extend credit on a regular basis, particularly if their whole business model involves invoicing private clients with sums up to £5,000. If they do, and if (as a result of changes such as the above) there is no reliable recourse which would allow them to recover most of that debt within a reasonable time, their directors will have to look to their own solvency over the longer term, and the risk of wrongful trading or placing themselves in breach of duty. I suspect that professional services firms who accept engagements from private individuals and habitually invoice on a project basis will be some of the worst hit.

With the possibility of economic recovery stalling in the near future I would argue that this is not the time to be making such a big leap. The level ought to be fixed at £3,000 (or less) pro tem, in line with the cost of living and the procedure in Scotland, so we can see what impact that has over at least a 3 year period before a further hike is even considered. Absent an unlikely change of heart, however, we are stuck with it, for the reasons now given. In the meantime, how many creditors owed between £751 and £5,000 are even now throwing out statutory demands like confetti with the aim of issuing bankruptcy petitions before 1 October? As a firm we have not really seen an increase in this, possibly because most of our creditor clients are claiming well over even the new threshold, but for the smaller creditors this may be because they are simply unaware of what is coming or, like me, have been hoping against hope for an announcement that parliament would have watered down the effect.

If you need any assistance with any matter relating to personal bankruptcy, or insolvency more generally, please contact me. For debt recovery enquiries generally please refer to Chris Holliss.