CONCERNS are mounting at the rising tide of bankruptcies following a flurry of collapses of firms over the past few weeks. But when it comes to personal debt, Scotland on Sunday can reveal that Scots are twice as likely to go bust as those living south of the Border, and these numbers may soar when insolvency laws are relaxed later this year.
The Scottish Executive is shortly to announce final plans for reshaping the process by which those with big debts, such as credit card bills, can wipe them out by voluntarily entering bankruptcy. Furthermore, the time it takes to recover from debts w
ill be reduced from three years to one.
Over the past few weeks a rash of firms including One Plus, Kelvin Homes, Cabtivate, Benjys the sandwich bar and Oakdale Bakeries have closed their doors. But personal debt is also soaring as rising interest rates turn the screw on consumers struggling under a £1trillion debt mountain. It is the acceleration in the rate of young shopaholics going bust which is causing most concern.
Since 2004, bankruptcies in England and Wales have more than doubled from 46,650 to 107,288 following changes to the law which reduced the time it took to shake off, or discharge, a bankruptcy from three years to one. Last year alone they rose by 60%.
The rate at which Scots are going bust has not raced ahead so fast, only increasing to 15% last year to 13,638.
However, Scotland on Sunday can reveal that, proportionately, twice as many Scots are volunteering for liquidation arrangements compared with south of the Border, following a detailed analysis of the data carried out with the help of Johnston Carmichael partner Matt Henderson.
Overall, a third more Scots as a proportion of the adult population goes bust, compared with those living south of the Border. However, the data breaks down to disclose that two in every 1,000 Scottish adults will volunteer for bankruptcy arrangements, compared with only one in 1,000 in England and Wales.
The numbers forcibly dragged to the bankruptcy courts are similar on both sides of the border, with 1.35 per thousand in Scotland and 1.5 per thousand elsewhere in the UK.
The reason why Scots appear to have a higher tendency to give up on their debts is something of a mystery. And PKF insolvency partner Bryan Jackson believes the law changes will see an even sharper leap.
"I'm sure the numbers will rise and go on rising. It's not firms going bust. About 99% of those involved are young consumers writing off credit card debts," he says.
PWC partner Bruce Cartwright believes we have created a club for whom a credit card represents membership: "They focus on the minimum monthly repayment, and provided they can afford that they don't think about the scale of the debt they are accumulating. They go on spending, and balances go on growing. When they finally realise, it is too late."
He says resolving these issues is a matter for social policy, not the insolvency professionals. "On balance, I probably support the reduction in the discharge period. Sadly, some people get stuck in a no-man's land with years of purgatory and headache. They need the chance to wipe the slate clean and move on. But it mustn't become too easy."
Johnston Carmichael's Matt Henderson has concluded Scotland's figures are higher partly because the voluntary process known as a Protected Trust Deed is simpler and cheaper than Individual Voluntary Arrangements (IVAs), the equivalent south of the Border.
He explains: "In Scotland you don't have to involve a court and the fees are lower. It's therefore a more attractive arrangement, and also viable for people with less money at their disposal."
Henderson also says that irresponsible lending and borrowing have institutionalised debt and suggests student loans have done much to alter the psyche of debt among the young.
"The government says to these young people: here, have all this money now and pay us back some time in the future. They think they can do the same with the banks."
However, PKF's Jackson claims rogue debt counselling firms in Scotland are fuelling the practice. "There may be a few bad eggs out there stimulating some of this activity. It's not always in the debtors' interest to enter a trust deed. They may be able to come to better arrangements on their own.
"But I believe there may be some firms who put their own commercial interests before those of the person with the debts."
Certainly, the big rise in bankruptcies south of the Border is also believed to have been driven of late by the sharp practices and aggressive marketing of firms persuading people they can walk away from their debts for free.
Cartwright warns: "There are signs that some of these are eyeing the Scottish market with a view to moving in here too."
This will become easier for them after changes shortly to be announced by the Scottish Executive, which will make processes on both sides of the Border more similar.
One result could be to involve lenders and other creditors more in the process in Scotland than they currently are. Cartwright says: "It is possible that insolvencies are higher here because creditors take a less aggressive role and tend to go along with whatever is suggested, which again makes it easier. I believe creditors should be more involved. After all, it is their money."
Money Advice Scotland chief executive Yvonne Gallacher disputes that the Scottish process is always cheaper, but she accepts cultural changes have played a part.
"New norms are developing. In some cases, if people want something they buy it without thinking about whether they can pay for it. But this attitude will lead to more people being financially excluded in the end."
What to do when you get into debt
If you have debts you can't clear and you can't afford the regular repayments, speak initially to your bank or lender. Most have helplines which offer basic advice, or you can write to customer services. Hopefully they will accept a lower payment until the bill is clear.
If not, contact a money advice charity, such as Money Advice Scotland or a local citizens advice bureau.
These will try to negotiate a debt arrangement scheme with your lenders, whereby you pay what you can. This is entirely voluntary on both sides, and interest, albeit possibly at a reduced rate, will continue to accrue.
Some banks are more willing than others to co-operate with borrowers in trouble. If they refuse to agree to a debt arrangement scheme and are still threatening court action then it may be time to consider a Protected Trust Deed.
Why enter a Protected Trust Deed?
The main objective, as the title suggests, is to protect any assets you have from the bailiffs. With a full bankruptcy, known in Scotland as a sequestration, all your assets are seized and sold to pay your debts.
With a Protected Trust Deed, a trustee is appointed, normally an insolvency practitioner. You then hand over all your assets to him, such as a house, investments and life policies.
These are protected from seizure by your creditors. He then helps you draw up a scheme of repayments, which normally involves interest either being frozen or sharply cut.
Your repayments also go into the trust, normally for three years. At the end of this time, the trustee takes out his fee and divides what is left between those owed money. Reputable insolvency practitioners will always detail their full charges at the outset, but Yvonne Gallacher, chief executive of Money Advice Scotland, has seen cases where trustees have significantly increased their charges at the end of the arrangement.
She said: "We had one case where an elderly person was asked for a further £20,000 at the end of three years. They thought they could see the light at the end of the tunnel, and they had come through it and their home was still safe.
"But the trustees pushed up the fees to a level whereby they were forced to consider remortgaging their home anyway. This is what they were trying to avoid at the outset."
When does sequestration begin?
If any of your creditors objects to you entering a Protected Trust Deed then they may press ahead with sequestration through the courts. Individuals may themselves wish to enter formal bankruptcy if they have no assets to lose and insufficient income to offer token repayments.
It is a public process involving a court appearance. Your employer and landlord will be notified and a note may remain on your credit file for up to six years, which can make getting credit such as a mortgage or credit card very difficult.
Furthermore, some professions including financial services and the law exclude applicants who have been sequestrated.
