When in debt, the first thing to do is to talk

AGROWING number of Scots are haunted by the spectre of bankruptcy as rising household costs and tighter lending conditions pile on the pressure.

The number of Scots made bankrupt reached record levels in the last quarter, according to Insolvency Service figures published yesterday and analysed by PKF accountants and business advisers. There were 5,998 personal insolvencies in Scotland, a 26.7 per cent hike from the previous quarter and 70.1 per cent up from a year ago.

Unsurprisingly, debt advice groups have reported a significant increase in debt inquires in recent weeks as the economic slowdown has intensified.

For those finding their personal debts increasingly difficult to manage, there are some steps that can be taken to address the situation. These range from everyday measures such as budgeting and taking advice to opting for sequestration.

In recent months, the options available have become more limited, however. Debt consolidation is now effectively impossible as credit is in short supply, while remortgaging to free up more funds is increasingly difficult in the current mortgage market.

However, the first and most important step for anyone struggling with debt is to face their problems and seek advice.

IT'S GOOD TO TALK

Debt problems are exacerbated by a reluctance to recognise them, especially among older generations for whom the stigma is too great. The average 61-65 year-old calling Glasgow debt solutions firm Newtomorrow for debt advice has 43,760 of unsecured debt, compared to the average caller who is 41 years old and owes 30,334.

It can be hard to admit to financial problems but sticking your head in the sand will only make matters worse, stressed Anne Buchanan, Glasgow-based corporate recovery partner with accountants and consultants PKF.

"The secret is taking advice as soon as possible because you can minimise your problems just by doing that.

"If you have debt issues, approach Citizens Advice or an insolvency practitioner for free advice and they will point you in the right direction."

If possible, talk to your creditors.

" In the current climate, many lenders are less flexible than previously, but if you speak to your lender you may be able to reach a mutually agreeable solution.

Free sources of debt advice include National Debtline Scotland, Newtomorrow, Citizens Advice and the Consumer Credit Counselling Service, among others.

DEBT MANAGEMENT PLANS

Informal debt management plans are designed to help you repay your creditors, with the management company distributing your assets accordingly.

They can be flexible and some firms will manage to get your interest payments frozen or reduced.

Most specialist debt management firms are unregulated and have little power with creditors, so interest payments can be hard to fix at favourable levels. Non-profit organisations can also help you with repayments plan, said Buchanan.

"If you are in employment look at whether you can afford a realistic repayment plan, which Citizens Advice can help you set up."

The informal debt repayment plan option is only advisable if you are sure that you won't incur further debt and you are comfortable with the conditions set.

PROTECTED TRUST DEEDS

These are basically informal bankruptcy arrangements with fewer restrictions than sequestration. But if you can pay your debts off in less than four years through budgeting and expenditure management measures, said Ian Wright, managing director of Newtomorrow, you should not need to go as far as taking out a PTD.

With PTDs you make realistic monthly payments to an insolvency practitioner who handles the sale of any significant assets you may have and distributes the disposals to your creditors (provided they agree with the arrangement). Your debts are typically paid off after three years, at which point there is "debt forgiveness".

As with all debt solutions, there are restrictions and pitfalls to consider. For example, your home could be at risk if for any reason you are unable to comply with the conditions of the trust deed.

SEQUESTRATION

This is the Scottish form of bankruptcy and aims to ensure your assets are shared out among your creditors while relieving the burden of debts. It's not a get-out-of-jail-free card, however, and there are several restrictions. You can only be considered for sequestration if your debts total at least 1,500 and you haven't been declared bankrupt in the previous five years.

"Sequestration is considered if you cannot fund a PTD," said Wright. "It's for people who are really struggling and have very little or no disposable income."

The process involves the transfer of your assets and property to a trustee who then sells them (including property if necessary) for the benefit of your creditors. If you comply with the trustee's requests, you can be automatically discharged after one year.

For more details on sequestration, contact the Scottish sequestration administrator, Accountant in Bankruptcy.

Sequestration has been made more accessible by the LILA (low income, low asset) rules introduced in April, which allow debtors to petition for their own sequestration if they meet the necessary criteria, including a minimum debt level of 1.500.

Previously the process had to be instigated by a creditor and the change has driven an increase in sequestrations, while PTD figures have remained largely static.

This is the option of last resort and anyone considering it should take professional advice first.