The Government has announced that from October 2015 it plans to increase the minimum threshold for creditors’ bankruptcy petitions from £750 to £5,000 and the maximum level of debt in respect of which a Debt Relief Order (“DRO”) can be obtained from £15,000 to £20,000.

The increase of the minimum threshold for creditors’ bankruptcy petitions to £5,000 is likely to be the more controversial of the 2 measures. Whilst there is a consensus that the current limit of £750 is outdated and in need of revision, the increase is significant and the evidence collected by the government on the subject demonstrates that a number of interested parties had called for a more modest increase.

It is common knowledge that the Court’s bankruptcy jurisdiction is often used by creditors to put pressure on debtors to pay. However, the Court’s position that this is an abuse of process is clear and it may be that the increase is partially intended to put a stop to this practice. In any event, it raises the question of whether there is an alternative that is fit for purpose.

For a creditor to collect a debt of less than £5,000 (even though it isn’t the subject of any dispute with a realistic prospect of success), a creditor will have only 1 practical option where a debtor will not pay: obtain judgment via the small claims court. If the debtor will still not pay on the threat that their credit rating will be affected, this will have to be followed by enforcement by way of a charging order, a third party debt order, an attachment of earnings order or by sending in the bailiffs.

In many cases examination of the debtor to obtain information will be necessary before a viable enforcement application can be made. Having filed an application for examination of a debtor in November 2014 and had it listed to take place in May 2015, we would query whether from a cash flow perspective this is a realistic option for a lot of smaller businesses. Only negligible fixed costs and Court fees will be recoverable, meaning that businesses are additionally expected to be able to deal with claims of this nature without the benefit of assistance from legal professionals.

Whilst debtors will undoubtedly welcome the increase to the minimum threshold and there is likely to be a decrease in the number of bankruptcies, we would suggest that it will be accompanied by a corresponding increase in the number of corporate insolvencies caused by creditors becoming unable to use the threat of bankruptcy to collect debts of less than £5,000. The changes will be the subject of parliamentary scrutiny before they are implemented and I would hope that before a final decision is made, the interests of small business creditors are fully considered.