Proposals will make it harder for Scots to repay creditors, writes Jeff Salway
Proposed changes to Scottish bankruptcy laws risk condemning the poorest debtors to “decades of poverty” and will make it harder to repay their creditors, experts have warned.
Changes to the way debt repayments are calculated will leave debtors financially crippled by trapping them in long-term agreements that may also leave creditors out of pocket, says the Institute of Chartered Accountants Scotland (Icas).
It spoke out on the proposals just weeks after the Scottish Government’s Accountant in Bankruptcy (AIB) was told it would be denying thousands of Scots a way out of debt if it went ahead with a crackdown on protected trust deeds (PTDs).
The planned changes to Scotland’s bankruptcy laws come as the number of Scots going bust continues to rise. People north of the Border are almost twice as likely to go bust as those in the rest of the UK, the AIB revealed last month, as more households struggle to cope with debts.
The AIB’s proposals would see debt repayments based on a fixed percentage of the individual’s income without assessing other mitigating circumstances.
The poorest would be hit hardest by the move, as the increased costs of financing their debts would leave them unable to meet their day-to-day living expenses and bills, claimed John Hall, of the insolvency trade body R3.
“Given that many Scots are simply surviving at the moment by only paying the interest on their debts and that tens of thousands are being made bankrupt each year, it is questionable whether now is the right time to make the conditions even tougher for some of the most vulnerable people in society,” he said.
Hall also hit out at government plans to change PTDS, the fastest rising form of bankruptcy in Scotland. In the first quarter of 2012 there was a 42.6 per cent year-on-year rise in the number of people taking out PTDs, an arrangement used by relatively affluent Scots who are in employment and have assets.
More than 9,000 Scots have taken out a PTD over the last year as access to previous sources of finance, such as credit cards and remortgaging, has been restricted.
But middle-income Scots going bust face more harsh debt repayment conditions under AIB plans to set a minimum dividend payment of 50p in the pound on PTDs. Last year the average dividend, which is the amount repaid of what is owed, was 16.2p in every pound.
“The proposed changes have not been welcomed by creditors or consumer groups and will have an adverse impact on the Scottish economy at exactly the time when it needs a boost,” said Hall.
Icas described the increased repayment demand as “unrealistic” and said it would deprive both debtors and creditors of a valuable bankruptcy option. It warned that debtors “may face decades of poverty as a result of these proposals”.
Bryan Jackson, chair of the Icas insolvency committee, said: “Society will not benefit from losing hundreds of thousands of consumers who otherwise might be able to spend money improving the economy.“
Debtors shouldn’t be let off the hook if they can afford to pay, but the changes could punish individuals who have run into money difficulties through no fault of their own, according to Jackson, particularly in the current economic climate.
“Perhaps what people don’t always appreciate is that the most common reasons individuals become indebted is due to ill health, redundancy, and divorce and not always financial profligacy,” said Jackson.