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Reporting Relative Insolvency Figures

At the end of last week there were a number of news reports regarding relative personal insolvency statistics for Scotland compared to those in England and Wales. The headline statistic was that the rate of personal insolvency, becoming bankrupt or signing a trust deed in Scotland, was running at nearly twice the level seen in the rest of the UK.

The headlines were frightening. “Scots still facing financial turmoil as bankruptcy rates are double the rest of UK” announced the Daily Record, The Herald headline read “Insolvency in Scotland Twice UK Rate”, and “Recession Hitting Homeowners Hardest” led reporting of the issue in the Scotsman. These headlines follow recently announced statistics by the AIB confirming broadly level totals of people becoming bankrupt or signing a trust deed in Scotland compared to the same period a year prior.

On the surface of it the headline fact is indisputable. 0.38% of Scots became insolvent last year (around four people out of every thousand) compared to 0.22% of residents in England and Wales (about two people out of every thousand). But from these statistics can we really infer that Scotland is being more seriously afflicted by personal debt than other parts of the UK? Are there other reasons that might help to explain the personal insolvency disparity between these two parts of the UK? Is it right to include only persons that have become formally insolvent in the comparison?

Let’s start out by looking at causation. Becoming bankrupt, or signing a trust deed in Scotland, is typically the end-result of a number of adverse financial, economic or personal factors. When you look into the financial and economic factors that could lead to serious debt, Scotland does not appear to fare unduly badly compared to the rest of the UK.

We looked into this in our “exposure to debt in Scotland” trust deed blog in October 2011. Average Scottish personal debt was lower than in England, unemployment levels are similar, housing costs are lower in Scotland, average pay rates are similar. There does not appear to be a toxic cocktail of financial circumstances leading people towards bankruptcy or a trust deed in Scotland in comparison to other parts of the UK.

It therefore isn’t possible to pin higher Scottish personal insolvency rates on the factors that typically cause a build-up of personal debt (or indeed existing higher levels of average personal debt). Being “insolvent” basically means that you lack the capacity to repay your debts when they are due to be paid. We see little evidence to support the idea that there are twice as many Scottish people who could be described as being “insolvent” (ignoring whether or not they have become “formally” insolvent by way of sequestration or by signing a trust deed in Scotland).

So what really is different for Scots (compared to their counterparts in England and Wales) which might lead nearly twice as many of them to become insolvent? It seems likely to us that the relative insolvency rates may have more to do with the options available to persons in serious debt in different parts of the UK.

For example, a trust deed in Scotland typically requires contributions for three years while the comparable IVA in the south lasts for five or six years. This creates a greater incentive for persons in England and Wales to choose an informal debt management plan (for which statistics do not exist and is not a “formal insolvency”) rather than an IVA.

It costs £100 to apply for bankruptcy in Scotland, compared to £700 in England and Wales. It is extraordinarily difficult for many financially stressed people to put together £700 for this purpose.

Could there be one person in a thousand in England/Wales who simply cannot raise the £700 to become bankrupt? Could there be one person in a thousand south of the border in an informal and unmeasured debt management plan because five or six years in an IVA just seem too long? Both seem to be highly likely.

Perhaps the higher Scottish insolvency rate is a positive signal about the accessibility and awareness of measures designed to help people who are no longer in a position to repay their debts? Three years for a trust deed in Scotland is by no means easy for those that choose this route, so on average people would be much less likely to use this measure if it lasted as long as an IVA (normally five or six years). £100 isn’t easy to find if you are in financial trouble, but it’s much more viable than finding £700 to become bankrupt elsewhere.

So what would happen if the term of a trust deed in Scotland was extended to a minimum of five years and the fee for bankruptcy was increased to £700? We’d suggest the relative personal insolvency rates between Scotland and England/Wales would narrow together pretty quickly. We’d also suggest that much social damage would be caused by creating disincentives for people to deal with financial situations which have already moved beyond the point of return. In these terms, the statistical disparity in insolvency rates takes on a different meaning to that presented in the media last week.

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