NOT every business does badly in a recession. Some do very well indeed.
The following case is fairly typical of one such business and illustrates something worryingly wrong and unfair at the heart of the insolvency industry in Scotland.
John (not his real name) was referred to Govan Law Centre by a psychiatric hospital as his home was being sold to pay off his debts.
John lives with a severe mental illness and his present episode has been ongoing for the best part of a decade. He has long periods where he is withdrawn, disengages, struggles to care for himself and suffers acute paranoia.
His medical report confirms that both his social and cognitive functioning are significantly impaired and, as a consequence, he struggles to organise his finances.
John supposedly had a debt of £13,000 in council tax arrears. His council made him bankrupt and an insolvency practitioner was appointed to realise his assets. The insolvency firm put his house up for sale to pay off his debts and slapped on costs of more than £10,000.
John’s debt was now almost £25,000. His home, which he had paid off over the years, was being sold to pay his two biggest debtors: the council and insolvency practitioner.
Not only did we prove that he didn’t owe any council tax arrears, but also that he was actually owed state benefits he hadn’t claimed. So the council tax debt and costs were dropped.
The £10,000 debt to the insolvency practitioner still stands, however, and they are claiming it.
John is not our only case. When Janice (not her real name) split up with her husband, he had business debts of more than £20,000. He was made bankrupt and the Accountant in Bankruptcy sought to force the sale of her jointly owned family home, making her and her children homeless. The bankruptcy fees and charges exceeded £20,000.
When people find themselves in financial distress they are vulnerable. If they own an asset with some capital equity – such as their home – they may feel that money which has taken many years to accrue is being instantly siphoned off in a massive fees and charges grab. It is.
That’s the gravy train of the insolvency industry in Scotland.
And creditors ride that train too. In bankruptcy cases they enjoy 8 per cent annual interest until they get paid (at a time when most savers would be lucky to get 1 per cent interest on an Isa).
Of course we all need to be paid, and I am not suggesting insolvency practitioners don’t merit the middle-class lifestyle they enjoy. But they might ask themselves this: is this really why you went to accountancy school? To earn a living from homeowners in severe financial crisis?
The system is out of kilter and it’s unjustifiably expensive, especially in relation to the size of debts. In short, it’s a cash cow and insolvency firms need to stop milking people when they hit rock bottom.
Insolvency practitioners need to be better regulated in the consumer interest. I am asking the Scottish Government to undertake research so we can assess the extent of the problem, and then debate what the Scottish Parliament can do about it.
Mike Dailly is the principal solicitor at Govan Law Centre