Insolvency firms ‘mis-selling to vulnerable Scots debtors’

Insolvency practitioners have been accused of mis-selling vulnerable debtors into unsuitable bankruptcy agreements that leave them at risk of even greater difficulties.

Scotland’s personal debt crisis is being exacerbated by unscrupulous insolvency practitioners (IPs) raking in huge fees from selling protected trust deeds (PTDs) without explaining the often serious long-term consequences, a leading credit union has claimed.

It warned of IPs, including some of the biggest accountancy firms in Scotland, charging fees that in some cases are almost the size of the original debt.

PTDs are Scottish insolvency arrangements aimed primarily at people who are in employment and have assets.

With more than 9,000 taken out over the last 12 months, they are the fastest rising form of bankruptcy, according to the most recent Accountant in Bankruptcy (AiB) figures. It reported a 42 per cent leap in the number of PTDs taken out in the first three months of this year alone.

The trend has been attributed to increased debt difficulties among relatively affluent Scots, with access to previously easy sources of finance – such as credit cards and remortgaging – significantly restricted since the credit crunch began.

But the rise has also been fuelled by the increasingly widespread mis-selling of PTDs, according to Edinburgh-based Capital Credit Union.

It has reported a sharp rise in recent months in the number of members looking for help after signing up for agreements they didn’t understand or, in some cases, didn’t even need.

Marlene Shiels, chief executive of Capital Credit Union, said: “Some firms of IPs are 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 PTD are unaware of the consequences of having done so.”

Those consequences include long-term damage to an individual’s credit rating that makes it harder to access affordable credit and can, in some cases, prevent them from taking jobs.

Under AiB guidelines, debtors must be fully advised on the implications of taking a PTD and informed of any viable alternatives. However, Shiels said some IPs are failing to do this.

“There are some shocking examples of preying on those who are desperate and in need of help,” she said. “Recently one of our members, who has learning difficulties, approached us for a loan but he had already signed a PTD and no-one had explained the implications of this to him.”

Shiels also hit out at the inconsistent fees charged by IPs for PTD work. One Capital Credit Union member was charged a fee of £6,398 for a PTD where the debt was £8,133.

John Hall, Scottish council member with insolvency trade body R3, said understanding the implications of a PTD and how it will affect them in the future is the most important step for anyone taking a step towards bankruptcy.

“If an individual has all of this information, understands the implications, and has been fully informed of their options, then they should be able to make a choice which is appropriate to their needs.”

But Shiels warned that unless the AiB takes action a “desperate situation” will become even worse – with potentially dire long-term implications for Scotland’s economy.