Councils and housing associations to be hit by rise in bankruptcy petition threshold
The proposed increase in the minimum threshold for a creditor’s bankruptcy petition from October 2015 could hit local authorities and housing associations particularly hard, an accountancy firm has warned.
The forthcoming change – announced in January – will mean that creditors must be owed a minimum of £5,000 before they can start bankruptcy proceedings to pursue that debt. The current minimum is £750.
Accountants Moore Stephens called of a public sector carve-out to be considered, saying that allowing public bodies to pursue debts of a lower value would help them stem their losses from cumulative smaller bad debts.
Insolvency Service figures have shown that 15% of bankruptcy orders were made for debts of less than £5,000 last year, 785 of the 5,235 total creditor petitions for bankruptcy.
Accountants Moore Stephens suggested that the sharp increase in the bankruptcy threshold would make it far harder for creditors to recover money owed.
Obtaining payment through other means, such as County Court judgments, was often unsuitable due to the cumbersome nature of the process and the lower prospects of a successful recovery, it added.
Partner Michael Finch said: “These figures highlight the impact that the unexpected steep rise in the bankruptcy threshold is likely to have, with public sector bodies having a crucial tool for debt recovery taken away. Some are likely to be forced to write off a substantial number of small debts.”
“Putting someone into bankruptcy for low value debts can be disproportionate as there are serious consequences for individuals. However, these changes to the bankruptcy threshold will ultimately leave taxpayers to foot the bill for those who run up debts intentionally.”
On a public sector carve-out, Finch added: “Without the ability to use bankruptcy proceedings as part of their recovery programmes, creditors such as local authorities will now struggle to recoup any payment on these debts.”
“The concern is that ‘serial debtors’ may see council tax in particular as ‘optional’ if they know that the local authority has limited means to pursue them.
“If local authorities cannot recoup their bad debts then the shortfall will have to be made up from elsewhere – most likely through council tax hikes or cut-backs to services.”
