Scots to be Helped Out of Debt

The Scottish Executive is offering 5,000 Scottish residents who are in the red and are on low incomes with few assets a chance to have their debts written off.

This is possible through an escape clause through a new route to bankruptcy as personal debt continues to be a growing problem.

Citizens Advice Scotland (CAS) deals with £211 million of debt a year. The average debt owed by individual clients is more than £13,000.

Under current law, a debtor can petition for their own bankruptcy if they owe at least £1,500 and are unable to pay their debts and at least one of their creditors has taken court action to recover the debt. The debtor then becomes known as apparently insolvent.

However, unfortunately those who are worst off and whose creditors have not taken court action cannot access this option. These people could then end up in a vicious circle of debt and be pressurised to make payments they simply cannot afford.

Now the Executive is consulting on low income, low assets (LILA) a new route into bankruptcy. If the scheme gets the go-ahead it could be introduced as early as April next year.

To come under this category, debtors must have a weekly gross income of less than £100, do not own their own home and have assets of less than £1,000. This would also declare someone bankrupt.

The initiative would be funded by the Executive but debtors would have to pay an application fee of £100. Their debts would then be written off. Based on CAS figures, there are about 5,000 people who would immediately benefit.

CAS, said that this scheme would make a big difference to the poorest in society and people who have been stuck in the vicious circle of debt with no foreseeable way out of the trap.

Bankruptcy is not an easy option and there can be serious consequences, including the effect on credit-ratings. For some people, it can even jeopardise their current or future employment. However, for those deep in debt, and require debt help, bankruptcy probably is their only realistic option forward. It would, at least, allow them a chance to rebuild their lives eventually.

CAS said there must be careful consideration of the definition of "income" and "assets" to ensure low income earners are not excluded because, for example, they could own their own home but it may not have any equity in it.

As well as not being able to declare themselves bankrupt LILA people cannot qualify for a Protected Trust Deed (PTD), the Scottish version of an Individual Voluntary Arrangement.

This lets people repay their debt over a specified period, after which any remaining debt is written off.

Given the lack of success of the Executive's Debt Arrangement Scheme (DAS), ministers would have to reassure people this new initiative would work. DAS, which is intended to help people rearrange their debts so they can pay them off, was launched in 2004. Since then, the Executive has ploughed in close to £12 million but has only helped just over 200 people with about £3 million of debt.

DAS is being changed to make it more appealing by freezing interest on debt, but there are still too few insolvency practitioners willing to become accredited to advise the scheme, because they don't believe it can work.
Also, before you are discharged from sequestration it will be unlawful to borrow more than £250. This often rules out the option to continue trading if you are self-employed. You will find it difficult to obtain any credit and will be unable to act as a director of a limited company.

While it is good news that a governmental body is finally stepping in to help people in serious debt, the offerings have serious consequences and you may find it extremely difficult to ever borrow again, that includes mortgages.

Debt is something everyone deals with everyday and you may find you don’t have many options, but the best thing to do is frequently re-evaluate your finances and before you enter into any debt repayment schemes ask yourself if it is really worth the black mark on your name.