When the goal is to avoid getting deeper into debt

Published on 18/02/2012 00:00

When Rangers FC went into administration this week, it opted for a route out of financial difficulties that a growing number of Scots are being forced to consider.

Faced with disputed tax bills and with a £10m deficit in annual running costs, the Glasgow club has been forced to seek a deal with its creditors, not least HM Revenue & Customs, or face potentially going out of business.

Its problems will be familiar to thousands of Scots who are struggling to pay their bills and clear their debts. The rate of personal insolvency in Scotland is almost twice that elsewhere in the UK, according to figures published recently by the Accountant in Bankruptcy (AIB).

Last year almost 20,000 people went into sequestration – the Scottish term for bankruptcy – and 8,522 took out protected trust deeds (PTDs), where assets are transferred to a trustee and equity is used to pay creditors, the second highest on record.

The latter are typically used by relatively affluent Scots in employment with assets, evidence that the economic downturn is affecting a broad spectrum of society. So Rangers, one of the big names of Scottish and UK football, is not alone in being forced to take measures that would not so long ago have seemed inconceivable.

With household incomes squeezed and the credit tap all but turned off, more Scots than ever are looking at ways of getting out of financial difficulties. Some 400 Scots are expected to be made bankrupt every week this year, including a growing number on middle incomes.

John Hall, Scottish council member for insolvency trade body R3, said: “Unfortunately, the housing market is not likely to improve in the coming year to rescue heavily indebted individuals.

“Many are simply finding that they reach the stage where, at the end of the month, they cannot meet all of their payments and this tips them over into insolvency.

“The likelihood is that we shall continue to see a lot more of this in the coming year.”

But how do you know when it’s time to consider some form of bankruptcy or embarking on debt restructuring?

One sign is if you’re paying only the interest on your debts each month and making no inroads into the actual capital, according to Hall.

He said: “ Our research shows that one in six individuals is only able to pay the interest on their debt rather than paying off the debt itself.”

Use of payday loans to help fund day-to-day living is another characteristic of would-be bankrupts.

“This is a further sign that the severely indebted are simply getting themselves deeper into debt. The inevitable result of this will be bankruptcy in a month, six months or a year,” said Hall.

But Nikki Williams, corporate recovery director with accountants and business advisers PKF, said that recognising whether you’re on the verge of insolvency can be very difficult.

“People experiencing severe debt problems often find themselves unable to acknowledge the reality of their situation.

“In fact, many people are unaware of just how much they owe and how long it would take to pay off their debts,” she said.

With serious long-term implications to think about, it’s vital to seek advice before going down the bankruptcy route, not only to work out whether it’s the best option but to determine which, if any, of the various options is suitable for your circumstances.

For example, any form of debt arrangement vehicle or insolvency can play havoc with your credit rating and seriously impede your chances of being accepted for any form of borrowing or financial product for up to six years.

There are several options to consider, not all of which entail formal bankruptcy:

DEBT ARRANGEMENT SCHEME

The number of people using these plans, which provide a way of repaying debt over an extended period, doubled last year, according to the AIB.

Debtors using these schemes commit to debt payment plans (DPPs) that allow them to repay their debts at a rate reflecting their disposable income.

It is based on a monthly payment that is divided up between creditors, according to the terms agreed. All interest fees, penalties and other charges are frozen if creditors agree to the plan and the debtor is protected against creditor actions aimed at recovering their money.

PROTECTED TRUST DEED

These are typically used by Scottish homeowners in employment and are the fastest rising form of insolvency as the effects of the economic downturn permeate all levels of society.

PTDs are formal arrangements between debtors and creditors that allow as much of the debt to be repaid as the debtor’s assets will allow. The proposal is drawn up by an insolvency practitioner, based on the debtor’s assets, debt levels and disposable income and is usually set for three years.

These are most suitable if you’re able to contribute to the repayments from your disposable income, enabling a dividend to be paid to creditors.

If enough creditors agree to the repayment package they are not able to take legal action to recover the debt.

They also agree to discharge the debtor from the remainder of the money owed if the latter meets the terms of the PTD within the agreed time frame.

SEQUESTRATION

Under the Scottish form of bankruptcy, debtors can be made bankrupt either through a creditor’s court action – where they are owed £3,000 or more – or by paying a £100 fee and making their own application to the AIB. To avoid court action the debtor must owe at least £1,500.

To qualify you must have a certificate for sequestration or be eligible for the low income, low assets option (earn not more than the standard national minimum wage for a 40-hour working week and have no assets worth more than £1,000 individually or combined assets above £10,000).

Alternatively, you can qualify if a creditor has served a charge for payment or a statutory demand.

You also need to have been living in Scotland during the last year and not been made bankrupt within the last five years.

All assets, debts, income and expenditure have to be disclosed to the trustee (usually an insolvency practitioner), who assumes ownership of your assets.

Those assets, such as any property you own, can be sold by the trustee to help repay your creditors and you may have to make repayments from your income if there is any left over.

You could be discharged from your bankruptcy and debts after as little as a year if you co-operate fully with the trustee and meet allrequirements.