New rules to protect homes 'may backfire'

NEW Scottish Government rules aimed at preventing debtors from losing their homes have been dismissed as a red herring that could have the reverse effect.

Experts say the second part of the Homeowner and Debtor Protection Act, which came into force on Monday, could result in creditors taking more aggressive action against debtors. The new measures allow debtors to apply to have their home ring-fenced from protected trust deeds (PTDs, informal bankruptcy arrangements with fewer restrictions than sequestration) provided creditors agree. But that is highly unlikely, according to John Hall, Scottish council member for insolvency trade body R3.

He described the move as a politically motivated red herring. "I cannot recall a sequestration or PTD going as far as a property being repossessed," he said. "It's a damp squib because while PTDs can now exclude property, that will never be accepted by creditors."

Hall claimed the provision could in fact backfire and increase the chances of repossession. "The greater prospect is that creditors will instigate sequestration if a debtor applies to exclude their property. If they feel that the debtor is trying to put the property out of reach they are more likely to take an aggressive approach," he said.

But Graeme Brown, director of Shelter Scotland, said creditors should play their part in helping debtors tackle their problems.

"A PTD is one of the ways people can deal with their debt but its efficacy is based on mortgage lenders agreeing and creditors being satisfied with the arrangement," said Brown.

"Shelter Scotland urges creditors and lenders to be as sympathetic as possible and to let customers pursue all possible angles before they move to repossess homes."

The new rules also feature a "certificate for sequestration", where applicants will only need a certificate from an authorised person - such as an insolvency practitioner or money adviser - rather than a charge of payment from a creditor, as was previously required.

Insolvency levels in Scotland fell in the last quarter, according to government figures published this month, but Hall predicts a rebound next year as jobless figures rise. And the new route into sequestration will make it easier for people struggling with debt to declare bankruptcy.

There was a massive surge in insolvencies after the Low Income, Low Asset (Lila) rules easing access to sequestration were introduced in 2008, although Hall believes the impact of the latest rules will be more modest.

Brian Milne, director of reorganisation services at Deloitte Scotland, agreed. "We may see a shift from PTDs to sequestration," said Milne.

"But I don't think there will be a huge swell in insolvency numbers because if someone really needed debt relief they'd have signed a PTD or opted for another form of debt relief."

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