Bankruptcy threshold to be raised from £750 to £5,000

Currently, those who owe someone as little as £750 can be forced into bankruptcy, but from October, the Government plans to increase this so fewer people will need to take this expensive and last resort route (see our Debt Solutions guide for formal debt resolution tools).

This will be the first time in nearly 30 years that the limits have been revised, however the plans are subject to parliamentary approval and will only be valid in England and Wales as debt management is devolved in Scotland and Northern Ireland.

The Government also announced that the maximum amount of debt that can be covered by a debt relief order (DRO) will increase from £15,000 to £20,000.

In addition, the total value of assets (savings, shares, property) those applying for a DRO are allowed to have will rise to £1,000 from £300. Applicants can also have a car, so long as it isn't worth more than £1,000.

What is a debt relief order?

DROs were first introduced in April 2009 with the aim of providing debt relief to those excluded from existing procedures and since then, 140,861 DROs have been granted, with 26,876 of these in 2013/14.

DROs involve debtors' repayments and interest being frozen for 12 months, and if their financial situation hasn’t changed at the end of this time, then their debts are written off.

After essential living expenses, those with DROs can't have more than £50 left over from their income/benefits each month.

The fee to apply for a DRO is £90, which is much less than the cost of declaring yourself bankrupt, which is £700.

As a result of the move, the Government expects that about 3,600 people per year with low levels of debt and no ability to pay off those debts will be granted a DRO rather than being forced to become bankrupt.

'The changes give a better chance of escaping from the spiral of indebtedness'

Business minister Jo Swinson says: "Struggling with unresolvable debt can cause immense stress for families. These changes will ensure that our debt relief schemes are updated so that they still meet their original goal of providing access to those who need them. They also ensure that bankruptcy, which has the most significant consequences, is reserved for those with sizeable debts.

"As always, it is important for people struggling with their debts to seek early advice from National Debtline (0808 808 4000) or other advisers. The changes announced today give them a better chance of escaping from the spiral of indebtedness so they can rebuild their lives."

The move comes after the Insolvency Service, which grants DROs, sought views from debt charities and other interested parties on the operation of them and on the bankruptcy debt threshold.

The debt problem checklist

If you're struggling to manage your cash and reduce your outgoings, here are some tips to help:

• Budget and reduce outgoings: Get a handle of what you spend to future-proof your finances. See our Free Budget Planner.

• Earn under £72k? Check your benefits: Any family with an income of under £72,000 may be entitled to some form of benefit. See our Benefit Check-up tool.

• Can you get help paying the mortgage? There are a couple of Government schemes specifically to help mortgage holders who are struggling to make monthly repayments. These include an extra benefit to pay the interest for you, and a full rescue scheme where your local council buys some or all of your home then rents it back. See our Mortgage Arrears guide.

• Reclaim, reclaim, reclaim: If you have, or have had a loan, then it's crucial to check whether you were mis-sold payment protection insurance, which could've cost you £1,000s, to see if you can get the cash back. For those in debt, it's very likely some of it has been made up of fees and charges. If you've incurred bank or credit card charges for going beyond your limits, you may be able to get the cash back.It's also possible you may be in one of 400,000 homes in the UK paying too much for your council tax.