Will changes to Scottish debt rules mean more Bankruptcies?
The Scottish government are planning big changes to the debt solutions available for people living in Scotland. We consider the proposals and whether these are likely to force more people into bankruptcy in Scotland.
A report published at the beginning of November by the Scottish Government has outlined its proposed changes to the rules governing the various personal debt solutions available in Scotland.
Once agreed these changes will be brought into Scottish law in a new Bankruptcy Bill which is expected to be considered by the Scottish Parliament in the summer of 2013.
Based on the report it seems that the changes proposed are far reaching and will have a fundamental affect on how people in Scotland decide to deal with their debt problems.
What are the proposed changes to the Trust Deed Solution?
The proposed changes to the Trust Deed rules seem to be considerable. The three most significant ideas are as follows:
1. The minimum amount of debt required to start a Trust Deed will be £10,000. At present there is no minimum debt amount.
2. The minimum amount that must be paid back to creditors within a Trust Deed will be between 30p and 50p. Currently there is no minimum payment.
3. The minimum period over which a Trust Deed must run will be four years (48 months). There is currently no minimum although most Trust Deeds last for three years.
Could the changes push more people into Bankruptcy?
The publication of these proposals has been received with some alarm. The Scottish Government have stated that the changes will make their bankruptcy rules “fit for the 21st century”. However organisations such as ICAS (Institute of Chartered Accountants in Scotland) have highlighted a number of concerns.
The suggested problems are twofold. Firstly the changes will make it more difficult for an individual to qualify for a Trust Deed in the first place.
To this there can be very little argument given that the current rules provide no minimum barriers to qualify for a Trust Deed. As such to tighten up these rules will simply mean less people qualify and more have to turn to the bankruptcy solution.
Secondly, the Trust Deed will become a far more onerous solution and therefore less beneficial for the individual when compared to declaring bankruptcy.
Again there seems little to defend this viewpoint. If a minimum amount to be paid back to creditors is introduced, this will always make the Trust Deed solution less favourable than bankruptcy where there will be no minimum repayment amount.
Particularly hard hit will be people who have little spare income but who would like to make a best effort to repay their debt. It seems that they will be barred from using the solution and forced down the bankruptcy route.
In a wider sense, when weighing up their debt solution options if people can see that bankruptcy will not last so long or will not involve such onerous payments, it stand to reason that if everything else remains equal they will go for the bankruptcy option.
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What are the proposed changed to the Bankruptcy rules?
The Scottish Government have also proposed various changes to the bankruptcy solution. One of these is to simplify the eligibility criteria for borrowers applying for bankruptcy. This might suggest that the Scottish Government are in fact trying to move people towards the bankruptcy solution rather than the Trust Deed.
However the proposals also include more onerous suggestions such as increasing the minimum debt level to £3,000 before bankruptcy can be applied for and a suggestion that payment terms which are currently three years will be extended perhaps to five to bring these more in line with the Trust Deed.
In addition Bankrupts may be forced to have payments taken directly from their wages which in affect would inform their employer of the situation.
These suggestions may make bankruptcy less palatable for some when compared to the Trust Deed option. However they do not hide the fact that under the proposals may people will simply be barred from the Trust Deed option and will therefore be forced down the bankruptcy route.
Change will always go hand in hand with alarm
The proposals to the Trust Deed and Bankruptcy rules suggested by the Scottish Government are significant.
Many will argue that in fact such action is long overdue and point to the fact that for years, personal insolvency solutions in Scotland have been far more lenient than those available in England and Wales.
Clearly with the introduction of the new Bankruptcy Bill, the Scottish Government have an opportunity to improve the position of both people in debt and those banks that are owed money.
However if the changes simply make it more difficult for people to take advantage of the Trust Deed solution, the result will be more people resorting to the bankruptcy solution and the position of people who are owed money undermined.
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