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A Sharp Decline in Scottish Debt Problems

3rd February 2015

The latest statistical release from the Accountant in Bankruptcy confirms a continued downward trend in the use of Scotland’s statutory debt solutions. The combined total of people commencing with a protected trust deed, sequestration or debt arrangement scheme has fallen 17.6% compared to the same period last year.

Overall the figures have now reached levels last seen before the credit crunch and subsequent recession. Personal insolvency figures had surged following the financial crisis in 2007 and 2008. A steady downward trend has now been in place for a number of years.

The least significant fall has been in the number of bankruptcies. Awards of bankruptcy in Scotland fell by 5.7% compared to the same period last year to a total figure of 1,577 for the past quarter. Around 80% of these bankruptcies were initiated by debtors and around 20% were initiated by creditors. 

The debt arrangement scheme (DAS) was used by 7.1% fewer people than during the same quarter last year. 1,097 people set up a DAS during the most recent period.

By far the most significant decline has been in the use of protected trust deeds. 1,056 Scottish trust deeds were set up in the last quarter, a massive fall of 36.9% compared to the same period last year.

The Scottish government is understandably pleased with these results. Business Minister Fergus Ewing said, “There can be no doubt insolvencies falling back to pre-recession levels reflects the improving economic picture in Scotland – but there is no room for complacency. The Scottish government has recently introduced Scotland’s Financial Health Service, aimed at helping those people with money worries lighten their financial load by signposting them to advice and support from trusted organisations”. 

Others remain concerned that these promising figures do not necessarily reflect a more financially secure Scottish public. Most economic observers continue to believe that the economic recovery is fragile and vulnerable to events elsewhere in the world. There’s also a significant concern that many people are managing to sustain their debt repayments only because of the unusually low interest rates that have been prevalent for several years.

There’s also a belief in some quarters that a more measured approach by the UK’s debt collection industry has led to a temporary lull in the pressure being applied upon debtors. Debt collection action and legal threats have long been a major factor in driving people to seek debt advice.

Since the Financial Conduct Authority took over the regulation of the debt collection industry in April 2014 there has been a substantial general move towards a more sympathetic approach to debt recovery. Whether this continues in the long-term is open to question. One senior employee we know at a well-known debt collection agency has informed us that their clients (the banks) are insisting on a much more customer-focussed approach to debt collection. Will this continue if it turns out that recovery rates fall?

Finally there has been a temporary disparity between the potential repayment terms of trust deeds compared to bankruptcy in Scotland. Protected trust deeds were increased to a minimum term of four years recently, while the repayment term associated with bankruptcy was temporarily withheld to three years. This disparity will end soon, potentially encouraging more people to choose a trust deed rather than sequestration in the future.

The decline in the use of statutory debt solutions in Scotland is a welcome and significant trend. Whether it will continue is likely to depend upon factors that fall outside of the control of the Scottish government. 

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