COVID 19: Responding to the Debt Crisis

As the public health crisis of Covid 19 unfolds, it is still too early to know the extent the financial crisis will impact on the personal finances of millions of Scots; but with over one million new claimants already claiming social security benefits across the UK; and predictions growth in the economy could fall by 25-40% this quarter, it’s not unreasonable to anticipate the effects will be severe.

Particularly, as almost 700,000 Scots were already struggling with problem debt before this began.The problem is unlike in the aftermath of the Credit Crunch, the free Money Advice Sector in Scotland is not in any state to respond. After 10 years of austerity and cuts of 45% to free money advice by local authorities between 2014-17, the Sector was already 50% under capacity according to the Money Advice Service. What that number will be after this crisis is anyone’s guess.

After the last Credit Crunch, we were in a much stronger position.

Between 2003-2005 there had been an additional £3 million invested each year; and from 2005-2007 an additional £5 million per year. In addition to that we still had a relative progressive system of laws that could help people.

Between 2009-15, there were over 140,699 personal insolvencies and 21,364 Programmes under the Debt Arrangement Scheme. This allowed Scotland to effectively respond to that crisis in a way that other countries couldn’t.

Take Ireland, for example. In the first quarter of 2015, they still had over 104,000 mortgages in arrears, and of those, 37,933 had arrears of more than 2 years. Limited in the immediate aftermath of the credit crunch by what was a Victorian era insolvency system, between 2009 and 2015, there were only 1,163 personal insolvencies.

The lesson is clear, if you want to recover from a financial crisis, you must have the resources and laws in place to address the issue of problem debt.
In addition to funding free Money Advice services properly, you need to think radically.

To begin with, Scotland could waive bankruptcy fees for everyone who is in receipt of income-based benefits, whilst increasing the maximum level of debt that can be included in fast track Bankruptcies from £17,000 to £25,000. We could also discount the first £50 of disposable income, so those on low incomes don’t need to unnecessarily contribute to their bankruptcy.

This could see 1,000’s debt free within 6 months.
We could also disregard the first £30,000 of equity in homes in all bankruptcies and avoid their unnecessary sale.

In addition to that, the new Debt Arrangement Scheme Regulations, passed only in November 2019 that banned all private sector fees, could be applied to cases entered prior to them commencing. That would assist thousands struggling to repay their debts and raise an additional £2-3 million for the free money advice sector.

We could also increase protections in bank account arrestments (last year there were over 170,000), so only a percentage of funds held in accounts over £529.90 is frozen, instead of the full amount, like with wage arrestments.

Such radical thinking is necessary, if we want to ensure Scotland responds effectively to this crisis, like we did the last one.

Readers Questions

  1. Joe

    Hi there. Just thought I’d give you a quick update. I’ve had no reply after sending the discharge to one insurance company. In the meantime another Insurance company where my mum also had a policy informed me ( after I chased them ) that they have written to the trust fund company. They then also asked for the certificate of discharge. I contacted the company from where the original discharge certificate is from and they no longer have records. The trustee has also retired. Meantime , the company both insurance companies have written to , no longer exist under the original name or address. The company who issued the discharged the certificate from explained that this is usually suffice. It’s all a bit annoying.
    Thanks again for the help.

    1. Scottish Adviser

      Hi Joe

      I have sent you an email, can you send me your Mum’s name and address.

      So, I can see who the firm is.

      1. Scottish Adviser

        Hi Joe
        The original Trustee sold her firm about 2012 and has now retired, although the new firms still exist and should still assist you.
        I think if they have written to the insurance firm, like you say, saying they have no interest in the policy, there is no impediment to them paying you the funds. Chase the insurance firm up and if they don’t pay make a complaint.
        If you need additional proof you could ask the Accountant in Bankuptcy (AIb) (a Scottish Government agency, to confirm both your Mum and her Trustee have been discharged). 
        Your Mum’s Trust Deed was so long ago it’s not on the online register, but I have sent you the public notice of it that was published in the Edinburgh Gazette. This should help the AIB find it (though it may be archived).
        Be prepared to chase up the insurance firm, I see no reason they shouldn’t pay as the Trustee has made it clear he has no interest.
        In terms of the insurance firm that went bust, speak with the Financial Services Compensation Scheme, they may be able to help (but if your Mum was not paying the premiums because the policy lapsed, you may have little recourse).
        I hope this helps.

    2. Joe

      Thanks so much for signposting me to the AIB and ensuring I follow the correct protocols when trying to trace the paperwork for my mum’s old protected trust deed. The AIB were really efficient. The trustee had discharged herself from the trust deed. I have sent the letters they sent me to the insurance companies.
      The trustee hadn’t notified the insurance company at time of discharge.
      What a brilliant efficient service you run.Highly altruistic.
      I’ll keep you posted.

  2. Joe

    Thank you so much for the advice. I’m going to call the company tomorrow. I’m hoping that it’s just say standard protocol. I’ll keep you informed. Once again , much appreciated.

    1. Scottish Adviser

      No problem Joe.

      The Certificate of Release/Discharge should be enough, but if not a letter from the Trustee should be sufficient.

  3. Joe

    Hi There.

    My mum died last week during lockdown.
    She is survived by me and my brother with a fifty fifty split to her insurance policies.
    However, she had a protected trust deed in 2009 and we have a certificate of release from this dated 2012.
    The insurance company has contacted us mentioning a letter of bankruptcy discharge. We are worried that they are going to chase this , despite her being discharged from this. Would welcome advice.

    1. Scottish Adviser

      Hi Joe

      First, can I say I am sorry to hear about your Mum.

      In relation to your Mum’s insurance policy this doesn’t sound like a problem.

      Its standard procedure when someone signs a Trust Deed, that the Trustee intimates they have an interest in the policy which they usually do.

      This is to stop an insurance firm paying out on the policy until the Trustee is no longer in office, or administering the Trust Deed.

      Often when the Trustee gets their discharge, they dont notify the insurance firm, so years later they may contact the Trustee or ask for a letter from the Trustee saying they have no interest in the policy. Basically, they dont want to give the money to the wrong person and are taking a belts and braces approach.

      The best way to do this is contact the Trustee by looking up your Mum’s Trust Deed. You can normally do that by carrying out a search on the Register of Insolvencies.

      The Trustee should give you a letter.

      You should not have any problems because it was so long ago. If you have problems finding details of your Mum’s case or contact details for the Trustee (as some have retired), contact the Accountant in Bankruptcy’s Office.

      If the Trustee is still in Office, which can happen, but rarely so long after the person who was in debt gets their discharge, and claims they are entitled to take the money, come back to me. I am certain this wont be the case, but in the very slight chance it is, let me know as this is a complex area of law and I can point you in the correct direction.

      Again sorry to hear about your Mum.

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