Online Exclusive: Debt Roulette

Scotland’s pioneering scheme to assist homeowners in debt is facing funding cuts that look set to reduce protections available for debtors’ homes in personal insolvency.  Alan McIntosh takes a closer look.

Since the credit crunch, the Scottish Government have been keen to highlight the initiatives they are taking to support Scottish home owners. In 2009 they have launched the Home owners Support Fund and in 2010 they enacted the Home Owner and Debtor Protection (Scotland) Act 2010. Less fanfare is now being made of plans to slash funding for the Home Owners Support Fund by 46%, from £18.5 million to £10 million from the 1st of April.

The Fund which runs the Mortgage to Rent and Shared Equity Schemes had been acclaimed for its progressiveness and was the first of its kind in the United Kingdom. Westminster drew on it in 2009 when it launched the Home Rescue Scheme for England and Wales. Yet despite the huge risk that repossession and bankruptcy numbers will increase, new rules due to introduced will roll back the availability of the scheme for families facing the loss of their home. Both schemes attempt to keep home owners in their homes: the Mortgage to Rent Scheme by arranging the sale of a debtor’s home to a social landlord; and the mortgage to shared equity scheme, by providing a Scottish Government loan to reduce the level of indebtedness in return for an equity share of the property.

The new rules now being introduced will cap the financial assistance provided to participating social landlords and restrict the amount trustees in personal insolvency can receive to that which their clients can receive. This creates a risk landlords will now stop participating in the scheme with funding being capped at 60% of the house’s value and trustees will not allow debtors to use the scheme when equity exceeds the £8,000 or £12,000 that they are able to receive.

It is arguably correct that funds available to trustees should be cut, as where a debtor is not insolvent they are restricted in how much equity they can receive from a mortgage to rent sale, but where a debtor is insolvent, trustees previously were entitled to the full equity. In effect, this meant public funds were being used to pay trustee fees and unsecured creditor claims. However, the planned changes, which stakeholders have not been consulted on, will result in the removal of one of the few protections available for debtors’ homes in personal insolvency and with the Scottish Government not prepared to look at the issue of debtor’s homes in their current Bankruptcy Law Reform, be a real loss in protections for home owners.

With the Accountant in Bankruptcy’s office having suffered over 60% cuts in the last two years and advice agencies throughout Scotland facing closure and cut backs, these swingeing cuts to the Home Owners Support Fund indicates a continuing trend. That is despite the furore a few weeks ago, when it was wrongfully suggested five of Glasgow’s Citizen Advice Bureaux would have to close, the current government does not believe providing support to indebted Scots and their money advisers is high on the agenda.