Professor of Law Iain Ramsay questions the use of bankruptcy as an individual debt-collection device following publication of a recent consultation paper by the Insolvency Service.
Professor Ramsay believes the consultation paper on the role of Debt Relief Orders and the amount of debt necessary for a creditor to commence a bankruptcy petition, raises important issues about the role of English personal insolvency law.
In a blog post entitled Should Bankruptcy be used as an individual debt-collection device? Professor Ramsay suggests a threshold question as to whether insolvency should be a proceeding available to a creditor to enforce an individual debt.
He comments: ‘Insolvency is a collective procedure providing a mechanism for distributing an individual’s available assets equally among his or her creditors. Historically in English law it did function as a debt collection measure given the limitation of common law remedies and English law continues to permit an individual to use bankruptcy to collect a single debt for over £750 through the statutory demand procedure. Under the procedure the creditor serves a demand for payment which if not paid within 21 days generally entitles the creditor to obtain a bankruptcy order. Twenty one percent of bankruptcy orders (5378) in 2013 represented creditor petitions and 11900 petitions were commenced during this period. This is a much higher rate than in Canada or the US where creditor petitions are extremely rare.’
Professor Ramsay says that some creditors use this process as a powerful threat or as a way of closing a file and passing the problem to the Insolvency Service:
“This use of bankruptcy and its threat are problematic. Individuals may become further indebted in order to repay the individual debt or take some unwise action in response to the threat. Individual creditor action may disadvantage other creditors. Payment to the petitioning creditor is in substance a preference for one creditor at the expense of another violating the bankruptcy principle of equal treatment of all unsecured creditors (creditors try to avoid this by requiring payment from a third-party). Court time is wasted if the court has to dismiss the petition. The process deprives the debtor of the protection of the ordinary courts in individual debt collection where an instalment order may be made for payment. Disproportionate costs and fees may result for a bankrupt. A Newsnight investigation in 2014 documented an individual with council tax debts of £1350 which transformed into a debt of £80,000 through bankruptcy fees. The use of the threat of bankruptcy where there is no real intention of carrying through on the threat would constitute an unfair commercial practice under the CPUT regulations.’
Read the post in full on Professor Ramsay’s blog.
Professor Ramsay writes regularly about international developments in credit, debt and insolvency on his blogCreditDebtandInsolvency. He is currently on a Leverhulme research fellowship studying the development of personal insolvency systems since 1979 in Europe and the US. Read more about his research interests and publications on his staff profile.