Challenges remain to cut mountain of debt down to size

Published on Friday 20 November 2009 18:36

THERE was a time last year when the personal insolvency notices in the Edinburgh Gazette started to resemble a telephone directory, rather than the slim volume of normal times.

These are still not normal times. They have not resembled anything close to normality for well over a year now and the chances of us basking on the sunny uplands of normality any time soon seem increasingly remote.

So what are we to make of recent figures from the Accountant in Bankruptcy (AIB) showing that personal insolvencies in Scotland for the second quarter of this year were down to 5,767, a drop of 8 per cent on the previous quarter and 4 per cent on the same quarter last year?

Is Scotland's mountain of personal debt starting to erode? Are people getting to grips with their finances? Are borrowers sniffing the macro-economic winds and deciding to behave more responsibly?

I don't think so. Not if the people who are walking through my door are anything to go by. If the official figures are the tip of the iceberg, one woman I saw recently epitomised the hidden dangers lurking beneath. She had been managing – just – to juggle with a large mortgage, falling house prices and a huge, unsecured loan.

Then her husband walked out on her, and without his financial input, the whole house of cards came down.

Her huge amount of negative equity is not unusual by any means. There are a lot of people just under the insolvency radar who are managing to service massive levels of personal debt built up in the years off easy credit but who are also desperately vulnerable to an unforeseen change in circumstance, such as job loss, marital breakdown or even bereavement.

The figures could also be distorted by significant numbers of people entering into informal debt management programmes because they do not want to lose their property.

And it has to be borne in mind that, although the AIB's figures are currently showing a downward dip, they are still historically high and show no signs of returning to pre-crisis levels.

We have to remember, too, that individuals are profoundly affected by the wider economy and, in the corporate sphere, we are seeing cases where nervous banks – who might previously have given a company a bit of leeway – are erring on the side of their short-term interests and calling in their loans.

The second wave of bloodletting by the banks – as they continue frantically to strengthen their balance sheets – has already started and the effect on the official insolvency figures will be predictable.

There is some evidence that corporate failures are being are being subsumed by the greater corporate body – most of the recent merger and acquisition activity in Scotland has been built on companies being bought out of administration.

Obviously, as businesses are preserved and jobs saved, the effect on the figures should be beneficial.

However, with people of the stature of George Soros saying that he does not believe the current recovery is sustainable, the possibility of a lot more pain to come cannot be discounted.

As an economy, we still have some very significant and challenging issues to deal with on both a personal and commercial level.

For anyone struggling with debt, the advice would always be to seek help as early as possible.

The Citizens Advice Bureau or a licensed insolvency practitioner are reliable sources of information. Both will give an initial consultation for free – all CAB consultations are free – and once people are clear on their rights, then it will give them much more confidence in addressing their problems.

&#149 Eileen Blackburn is head of business recovery and partner in French Duncan chartered accountants.