The recent statistics producced by the Accountant in Bankruptcy has shown that the Scottish debt landscape has begun to change.
The number of sequestrations (formal bankruptcies) in the first quarter of this year remained the same with the number for the previous quarter (3,139), but showed a 16 % decrease on the numbers from the same quarter last year.
A similar story can be told for protected trust deeds, with only 2,239 becoming protected in the first quarter, which although up 10 % on the previous quarter was down 13% on the same quarter for last year.
The real story, however, is the 495 debt payment programmes entered into under the Debt Arrangement Scheme, showing a 19% increase on the previous quarter and a 60% increase on the same quarter last year.
The Debt Arrangement Scheme is a statutory alternative to personal insolvency and allows debtor to repay their debts in full, whilst providing them with protection from their creditors. Importantly, it also avoids debtors having to realise assets and allows interest and charges on debts to be frozen and eventually written off if the programme is succesfully completed.
Launched in October 2004, the scheme has had a troubled beginning with a poor uptake and problems with debtors unable to access it. This has largely been because access is exclusively through an approved money adviser and there has been a shortage of approved money advisers. This has now been partly solved with increased private sector involvement and it is now believe up to 10% of all applications may now be originating in the private sector. Concerns have, however, been raised in relation to private sector involvement with some private sector providers charging debtors up to £1,800 to access the scheme.
However, the increase in the number of the debt payment programmes may not just be a sign that debtors are keen to repay their debts, but that they have no other remedy available to them.
Those who enter the Debt Arrangement Scheme have to have disposable income to make payments and, therefore, it may be that increasing numbers of white collar debtors may be using the Scheme where there has been a drop in the household income and they are unable to use personal insolvency as a remedy. This may be as in personal insolvency debtors are required to realise the value of assets, such as homes and cars for the benefit of creditors. One of the advantages of the Debt Arrangement Scheme is that debtors do not normally have to realise their assets for the benefit of their creditors.
This creates a problem, however, for those debtors with assets, if they are unable to realise those assets (it may make them homeless or leave them unable to get back and forth to work), resulting in them having to enter repayment plans with their creditors that could take 10 years or more.
The Scottish Government will be introducing a new route into seqeustration also in October, which will allow debtors who cannot repay their debts as they fall due to apply for bankruptcy. This may result in an increase in the number of bankruptcies each year, but may equally result in a reduction in the number of protected trust deeds. In addition to this, the Government, as part of the new Act, will also be introducing new forms of protected trust deeds that will allow debtors to exclude their home from it, allowing them to keep it even though they are personally insolvent. This, however, is likely only to be in cases where there are small amounts of equity in the home.
It is clear that Scotland’s debt remedy landscape is now beginning to shift with one debt payment programme being entered into for every four protected trust deeds being signed. It could be tomorrows debtor landscape is one where there is more debt payment programmes and less personal insolvencies. It could also be with the decreasing number of personal insolvencies and increasing numbers of debt payment programmes, Scotland’s personal insolvency industry will now begin diversifying to offer the Debt Arrangement Scheme as one of the services they can offer.