In January this year it was announced that the minimum amount for a creditor’s bankruptcy petition would be increasing from £750 to £5,000 – a rather large leap for those chasing debts owed by individuals!
With the Order to raise the limit now approved it is time for creditors to understand the impact of the changes and assess whether they need to start recovery proceedings before the amendment takes effect on 1 October 2015.
Why the increase?
Whilst the rise from £750 to £5,000 is a considerable increase, it has to be acknowledged that this is the first review of the creditor’s petition since the Act came into force - some 29 years ago.
It is therefore not wholly unexpected that the rise in petition debt would have been increased and, given the recent recession, it is clear that there has been a shift towards assisting individuals who have small scale debt in order to break the cycle and dependence on loans to service loans.
What effect does the rise have on the debtor?
It cannot be denied that the changes will benefit the debtor more favourably than creditors. The change to the bankruptcy petition coincides with the raising of the limit for Debt Recovery Orders (DRO) from £15,000 to £20,000. The effect of the DRO is substantially the same as bankruptcy, but only applies to those who have very low incomes and no assets (for example you cannot be considered for a DRO if you own property). Further the level of £750 remains in place for debtors who wish to place themselves into bankruptcy. For creditor’s this means that a debtor is able to declare the insolvent more easily and have their debt wiped from his record. Debt relief organisations expect the use of DRO’s to become more prevalent from October 2015.
What effect does the rise have on a creditor?
For smaller scale debt the reality is that, even if a bankruptcy order was made, in the majority of cases there are no funds or the assets available to return a pence in the pound dividend to creditors and after a year the bankrupt is able to walk away and no longer concern himself with the debt.
The creditor may therefore be better off financially in agreeing a repayment plan with the debtor to consolidate the debt - bearing in mind any consumer credit issues of course!
• Protect yourself from the outset – it is advisable to undertake background credit checks on individuals before starting to trade with them. Equally, if a director is guaranteeing a business debt, ensure that you not only check out the company but the director’s credit history too.
• Continue to monitor – whilst most businesses are proficient in checking the credit ratings of its business partners at the commencement of the relationship, many do not monitor the continued credit worthiness throughout the relationship. Ensure that in the terms and conditions that govern your relationship that there is a right to do this and to reduce the credit limit if required. This way you will have a head start on knowing whether an individual is having monetary issues and protect your exposure accordingly.
• Act early – do not let debts mount up. In the past with the limit for bankruptcy so low there were more options available to aid in recovery. Now it is advisable not to let the debt get near the bankruptcy limit, as should the debt fall below the £5,000 mark it will be harder to pursue.
• Agree settlements – agreeing a payment plan, and ending the supply of services and/or goods, will assist in the recovery of smaller debts.
These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.