Using bankruptcy to collect council tax arrears

More councils are using bankruptcy and charging orders as a method for collecting council tax arrears according to research by accountancy firm Moore Stephens. In 2013/14, 32% of councils used bankruptcy for some council tax debts – a sharp increase from 20% in 2009/10.

It is estimated that councils petitioned to make 1,100 people bankrupt in 2013/14 because of council tax debts. But is this an appropriate method for councils to use to try to collect council tax arrears?

The creditor’s viewpoint

Moore Stephens think bankruptcy is appropriate. Their article describes bankruptcy as

the most efficient tool to recover council tax debt.

It says that Charging Orders are much less effective:

Charging Orders mean that councils are at the front of the creditor queue in case a debtor sells their property, but that is likely to mean a very long wait and this too depends on the debtor owning a property.

But if it is worth a council making a debtor bankrupt, then they are almost certain to own a property with equity so a charging order is a possible alternative.

This is also not an efficient way of recovering a debt. In many cases the council may actually lose money by making someone bankrupt:

• if a bankrupt has property, the bankruptcy costs can be £15-40,000 or more and they have to be paid in full before any money is returned to creditors;
• if someone in the house is elderly or disabled or there are children – quite likely scenarios for someone unable to pay their council tax – then the council may have a duty to rehouse them which will cost the taxpayer far more than the original council tax debt.

The debt advisor’s viewpoint

Methods of debt recovery should be appropriate for the level of debt. Making someone bankrupt to recover a thousand or two of council tax arrears is not a proportionate remedy. If someone has a good income then an attachment of earnings should be considered. If they have an expensive car, then bailiff enforcement should be possible.

Because council tax is unrelated to income, there can be situations where a person who is “asset rich, cash poor” is unable to pay. The old “easy” option of remortgaging to release equity ended in 2008 and isn’t going to return, despite the recovering economy, because of the change to mortgage lending affordability rules.

Minimum level for bankruptcy is increasing to £5,000

In October 2015 the minimum level of debt for a creditor to make someone bankrupt increased to £5,000. That is likely to rule out the majority of the cases where councils are trying to recover council tax through bankruptcy.

Moore Stephens say:

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.

I think the opposite. It is the inappropriate use of bankruptcy to recover small debts that the October change is targeting and there is no good reason why councils should be treated as a special case.

Councils are indeed suffering from large numbers of small council tax debts at the moment, but these are resulting from the changes to Council Tax Support schemes in the last two years, not an increase in “won’t pays”. This isn’t an easy problem to solve as the recent Joseph Rowntree Foundation Report of Council Tax Best Practice shows, but bankruptcies are not the answer.

If you have council tax arrears

Council tax arrears need to be treated as a high priority, not just because of the possibility of bankruptcy, but because many councils are very quick to move to Liability orders and enforcement by bailiffs, which can increase a small council tax debt considerably. You can also get sent to prison for not paying council tax – although this is rare it does happen. In Bradford in 2015-6, 34 people received prison sentences, including 7 single parents.

If you are currently struggling with council tax debt, then you need advice on your options – visit your local Citizens Advice.