Could Your Council Make You Bankrupt?


Research carried out by accountancy firm Moore Stephens has revealed that local authorities are increasingly turning to bankruptcy as a means of dealing with unpaid council tax. The company looked at 190 councils in England, Wales and Scotland, and found that 32% of them have taken bankruptcy proceedings against residents in the last financial year – a fifth more than in 2009/2010.

With arrears soaring to an eye-watering £2.6 billion, local authorities forced 1,100 people into bankruptcy in an attempt to collect unpaid tax. At the same time, 48% of councils in England and Wales were using charging orders, which allow creditors to secure unsecured debts such as tax arrears on the debtor’s house or flat and then receive proceeds from the property’s sale or re-mortgage. Back in 2009/10, just 26% of councils were using charging orders.

So what’s caused this large hike in the number of actions that local authorities are taking against people who’ve fallen behind with their council tax? Moore Stephen’s Michael Finch explains: ‘Council tax debts are now approaching unsustainable levels, and… local authorities are suffering more and more with “serial debtors” – a hardcore of people who have no intention of paying council tax or clearing their debts. That leaves councils with very few options other than petitioning for them to be made bankrupt.

Whilst the recession was in full force, many local authorities relaxed their procedures for recovering unpaid council tax, for the benefit of households who were genuinely unable to make ends meet. Statistics released by the Citizens Advice Bureau suggest they were right to do so, as the charity reported that it received more requests for help with council tax arrears than with any other type of debt in 2014.

However, now that the recession is on the way out, the councils are stepping up their efforts once again – largely because the vast amounts of unpaid tax are starting to threaten the provision of basic services in some areas of the UK. ‘According to government figures, households in Birmingham and Liverpool alone owe £203 million,’ says Andy Gorton, head of bankruptcy assistance firm, Bankruptcy Clinic. ‘The councils can’t afford to let things escalate further, so they’re increasingly taking action through bankruptcy petitions and charging orders.

Another reason for the recent flurry of Bankruptcy Orders could be the forthcoming change in the law, which will see the debt threshold above which a creditor can force a debtor into bankruptcy rise from £750 to £5,000. The increase will obviously rule out many smaller debts, leaving local authorities with the less effective Charging Order as their only weapon in these cases. Having said that, Moore Stephens note in their report that: ‘There is a strong case for public sector carve-out for the new bankruptcy threshold, to make sure that local authorities are not prevented from bringing in the vast quantities of small debts they suffer from serial debtors.

There is perhaps a strong case for giving councils the tools to reclaim money from the ‘won’t pay’ serial debtors. But what about the hard-working, law-abiding households who simply can’t pay, even if they want to? Says Andy: ‘In today’s society, families have to make tough financial choices. And if it’s a choice between feeding the kids and paying the council tax, then the local authority is going to lose out. These are the people who need help and support to tackle their debts in the best possible way – not enforced Bankruptcy Orders which could leave them with nothing.’

Worried about local authority action?

Don’t wait for your local authority to take action against you for council tax arrears. Take matters into your own hands and seek impartial debt advice from one of the free debt services out there.

Of course, you may find that declaring bankruptcy is your best option. But the court will view your case more favourably – and you’ll feel more positive about things – if you take control and show that you’ve willing to tackle and overcome your financial problems.

On the other hand, you may find that other options are open to you. If you have very little income and few or no assets, you might be able to apply for a Debt Relief Order, which is much cheaper than petitioning for bankruptcy. Or if you can afford to pay a certain amount off your debts each month, you could consider a legally-binding IVA or an informal Debt Management Plan.

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