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Are recent bankruptcy rule changes flying under your radar?

Are recent bankruptcy rule changes flying under your radar?

There were some recent changes in legislation that some may have overlooked. This article highlights the changes to bankruptcy and Debt Relief Order rules that came into effect from 1 October 2015.

Forced Bankruptcy

A change that may have gone under the radar for many is that since the 1st October the minimum amount owed for someone to be forced into bankruptcy by their creditors was raised from £750 to £5,000. Some might say it’s about time; the £750 limit was set way back in 1986 and so not appropriate at all for today. The higher figure will certainly mean there will be fewer bankruptcies each year.

If creditors force someone into bankruptcy, they issue the individual with a ‘statutory demand’ and they would have to pay the court fees -21 days after the statutory demand is issued they can start bankruptcy proceedings. With a voluntary bankruptcy, the individual petitions the court by submitting bankruptcy forms and the individual pays the fees. Bankruptcy in England and Wales costs £705 which covers court and administration fees.

Debt Relief Order

The other change that happened is that the maximum amount of debt that can be covered by a Debt Relief Order – which is the lower cost alternative to bankruptcy – went up to £20,000. What this means is that someone must owe less than £20,000 and have under £1,000 of assets. (The previous figures were £15,000 and £300 respectively).

The difference in costs between bankruptcy and a DRO is important; to enter a debt relief order costs just £90 mainly because there is no court involvement.

The new rules mean that more people on low incomes can go for the cheaper option. Debts that can go into a DRO are called qualifying debts and include credit cards, overdrafts and loans, arrears with rent and bills, hire purchase agreements and business debts. Examples of debt that cannot go in a DRO are student loans, fines relating to criminal activity and child support.

An order usually lasts for 12 months and during this time creditors that are named on the DRO cannot do anything to recover their money.

At the end of 12 months, if nothing has changed, the individual is discharged from the debt covered on the DRO. Other restrictions are that the person must:

  • be unable to pay their debts
  • have a disposable income of no more than £50 per month after income tax and NI and normal household expenses
  • be domiciled in England or Wales at some time in the last 3 years
  • not have been subject to another DRO within the last 6 years and
  • not be involved in another formal insolvency procedure at the time they apply.

The DRO stays on the individual’s credit record for 6 years.

Remember that the CII test changes 3 months after new legislation takes effect.

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Over to You…

So were you aware of these changes to the bankruptcy rules?