Bankruptcy rates soar among Scots

Published on Friday 7 August 2009 19:41

THE number of Scots being made bankrupt has soared by a third in the past year – but worse is to come as the personal debt crisis continues to unfold, experts have warned.

Nearly twice as many people are being made bankrupt in Scotland, proportionately, than in England and Wales, according to official figures published by the Insolvency Service yesterday. In the three months to the end of June, 6,294 Scots were made bankrupt, a 10.5 per cent rise on the previous three months and up 32.9 per cent on the same period last year.

But with unemployment still rising and credit availability restricted, Scottish insolvency figures are likely to rise further over the coming 18 months.

The obvious driver behind the trend is the recession, with unemployment and rising costs stretching households beyond breaking point. At the same time, a contraction in credit availability has shut off some of the options previously open to debtors, such as new credit and easy remortgaging.

The increase in the past year has also been fuelled by the introduction of new Low Income, Low Asset (Lila) rules making it easier for people to declare themselves bankrupt.

Under the Lila rules, which came into force in April 2008, debtors can petition for their own sequestration if they meet the necessary criteria, including a minimum debt level of 1,500. Previously the process had to be instigated by a creditor, and people with relatively low debt levels but unable to pay them back had little access to debt relief solutions.

Ian Mitchell, partner at Henderson Loggie in Edinburgh, said: "It is true that it is now easier to be made bankrupt, but the figures demonstrate that there is still a large demand for this form of relief," he said. "Also, for many who use this route, the word 'relief' is entirely appropriate as they can be in desperate financial circumstances."

But as more people go down formal bankruptcy routes, including Lila and protected trust deeds (PTDs), more will face the potentially damaging long-term implications of having their credit records tarnished by bankruptcy. And proposed changes to insolvency legislation in Scotland could drive the numbers up further.

The Accountant in Bankruptcy (AIB), which administers personal bankruptcy in Scotland, wants to introduce 'fast-track' PTDs for "straightforward cases", where debtors could give details of their liabilities, income, expenditure and assets online. It would be used for debts up to 50,000 and property would be excluded, with the consent of creditors. At present, if a debtor's property is excluded from a trust deed, it cannot become protected. However, there would be a fee of around 500, some of which applicants would have to pay upfront, plus monthly contributions from income.

Bryan Jackson, corporate recovery partner with PKF business advisers and accountants, expressed concerns that such legislation would create an environment in which bankruptcy is viewed as an easy option.

"The problem is that the individuals who are made bankrupt are either unaware, or are failing to recognise, that this damages their long-term credit record and restricts their future borrowing options," he explained. "The easing of the insolvency process may therefore be creating generations of individuals and families unable to access reasonably priced credit and instead being faced only with lenders which will be more likely to lead to future indebtedness," he said.

According to Jackson, the long-term result would be a class of "revolving door debtors" freed from their debts only to return years later in the same situation. "Such plans may be consigning whole groups of society to a life without access to mainstream credit, and reliant on high interest, specialist lenders which will be more likely to result in severe indebtedness for individuals," he warned.

But while credit agencies will pick up on bankruptcies and blacklist individuals, that is nothing new, argued Mitchell at Henderson Loggie.

"This problem will be affecting even more individuals with the increased bankruptcy figures and so it is a concern to a certain extent," he said. "A large number of the individuals may well have been in default with payments under loans or finance agreements leading up to bankruptcy which would have had an adverse effect on their credit rating even before being blacklisted."

Scottish bankruptcy numbers are set to soar further regardless of potential rule changes, predicted John Hall, council representative for R3 in Scotland. "There's always a lag between events such as unemployment rising and that being reflected in the insolvency numbers, plus any rise in inflation and interest rates could have a horrific impact on household budgets."

In Edinburgh, for instance, some workers made redundant by firms such as Royal Bank of Scotland and the Lloyds Banking Group could run into problems when their redundancy packages run out, he said.

"We have probably got another year to 18 months of suffering before insolvencies bottom out," Hall concluded.