Debt crisis rises in 'buy now, pay later' Scotland

SCOTLAND is in the grip of a personal debt crisis, according to figures published by the Department of Trade and Industry on Friday, which showed 3,498 Scots were declared insolvent between April and June of this year. Debt counsellors and insolvency practitioners point out that the underlying situation is much worse, as government changes to insolvency law, expected in the next 12 months, could lead to a doubling in the numbers of those being sequestrated in Scotland next year.

In all, just short of 14,000 Scots have been either sequestrated (the Scots term for bankruptcy) or entered into a Protected Trust Deed (PTDs; a less punitive form of debt arrangement to sequestration) in the past 12 months. Of the Q2 headline figure of 3,498, 1,892 were PTDs and 1,606 were sequestrations. This is a 15.5% fall in PTDs and a 23.1% rise in sequestrations, when compared to the same period in 2006, and according to accountancy firm PKF is evidence that a tougher line is being taken with debtors.

PKF looked into the individuals behind the headline figures for those entering protected trust deeds in the first quarter of 2007. It found that the average age of the 1,966 taking out Protected Trust Deeds was 40, but that almost one quarter were under 30. Gender-wise, 51% were male, with an average debt of £41,241, and 49% female, with an average debt of £34,466.

Bryan Jackson, corporate recovery partner at PKF, says the UK's culture of instant gratification, which has encouraged people to buy things on credit without any thought as to how they will pay for them in the long term, is to blame for the increase.

The cumulative effect of the past year's rises in interest rates will only exacerbate the situation. Jackson expects to see a rise in the number of those filing for bankruptcy or entering into alternative arrangements with their creditors in the next 12 months, as further changes to Scotland's insolvency laws come into force.

There are three forms of official debt arrangement in Scotland - debt arrangement scheme (DAS), protected trust deed and sequestration. Yvonne Gallagher, chief executive of Money Advice Scotland, the body which approves and monitors debt advice in Scotland, says the best option for each person will depend on that person's circumstances, including what job they do, whether they own a home, or have investments.

Debt Arrangement Schemes

Although DAS have been around for two and a half years, they have been little used (just 200 have been taken out, according to PKF). This is mainly because the original legislation did not freeze interest on debts, making other types of debt arrangement more attractive for those heavily in debt.

Since June 30, the situation has changed and interest is now frozen from the minute a DAS is put in place, allowing people to work towards paying off their debts without interest spiralling out of control.

DAS will appeal to those who wish to keep the family home, and who can prove they have the income to repay all - or a significant part - of their debt. An adviser, approved by the Accountant in Bankruptcy, will draw up and supervise a DAS payment plan.

The length of the plan will vary depending on the level of debt and a person's ability to make repayments, but provided the debtor sticks to the repayment arrangements they will be clear of their financial obligations once the plan has run its course.

One thing to note is that once the DAS is in place all calls from debt collectors, banks and other creditors will stop. Credit reference agencies also like DAS, as they believe they improve the credit record of those who have racked up a number of court judgments and defaults on their credit file. A DAS will signal to financial institutions that a debtor is taking responsibility for tackling their debts.

Protected Trust Deeds

Protected Trust Deeds are less formal than sequestration, as they do not involve a court process. Under a trust deed a proposal to creditors is made by a trustee which, if accepted, will freeze interest on an individual's debts. The proposal will also set out what creditors can expect to recover over the lifetime of the trust deed. Creditors are then given the opportunity to object to the proposals. In the past year insolvency practitioners report that creditors have been taking a tougher stance with trust deeds, refusing to accept them where they do not believe they are getting back enough of the outstanding debt. However, provided creditors agree and payments agreed in the trust deed are made, debtors will usually be discharged from any remaining debt after three years.

Trust deeds are sometimes used by those who would not be able to continue in their jobs if they are declared bankrupt. Solicitors, bankers, accountants, customs officers and tax inspectors, as well as company directors, will all find themselves either excluded, or severely restricted, in their professions after being sequestrated.

Sequestration

Next year Scottish insolvency laws will be aligned with those in England, which will mean people can be discharged from bankruptcy after 12 months. A move is also afoot which would allow those with few assets and on low incomes to apply for sequestration.

The Scottish Executive believes the latter move could see around 5,000 individuals on low incomes, who are currently excluded from sequestration because their creditors would get little or no money, restart their lives free from debt.

At present sequestration lasts for three years. Anyone can apply to the court to have an individual sequestrated provided they owe a minimum of £1,500. Alternatively, an individual can opt to have themselves self-sequestrated if they owe £1,500 or more and, crucially, one of the parties to whom they owe money has issued a Charge for Payment (similar to a county court judgment in England) against them, or asked the court for an Earnings Order (where a creditor is paid directly from a person's salary).

Once the process begins, a trustee (who has to be a registered insolvency practitioner) will be appointed to look into all outstanding debts. The trustee will sell off a person's assets, including all property such as house and cars as well as any investments, so that creditors can be paid. At the point when an individual is sequestrated, their name will be published in an official register and possibly national and local papers.

It is also important to bear in mind that, while from next year those opting for sequestration will be debt free after 12 months, their sequestration notice will remain on their credit file for considerably longer. Experian, a credit reference agency, said that the information can be held on an individual's file for up to six years, which could - and does - impact on a person's ability to get new credit or take out a mortgage.

PKF's Johnson also points out that students, some of whom who view sequestration as a way of walking away from student loans, will soon find this route closed to them. He said that Scotland will soon follow England in excluding student loans from the list of debts that can be written off by sequestration.

Help is at hand to guide strugglers to solvency

Money matters: Citizens Advice offers confidential guidance

IF YOU are struggling with debt, the first thing to remember is that there is free, confidential advice available from Citizens Advice, the National Debtline (0808 808 4000) or one of the advisers approved by Money Advice Scotland (0141 572 0237).

An adviser will look at all debts and help decide whether it is possible to make any payments to your creditors and, if so, which creditor should be paid first. They also have experience at negotiating with creditors and can deal with emergencies such as gas or electricity being disconnected or wages being arrested (when a creditor is paid direct from your salary).

Money advisers will also look at how your income can be maximised and, in particular, whether you are eligible for income support, tax credits, council tax or housing benefits, or rebates.

A money adviser will then lay out options depending on your situation and ability to repay your debts. The ultimate decision about what to do, however, will be yours.

If you opt for a debt arrangement scheme, then a plan to repay your debt will be drawn up and managed by an adviser approved by the Accountant in Bankruptcy. From the minute the plan is put in place, interest will be frozen on your debts so they will not get any bigger, while you work at paying them off.

Alternatively, if you have assets, such as a family home, then a protected trust deed or sequestration will be an option.

The money adviser will help you find the appropriately qualified person to take you through the next steps. A trustee - a qualified accountant - will be appointed who will have the power to sell your assets to pay creditors.

Both protected trust deed and sequestration last for three years, after which you will be discharged from responsibility for all your remaining debts. If you opt for sequestration, you will have to go to court to have the process approved and restrictions will be placed on what you can borrow (no more than £500) for the three-year duration of the sequestration.

The most important thing to remember is that the sooner you get help, the better. Ignoring letters from creditors will only make things worse, so seek help.