Personal finance: Choose the right way out of debt

Published on 07/10/2012 00:00

It is vital that you understand the long-term impact of the options for insolvency, writes Jeff Salway

PROPOSALS to finally regulate controversial payday lenders have come too late for thousands of Scots turning in desperation 
to the loans as their money worries build.

Payday loan firms have been warned that they face formal regulation unless they police the sector more effectively.

Lord Wilf Stevenson, chair of the Consumer Credit Counselling Service (CCCS), is to lodge an amendment in the 
Financial Services Bill that would compel the government to take action against payday lenders within a year.

But the firms have already cashed in on Scotland’s spiralling debt problem, figures from the CCCS show.

The number of its clients in Scotland who have taken out often-extortionate payday loans has soared by 285 per cent since 2009.

The charity believes that about 150,000 Scottish households are now spending more than half their income on repaying debts.

And it’s not only low-income households in trouble, with relatively affluent Scots 
struggling to keep on top of their spending as affordable high-street finance – such as overdrafts and credit cards – becomes harder to secure.

John Hall, Scottish council member for insolvency trade body R3, said: “Scottish personal insolvencies are on the rise and it is possible that many more Scots, including middle-income homeowners who are struggling with their finances, are likely to be considering taking out payday loans that could subsequently trigger financial problems.”

Payday loans may seem an easy, quick answer to cash flow problems, but they’re very rarely a solution, according 
to Bryan Jackson, corporate recovery partner with business advisers PKF.

“Too many people ignore their growing debt and simply borrow from another source, so the problem is delayed rather than resolved,” he said.

Free debt advice is available from charities including the CCCS (0800 138 1111 or visit www.cccs.co.uk) and your local Citizens Advice Bureau.

Not all sources of debt 
advice are reputable, however. Citizens Advice Scotland last year revealed that debtors have often been left worse off financially after taking advice from debt management companies (DMCs). Some DMCs have falsely claimed to be 
government agencies or charities, but charged debtors up to £1,000 even before providing any advice.

But specialist advice is 
also essential when it comes 
to weighing up insolvency 
options, given the potential long-term implications.

“There are several options available in Scotland and it is vitally important that people choose the one that is appropriate for them and also that they are aware of the impact that bankruptcy will have on their current and future life for the next five or six years,” said Jackson.

Here are the four main routes into insolvency in 
Scotland:

Debt arrangement schemes

All interest, fees, penalties and any other charges are frozen, and creditors are barred from taking action against the debtor to recover their debts. In return, the debtor has to commit to a debt repayment plan, with monthly payments that reflect their ability to repay according to their disposable income.

Protected trust deeds

This is a formal arrangement between the debtor and their creditors to enable the former to repay as much of their debt as their assets and income allow. The arrangement is usually based on a three-year term, but it can be extended.

Under a PTD, the trustee (who must be a licensed insolvency practitioner) drafts a 
repayment proposal based on the debtor’s assets, disposable income and level of debts. Creditors have five weeks to consider the proposals and 
object. The trust deed then 
becomes protected and all creditors are prevented from taking any legal action to 
recover their debts.

Sequestration

This is the Scottish equivalent of bankruptcy and can be initiated by debtors or creditors.

Once it has been awarded, a trustee is appointed to look after the insolvent estate and the debtor has to disclose all their assets, liabilities, income and expenditure.

Any value in those assets must be realised for the creditors, and debtors will also have to pay a contribution from 
income left over after basic household expenses.

The debtor is automatically discharged after a year, providing they’ve met the requirements, although they may be asked to pay further contributions from surplus income.

Low Income, Low Asset (Lila) sequestration

This is aimed at individuals seeking debt relief but who don’t meet the existing qualifying criteria for sequestration. Some 26,500 Scots have taken out a Lila sequestration over the three and a half years since it was introduced.

“Whilst this solution provides debt relief, the concern is that it produces a cycle of long-term debtors who are never able to get access to mainstream credit and are likely to become insolvent again and again,” said Hall at R3.

All forms of bankruptcy come with potentially damaging drawbacks, so it’s vital to get proper advice.

For example, any insolvency contract will hit your credit record, making it more difficult to secure affordable finance in future and potentially sending you deeper into debt as a result.

A PTD or sequestration affects a credit record for around six years.

There may also be implications for your home if you take out a PTD or go into sequestration, as creditors could have an interest in any assets you own.

Hall said: “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.”