Upcoming changes to personal insolvency diligence and bankruptcy

The Coronavirus (Recovery and Reform) Scotland Act was passed by the Scottish Government on 28 June 2022 and enacted on 10 August 2022 (the "Act"). It makes two key changes to insolvency and diligence in Scotland.

Bankruptcy floor limit

At the start of the pandemic, as a protective measure, the Scottish Government made a temporary change to the threshold of debt required to bring sequestration (bankruptcy) proceedings raising the threshold from £3,000 to £10,000. The Act brings the floor limit back down from £10,000 (not to the pre-pandemic level but) to £5,000.  From 1 October 2022 a creditor who is owed debts of £5,000 (or more) can petition to sequestrate a debtor.

Diligence

Bank arrestment is a method of enforcing debts. A creditor can freeze a debtor's bank account and if there are sufficient funds in the account to meet the debt, the sums owning are paid by the Bank to the creditor. Prior to the pandemic the minimum protected balance ("MPB") that a debtor could retain in the event of arrestment had not been updated for some time. The Act raises the MPB to £1,000, meaning that if someone has less than £1,000 in their account when an arrestment is served it cannot be taken by the Bank and paid to the creditor.  The new MPB applies to bank arrestments executed from 1 November 2022.

Finally, Moratoriums, which provide a "breathing space" for debtors who require time to consider their financial position and options, will be permanently increased from the pre-pandemic six weeks period to six months.   This change applies from 1 October 2022.  If a debtor obtains a moratorium from the Accountant in Bankruptcy they will be able to assess their position without the threats of diligence or bankruptcy from creditors.

Our thoughts

The raising of the bankruptcy floor limit appears appropriate given the period of time since it was last reviewed.  In addition, the new limit will harmonise the bankruptcy floor level across the UK, with £5,000 being the floor limit across Scotland and England & Wales.

Given the impact of the pandemic and the increasing cost of living, we expect a significant increase in both moratorium applications and bankruptcy when 1 October arrives.  We are already advising clients on their options following the Act, so if you have any questions please contact one of our experts.