From October this year, creditors must be owed at least £5,000 before they can initiate bankruptcy. This is significantly up on the current level of £750.
Figures obtained by Moore Stephens from the Insolvency Service reveal that 15% of bankruptcy orders were made for debts of less than £5,000 in 2013/14.
The firm added that local authorities and housing associations were likely to be particularly hard hit and called for a “public sector carve out” to bankruptcy rules.
Moore Stephens 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 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.”
He warned that the change to the regulations could see some “serial debtors” start to view council tax debt in particular as optional if they know the local authority has only 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,” Finch said.
