Raising the bankruptcy limit: a weakening of “the strongest of debt recovery tools”

 

Proposed Government legislation will mean that with effect from 1 October 2015, anyone wishing to present a bankruptcy petition against another must be owed a debt of at least £5,000.

This minimum level of debt is known as the bankruptcy limit. A creditor (or creditors acting together) can only present a bankruptcy petition to the court in respect of one or more debts if, at the time the petition is presented, the amount of the debt (or aggregate amount of the debts) is equal to or exceeds the bankruptcy limit.

Proposed Government legislation will mean that with effect from 1 October 2015, anyone wishing to present a bankruptcy petition must be owed a debt of at least £5,000.

This minimum level of debt is known as the bankruptcy limit.  A creditor (or creditors acting together) can only present a bankruptcy petition to the court in respect of one or more debts if, at the time the petition is presented, the amount of the debt (or aggregate amount of the debts) is equal to or exceeds the bankruptcy limit.

The current threshold of £750 has remained unchanged since 1986 and it has long been accepted that it required modernisation.  If it had risen in line with inflation, it is estimated that the limit would currently be around £2,000 therefore the proposed inflation-busting increase to £5,000 has come as a surprise to some.

So, why propose such a huge increase?

As one of several ‘debtor-friendly’ measures introduced in 2014 as a means of ensuring that the most vulnerable members of society have access to the most appropriate means of resolving their debt problems, Government policy underlying the raising of the bankruptcy limit seems clearly aimed at dissuading those who wish to use the threat of bankruptcy as a means of collecting very low level debt.

Representations made by stakeholders as part of the Consultation process proved persuasive in forming the Government’s stance.  Such representations focused upon the disproportionate effect of bankruptcy compared to the threshold level of debt; infringement of individual human rights and the social housing costs arising from the loss of bankrupts’ homes.

According to Jo Swinson, Business Minister, the proposed change “ensures that bankruptcy, which has the most significant consequences, is reserved for those with sizeable debts.”

What effect is this change likely to have?

Individual debtors will be given additional comfort in knowing that a low level debt is unlikely to lead to their bankruptcy (unless a number of creditors join together to reach the threshold).  Debtors may therefore seek alternative solutions such as time-to-pay arrangements, debt consolidation or debt management plans, or if the circumstances require, by the more formal means of debt relief orders or IVAs.

The position is less favourable for creditor businesses owed money by non-corporate customers.  Despite policy concerns about the use of bankruptcy to recover low level debt, the threat of bankruptcy provides an incredibly powerful tool to encourage even the most reluctant of customers to pay up.

One possible consequence of the proposed change is that suppliers may be forced to restrict credit limits to their customers or even require payment in cash in order to minimise their exposure to bad debts.  This may be both unpopular and impractical as many businesses need to offer credit in order to compete.

For many SMEs, £5,000 is likely to represent a fairly sizeable debt and if the proposed increase in the bankruptcy limit is implemented, businesses will only be able to rely upon this enforcement tool when the debt has reached a significant level.  As many business owners and professional advisers know, an effective credit control function is an essential tool when managing any business’s cash flow and this is likely to be even more important if the bankruptcy threshold increases to £5,000 on 1 October 2015.

In the absence of the threat of bankruptcy to seek repayment of debts of less than £5,000, many businesses will have to take their chances with other methods of enforcement, such as bringing claims in the small claims court or by attachment of earnings.  These routes can often be slow and costly therefore the best advice is to ensure that the debt does not build up in the first place.

Best practice for credit control

In light of the points made, Simon Merrett, Group Director at debt collection specialists Cerberus Group, summarises some key tips on best practice credit control:

  • Ensure invoicing is accurate and timely
  • Strong business terms with measures addressing late payment and retention of title are vital
  • Undertake regular risk assessments of customers (credit facilities should be reviewed regularly to see if a customer longstanding or otherwise still merits credit)
  • Having strong relationships with the purchase ledger contact on key accounts pays dividends
  • Be proactive – make phone calls to key accounts (typically the top 20% of customers by volume account for 80% of total debtor value) before the due date to ensure they have the invoice, that it is correct and confirm the payment date
  • Identify and address  issues early – knowing there is a dispute 20 days before something is due allows you to address it and maximise prospects of payment to terms
  • Apply terms – paying is a habit and the credit control of a business helps determine the habits of the customer.  If the terms are 30 days – apply those terms clearly and stop accounts if payment is not received
  • Escalate issues internally quickly  – move a non-paying account through the business quickly and either resolve issues or progress to experts to assist in recovery

 

If you have any questions or require any further information then don’t hesitate to call your local Leonard Curtis contact.

 

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