Jeff Salway: Ewing upbeat but cycle of debt and bankrutpcy takes worrying turn

Scots are being made bankrupt at a rate almost double that in the rest of the UK, pro rata, and the latest figures – taking us to the end of 2009 – are unlikely to be different.

The Accountant in Bankruptcy (AIB), which now publishes the Scottish statistics before the official insolvency service figures, in what appears to be an empire-building exercise, revealed the latest Scottish figure two weeks ago.

There were 5,678 personal insolvencies in Scotland in the last three months of 2009-10, a 2 per cent drop from the previous quarter and down 3 per cent on the same period in 2008. Tomorrow, we will be able to compare that with the rest of the UK.

The latest figure was among the highest quarterly figures on record, but the slight decline was enough to keep Fergus Ewing happy. The minister for community safety was "pleased to note that, even in these difficult economic times, there has been a further decrease in the number of personal bankruptcies".

Yet nearly 25,000 Scots were declared insolvent last year – almost double the number just two years ago – so it would seem Ewing is easily pleased. Any complacency should be cause for alarm, because the AIB's own figures offer clues as to why we can expect no let-off in Scotland's staggering level of bankruptcies for at least two more years.

The decline in recent months has been due almost entirely to the expected drop in the number of people taking advantage of the low-income, low-asset (Lila) rules that make it easier for debtors to declare themselves bankrupt. Given that the Lila rules were introduced in April 2008, there was always going to be a slowdown when the build-up of debtors waiting to take advantage of the legislation worked its way through the system.

But 2,328 protected trust deeds (PTDs) were taken out in the last three months of 2009, up 3 per cent on the previous quarter and 27 per cent higher than the corresponding quarter in 2008. This is partly because the introduction of the Lila rules raised awareness of bankruptcy solutions generally, with many people inquiring about Lila and finding that PTDs (informal bankruptcy arrangements with fewer restrictions than on sequestration) were more suitable.

It also reflects a shift in debtor profiles – to qualify for a Lila, debtors must not have any property, any single asset worth more than 1,000, or total assets in excess of 10,000.

Most debtors not meeting thosecriteria opt, instead, for a PTD, and recent research by PKF showed that homeowners accounted for 47 per cent of all PTDs taken out in Scotland last year, up from 33 per cent in 2008. The average Scot taking out a PTD is 42, with debts of 42,380, and the average male taking out a PTD is now 10,000 deeper in debt than in 2008. This illustrates the extent to which credit has been curtailed in the downturn, with families that previously funded their lifestyles on the never-never now getting a nasty shock when they apply for fresh credit.

As Moneyfacts revealed this week, the best loan rates are at their highest level for nine years and securing the best deals – or any loan at all – is increasingly difficult.

This, along with continued low wage inflation and predicted further increases in unemployment and interest rates, will keep Scottish insolvency levels high for at least another year.

Yet, measures being considered by the Scottish Government may add to the pain over the long term. It wants to create a new form of PTD, in which property would be "ring-fenced". On the face of it, this is sensible and it is aimed at tackling repossession, but repossession cases are either very low or non- existent in PTD cases.

The potential unintended consequences are more worrying. For instance, the legislation could inhibit creditors and, ultimately, restrict access to credit even further. Debtors would then be forced towards more expensive forms of credit, to the detriment of their credit records, and getting stuck in an even deeper cycle of debt.

Ewing has political reasons for championing any short-term dips in bankruptcies, which are, of course, welcome. But is there a suggestion that he doesn't fully understand the depth of the problem, or the implications of the Scottish Government's efforts to tackle it?