Family Debts And Scottish Trust Deeds
R3, an association for insolvency professionals, has researched the subject of borrowing from family. According to the Scotsman, R3 has discovered that a third of people in Scotland would borrow from family to help them manage financially. The proportion of people outside of Scotland is much lower at just one fifth. Fewer people in Scotland would approach their bank for extra funding (25% versus 33% UK average).
Are family helping out to prevent the need for debt solutions such as Scottish trust deeds? In some circumstances this may well be the case. Tightened lending criteria amongst financial institutions makes additional borrowing while already heavily in debt much harder than it used to be. Faced with the prospects of Scottish trust deeds it might be the case that some people approach family when other lending sources dry up.
Of course any kind of debt solution should be a treated as a last resort. It may be the case that Scottish families are simply more generous and supportive of their relatives than families elsewhere in the UK. Avoiding the need for Scottish trust deeds thanks to the support of family members certainly makes sense where it can be handled in a way that is affordable and manageable for all involved.
Family lending and borrowing isn’t without risks though, and these risks are magnified where a cycle of serious indebtedness is already in place. There may be a comparison in this respect between family debts and the types of debt consolidation that used to be so easily obtainable from banks a few years ago. If family can repay all of your debts, and you can afford the agreed repayments to them, there is probably no problem unless circumstances later change. If family pay off some of your debts, but the remaining debt repayments (including the new family debt) isn’t affordable, the overall level of debt is likely to quickly grow again.
The danger is that the overall debt reaches even higher levels, but this time repayments to family (as well as banks and credit card providers) are also jeopardised. This could in itself make life financially difficult for the relative that lent you the money.
How is money owed to your family addressed if you enter a trust deed in Scotland? The answer is that it isn’t possible to prioritise repayments to family over and above other creditors. You cannot include all of your other creditors in Scottish trust deeds while being given an allowance to carry on fully repaying family debts. Where satisfactory proof of the lending exists, family can be included as creditors in protected trust deeds. The potential for embarrassment and family disputes is obvious.
Borrowing from family may therefore be a legitimate and sensible way to avoid the need for recourse to Scottish trust deeds. However, such borrowing and lending should only take place after a careful affordability and budgeting exercise is conducted first. Where borrowing from family will only delay the inevitable, it may be better to first seek out qualified debt or Scottish trust deeds advice prior to making any family lending or borrowing decisions.
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