Upcoming Changes to Personal Insolvency Due Diligence and Bankruptcy

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The Coronavirus (Recovery and Reform) Scotland Act was passed by the Scottish Government on June 28, 2022 and signed into law on August 10, 2022 (the “Act”). It makes two key changes to insolvency and due diligence in Scotland.

Bankruptcy ceiling

At the start of the pandemic, as a protective measure, the Scottish Government temporarily changed the debt threshold required to enter into receivership (bankruptcy) proceedings raising the threshold from £3,000 to £10,000. The law brings the cap down from £10,000 (not to pre-pandemic level but) to £5,000. From October 1, 2022, a creditor who has debts of £5,000 (or more) can apply for a debtor to be placed in receivership.

Diligence

Bank attachment is a method of executing debts. A creditor can freeze a debtor’s bank account and if there are sufficient funds in the account to meet the debt, the monies held are paid by the Bank to the creditor. Prior to the pandemic, the Minimum Protected Balance (“MPB”) a debtor could keep upon arrest had not been updated for some time. The law increases the MPB to £1,000 meaning that if someone has less than £1,000 in their account when an arrest is served, it cannot be taken by the Bank and paid to the creditor. The new MPB applies to bank attachments executed from November 1, 2022.

Finally, the moratoriums, which provide “respite” for debtors who need time to consider their financial situation and their options, will be permanently increased from the pre-pandemic period of six weeks to six months. This change applies from October 1, 2022. If a debtor obtains a moratorium from the accountant in bankruptcy, he will be able to assess his situation without the threats of due diligence or bankruptcy from creditors.

Our thoughts

Raising the bankruptcy threshold seems appropriate given the length of time that has elapsed since its last review. In addition, the new limit will harmonize the floor level for bankruptcy across the UK, with £5,000 being the floor limit in Scotland, England and Wales.

Given the impact of the pandemic and the rising cost of living, we expect a significant increase in moratorium applications and bankruptcies as October 1 arrives.

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