What level should bankruptcy petition thresholds be set at?
R3 are calling on the government to consider raising this threshold to £3,000. Vote in a poll to express your view at which level they should be set.
This week, in response to government proposals, R3 – the Association of Business Recovery Professionals, called for a rise in the current bankruptcy petition thresholds.
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Currently the level of debt that a creditor can seek a bankruptcy order on an individual is £750.
R3 are calling on the government to consider raising this threshold to £3,000.
Relative to the current levels of secured and unsecured debt in the UK, £750 is a very low proportion that will allow banrkuptcy orders to be initiated by creditors.
Business Minister, Edward Davey commented:
to threaten someone with bankruptcy for such a small amount is disproportionate.
So the question is, at what level should the threshold be set?
We have already started debate on the subject with insolvency professionals.
@ClearDebt I would have thought somewhere nearer the £2k level? What do you think?
Gemma Kaplan
GemmaKaplan
When considering your answer you could take into account the following thoughts – from ClearDebt’s Andrew Smith:
“The idea of a threshold at which a creditor can initiatie bankruptcy proceedings against(a debtor is to strike a balance between what is a reasonable sum of money for a creditor to start a process which will have drastic effects on the debtor’s life and a level beneath which this threat is less of an effective recovery mechanism and more an opportunity to harass the debtor and persuade him to pay the creditor back, whatever his other financial woes.
“In 1986, when the current limit came in it was set at £750 – an equivalent value now would be around £1,700. But, the original figure has lasted for 25 years – so we should make some allowance for inflation. Also, people nowadays tend to owe a lot more than they did then: this may affect your thinking. On average, people who have credit card and bank loan (unsecured) debt owe around £15,500 – but that includes people who are coping as well as those that struggle”.
Vote in the poll and let us know your reasoning in the comments at what levels you regard as sensible that the bankruptcy threshold petition should become.
I think a new Bankruptcy Petition threshold should be £2,500.
The level should be pegged to the Charging Order threshold which looks set to rise much more significantly. If it isn’t, bankruptcies will rocket as the only means by which unsecured creditors can get their hands on asset value.
Our current level of unsecured debt per client at AMS Assured Money Solutions is over £26,000. I feel that £5000 particularly with inflation and the current financial problems would be a better limit and more appropriate.
The Institute of Credit Management believes a review of the threshold is overdue and supports a level of £3,000 as being a sensible way forward
The burdens and duties placed upon Directors should not be under-estmated, with use of Statutory Demands for testing the ability of companies to meet payment of their trade debts as and when they fall due. Since the Insolvency Level relates to both Bankruptcy and Companies Winding-Up – it is important to not increase the level too quickly and I would say £1000 be about right.
To increase the level too high would prejudice SME’s from seeking recovery of non-contentious debts other than through the court system, which incurs high penalties of issue fee, which may or not be recovered.
I strongly disagree with ICM policy here. Please re-consider.
An interesting debate . I am a Debt Recovery and Insolvency Solicitor-and am strongly against any such changes for all the reasons set out above. I note Philip King’s comments below, but as a trade body for creditors the stance surprises me. The proposal is another step in the ever onward march to a debtor friendly approach to collection. The beauty of statutory demands is that they cut out the court process initially -and hence avoid delays. Add this proposal to the scandalous delays and inefficiencies in the court system and you have more opportunities for debtors to duck and dive. The Civil Court Users Association has asked its members to respond to this proposal -and hopefully the rersponses will be as strident as mine( I am a member aswell)-and I can put any interested party in touch with them.
I would hope if other ICM members feel as seems to be set out here that we can be privy to why this approach has been endorsed by Philip -it all seems very strange-we are not the Institute of Debt Management are we?-or have I missed a name change somewhere along the line?
Strongly disagree with you Steve. £750 is a trivial amount of debt these days – and a number of DCAs do use the threat of bankruptcy (something they are most unlikely to follow-through on) as a means of scaring debtors into paying Paul one month and Peter they next – when they should be trying to make their best efforts to repay as much as they can afford to both.
A new, realistic threshold is one more nail in the coffin of over aggressive collection procedures and a step towards a rehabilitation culture where creditors work to turn defaulting clients into future customers.
£3,000 sounds right to me. Though I’m interested in Stuart’s thoughts on compatibility with Charging Orders.
Andrew -you and I come from different perspectives
I am a creditor man-that is my job-and I see so many Debtors”getting away with it”
I accept the need to distinguish the cant pays from the wont pays -but the latter category is a very big one
SME’s need cash to stimulate and grow their businesses -the delays in debtors paying in this country are one of the worst in Europe. It is important we don’t take away another tool in the box.
I acted a few years ago for a builders merchant who used statutory demands and bankruptcy as their only method of collection-they eradicated the bad debt problem over a 2 year period as all realised they were not to be messed with.
As reputable and regulated solicitors we do not condone the use of process unless it is to be carried through -but statistically it is a very useful tool
May I respectfully suggest it is in your Company’s interest to see the level increased as it will remove the threat of lower debt bankruptcy and help IVA’s etc …..
Steve, – I absolutely see your PoV, even if i don’t agree with it.
The only thing i want to take up, though, is your last point. I don’t think many creditors will make someone bankrupt for £750. The reputational risk alone ain’t worth it.
So, raising the threshold won’t change the reality of creditor behavipur – but it will stop scary letters implying something is going to happen that won’t.
Behaviour will match reality. That’s good. Isn’t it?
Thanks for such a clear articulation of your views, Steve and others. I think it might be helpful if I clarify a couple of things by copying the comments I’ve posted to the discussion on the ICM Credit Community LinkedIn group:
My comments are linked to this informal Cleardebt survey, not a formal government consultation – the government has stated its intention to consult on the threshold later in the year and, when it does, the ICM will of course talk to its members to inform its thinking and response.
The survey,and the recent government paper, refer specifically to personal insolvency and bankruptcy, not the winding-up of limited companies. It remains to be seen if, or how, government might propose differentiating between the two and, if it doesn’t or can’t, then that will influence our thinking.
Nevertheless, the current level of £750 has been unchanged since 1986 and, if the figure was appropriate then, one has to ask how that would translate 25 years later.
The point of engaging in surveys like this is to stimulate thinking and debate, and I’m delighted we’re demonstrating the power of the credit community to which we all belong by doing just that! Argument is much better than apathy!
£750 is far too low in today’s day and age – with the proliferation of unsecured lending by the banks and credit cards I believe the threshold should be raised to £2,000.
A point of information for readers. I Just had an email from a a contact with lots of expertise and knowledge in insolvency and banking.
They indicated to me that their initial view was that the proposed changes would have little or no impact on the banking industry as, based on their experience, they did not believe that a bank would typically seek to make someone bankrupt for less than £3,000.
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Regardless of whether it changes or not, bankruptcy will increase. The latest Insolvency figures are a touch dated and don not reflect what is happening in real terms currenlty on the ground. I think it may change to £1500, but will this affect things?…. No.
A much more significant rise in the threshold than is being suggested would also have the effect of removing some of the fear that deters many people from risking going into an IVA.
Aw, I do love all you professionals, with your career evidenced anecdotes about how consumers behave and what’s best for them… At the risk of alienating many of you, let’s turn this entirely on its head. How much personal borrowing was there in 1986? And how much now?
We have to start accepting that personal indebtedness is mainstream and that tipping over the balance into over-indebtedness is increasingly common in uncertain economic times. Any failure to accept collective responsibility for enjoying an era of easy credit will result in conflict and conflict will result in, well a heck of a lot of won’t pays and insolvencies.The profile of debt advice clients has been changing towards older, wealthier and home owning debtors, and what’s more the way we measure over-indebtedness has been shifting to a distinct focus on servicing debt. Check out Zero-credit’s Welfare Report for the evidence: http://www.zero-credit.co.uk/the-welfare-costs-of-personal-debt.html.
Economically, we’re between a rock and a hard place: creditors want their money back, borrowers may not have it, and then there’s a government that needs consumers to keep on spending – talk about pulled in every direction… Keep the bankruptcy thresholds so low and creditors will continue to scare the living daylights out of people who expected the crunch as much as any expert on the telly did.
To be honest, I think R3 have it about right at £3k because average earnings are circa £25kpa and average household income around £26kpa. That’s about two months’ money. Sure, people ought to have insurances to cover a change in circumstances but with food, energy and fuel prices rising many of them will wing it in the hope that they can get by. It takes time to unlearn irresponsible lending and borrowing and we all need to accept that.
I work as a Bankruptcy Consultant and have two cases on my desk at the moment. Apologies for naming and shaming but credit where its due (or not). The petitioning creditor for both cases is Lowell who are an extremely aggressive creditor. Both cases are for debt balances of less than £1200. One of the cases Lowell have actually purchased two debts form other companies and combined them to reach the £1200 mark.
The client in this case has been out of work for a short period and fallen into arrears. Both have significant asset in property that they are looking to lose through bankruptcy. The lady I’m dealing with currently has a creditors in bankruptcy TOTAL of £2000 with over £138,000 of asset now at risk. She has been out of work for several months causing mortgage arrears (she is now back in work and has paid off all mortgage arrears).So is £750 too low? With creditors like Lowell out there throwing bankruptcy petitions out for fun, I would say Yes. I would say £3000 is more realistic but wouldn’t shy away from £5000 either. I will see less cases hitting my desk sure.. But then there’ll be less women losing theirs homes because of several months out of work and one aggressive creditor. I’m sure she would have paid lowell (or whoever they bought the debt off) once she had repaid the mortgage arrears which she has now done.
Just another angle on the situation… But seeing some of creditor petitions in bankruptcy I can’t help getting a little ‘passionate’ lets say..
It should be at least £5,000 – in the current climate and given the other available solutions it is a more realistic figure
I object to the use of Stat Demands/Petitions which, in my opinion, is an abuse of the system for the reality that DCA’s are hitting property owners for relatively minor debts, presumably to secure or otherwise use (or rather misuse) the process to obtain payment.
A higher limit would help to contain this practise..