Debtors face bankruptcy ‘exploitation’

Published on 17/06/2012 00:00

DEBTORS in Scotland have been warned against signing up for debt agreements that could leave them even worse off, amid fresh claims of mis-selling by insolvency practitioners.

The number of people in Scotland turning to debt management and insolvency plans has soared in recent years.

But while the economic crisis and new rules making it easier to declare bankruptcy are largely to blame, experts say the insolvency boom is also being fuelled by the overzealous promotion of insolvency solutions.

Debt management companies (DMCs) and insolvency practitioners have been accused of exploiting vulnerable debtors by selling them into protected trust deeds (PTDs), sequestration agreements and other plans that aren’t suitable for them.

Some rake in high fees for doing so, while leaving their clients facing even greater financial hardship.

The biggest culprits, according to two of Scotland’s biggest credit unions, are insolvency practitioners (IPs), including some of Scotland’s biggest accountancy firms.

Marlene Shiels, chief executive of Edinburgh’s Capital Credit Union, claimed that some IP firms were “quite simply lining their pockets” at the expense of increasing numbers of vulnerable people.

“We are seeing the evidence of what can at best be described as bad practice on a daily basis and most of our members who approach us for help after signing a trust deed are unaware of the consequences of having done so,” she said. “On a personal level for those involved this is a heartbreaking situation.”

ScotWest Credit Union is encountering similar issues, having been approached by members who hadn’t been made fully aware of what they were signing up for when taking out a PTD.

Rod Ashley, chief executive of ScotWest Credit Union, said: “We have also seen situations where a significant portion of the funds gathered have gone to pay fees to insolvency practitioners, when it is questionable whether a debt arrangement scheme would actually have been a more appropriate form of relief for the debtor.”

The extent to which some debtors have been left worse off financially after taking debt advice was highlighted in research last year by Citizens Advice Scotland (CAS).

The report exposed the activities of DMCs found to be misleading debtors as to what they could do and how much they would charge. Some falsely claimed to be government agencies or charities but charged debtors up to £1,000 even before giving advice.

In some instances debtors paid hefty monthly fees only to find later that the money hadn’t been used to repay their creditors.

“Scotland’s CAB advisers see every day how debt destroys peoples lives,” said Susan McPhee, head of policy at CAS. “Bankruptcy can be a solution for some, but is never ideal. What is vital is that people get the best quality impartial advice – tailored to their own unique circumstances.”

PTDs were among the most contentious issues, CAS found, with many people pressured to sign up for them even when there were more suitable options available.

These are legally binding solutions that can protect the debtor from sequestration and are designed primarily for people who have an employment income and assets. They are the fastest growing form of insolvency agreement in Scotland, with more than 9,000 taken out in the year to the end of March, according to the Accountant in Bankruptcy.

But while that rise reflects increased debt problems among Scotland’s middle classes, many people are being tied into them without being made fully aware of the possible repercussions, said Shiels.

So what are the risks of turning to PTDs, sequestration or other insolvency contracts?

Perhaps the most obvious, over the long-term, is the damage inflicted on your credit rating. This is the measure used by lenders in working out the risk of a borrower defaulting on loan repayments.

It’s also part of the risk assessment carried out by utility providers, private property landlords, mobile phone companies and other suppliers. Credit records typically include information such as your previous borrowing and how punctual you’ve been in repaying. The data is built up by credit reference firms to help banks, building societies and other firms get a picture of how risky it could be to lend to an individual.

Creditworthiness is affected for around six years by a PTD or sequestration.

During that time it is likely to prove very difficult to secure affordable credit of any kind, whether a decent mortgage deal, credit card or even an overdraft. That means many debtors emerge from PTDs only to find it harder than ever to get finance – forcing many to turn to payday lenders and spiral deeper into debt in the process.

Bryan Jackson, corporate recovery partner with accountants and business advisers PKF, said: “It is important to realise that when an individual uses any of the routes into personal insolvency this will have a serious impact upon their ability to access mainstream credit.

“Whether it is a PTD, sequestration or a debt arrangement scheme, this will negatively affect lenders view of your ability to pay for some considerable time.”

You are likely to be credit blacklisted if you take out a PTD or enter sequestration –the Scottish term for bankruptcy – and your employment prospects may well be affected, said Jackson.

A damaged credit rating isn’t the only reason that affordable loans are harder to come by after entering insolvency. If you’re in sequestration, for example, you can’t get credit of more than £500 without telling the lender that you’re an undischarged debtor.

Debtors not fully aware of the ramifications of PTDs or sequestration may even be putting their home at risk, because there will be an interest in any asset owned.

That’s just one more reason why you shouldn’t take out a PTD or enter into sequestration unless you’re sure it’s right for you.

John Hall, Scottish council member with insolvency trade body R3, said: “No-one should feel pressured to choose one option over another.

“The choice should depend upon the personal situation of the individual and nobody should feel compelled to take out a PTD or enter into sequestration if they don‘t believe this is appropriate to their circumstances.”