Government Intend to Increase Bankruptcy Threshold

The Government has announced an intention to increase the bankruptcy threshold from £750 to £5,000 from 1 October 2015 (subject to Parliamentary approval). Currently a creditor can petition for a debtor’s bankruptcy so long as the debt is over £750.

The threat of bankruptcy has always been an effective tool for small and medium sized enterprises (“SMEs”) to help recover undisputed debts. Faced with the risk of bankruptcy, many debtors will pay up or at least enter in to suitable repayment arrangements. After 1 October, to collect a debt of less than £5,000, a creditor will have only one option which is to issue a claim via the small claims court. If a debt is not disputed, a judgment might be obtained relatively quickly and cheaply but if the debtor still does not pay, despite the fact that the non-payment is likely to mean that their credit rating will be affected, the creditor will have to take further steps to enforce the judgment. This could be time consuming and costly with no guarantees of recovery.

The change could have a damaging effect on the ability of SMEs to recover their debts. Coupled with the fact that under the rules of the small claims court, legal costs are not recoverable, SMEs could find themselves in a position where it is uneconomic to pursue a debt through the court process.