Newspaper Reports That Debtors Face Exploitation

18th June 2012

Scotland on Sunday has reported this weekend that debtors face bankruptcy “exploitation”. The article appears to be particularly based upon the views of credit unions. Insolvency practitioners appear to be in the firing line with accusations that people are being advised to enter into unsuitable arrangements (sometimes a Scottish trust deed or sequestration) when other arrangements might have been more appropriate.

The concerns of credit unions about insolvency procedures are inevitable. The amount that they can charge in interest is limited which makes it especially difficult for them to recoup losses that can occur when debts are written off by a trust deed or bankruptcy. Last month we reported in our trust deed blog that a credit union might have to lend and then collect £350,000 in twelve months to recoup the losses from a £7,000 loan that must be written off. We have previously written that we hope that credit unions will receive greater interest-charging flexibility to help alleviate this issue in the future.

There is also little doubt that credit unions in Scotland will be seeing cases where people were poorly advised by insolvency practitioners (and other types of adviser) to enter trust deeds or bankruptcy. Marlene Shiels of Edinburgh’s Capital Credit Union is quoted by Scotland on Sunday saying, “… most of our members who approach us for help after signing a trust deed are unaware of the consequences of having done so”. Rod Ashley of ScotWest Credit Union is quoted as saying, “We also have seen situations… when it is questionable whether a debt arrangement scheme would actually have been a more appropriate form of relief for the debtor”.

Sadly our trust deed forum confirms that these issues exist. We often hear from people that have been given insufficient information about the nature of the commitments that they are making if they go ahead with Scottish trust deeds or sequestration. This can cause major problems later.

We also hear of situations where people are talked out of the debt arrangement scheme (which should ensure full debt repayment) into trust deeds. One couple that we have spoken with today wanted to proceed with a debt arrangement scheme but were pushed so hard to start trust deeds instead (by a well-known firm of insolvency practitioners) that they contacted us for a second opinion. DAS was in fact suitable for them and met their personal objective of repaying their debts in full if possible.

It’s clear to us that individuals should take time to be certain that the debt resolution options they select are the best option for them, not the highest fee-earner for the company they’re working with. It’s also clear to us that a minority of trust deed firms do a poor job at making people aware of their commitments if they go ahead with trust deeds or sequestration. Some firms see what should be an “advice process” as in reality being a “sales process” to maximise their fee income. Insolvency regulators may need to take a greater interest in the quality of initial advice that is being delivered by IP’s and their agents if they wish for this “charge” to disappear in the future.

These issues reported by credit unions should however be placed in some context. In 2009 a sample suggested only 0.2% of the value of debts in trust deeds was in fact credit union loans. Credit unions themselves are not immune from lending sums to people that they are not in a position to repay. We have worked with a few clients where a credit union might, with hindsight, recognise that their lending actually played a role in causing the insolvency. It should also be remembered that debt advisers have a responsibility to inform people of the benefits and drawbacks of all options. Where this happens properly, and an individual chooses a Scottish trust deed or sequestration rather than DAS, the adviser that followed the correct process can hardly be blamed by a credit union for their lost money.

Is there widespread exploitation of debtors in Scotland? We don’t think so, but it is apparent that serious poor practice and profiteering exists in a few places. Improved monitoring of insolvency practitioner advice could quickly bring that under control. We suspect the credit unions also have certain “suspects” in mind when complaining about the way trust deeds and sequestration are being promoted, rather than believing that the whole “system” is at fault as seems to be the suggestion in the Scotland on Sunday article.

If a credit union would like to contribute their views on this subject, we’ll happily publish them unedited on the site.

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