Bankruptcy hits a record number of Scots in 2007

SPIRALLING levels of debt could soon see the annual number of personal insolvencies in Scotland break through the 14,000 mark for the first time.

This warning comes following yesterday's publication of official figures showing 13,814 Scots were declared insolvent in 2007 – up 1.3 per cent on 2006.

What makes these figures particularly worrying is that the manager of a Citizens Advice Bureau in Glasgow said it is not uncommon for an individual to be up to £140,000 in debt.

The Insolvency Service figures revealed bankruptcies – known as sequestration in Scotland – grew at a faster rate than protected trust deeds (PTDs), formal agreements with creditors.

Although the total number of personal insolvencies in the final quarter of last year was 1.9 per cent lower than in the same period for 2006, that was mainly because fewer lenders agreed to PTDs. The number of PTDs in the final quarter was down 13.4 per cent, while bankruptcies were up 15.3 per cent.

Andrew Kennedy, head of personal insolvency for KPMG in Scotland, said: "These figures do not mean that fewer Scots are finding themselves in debt. In practice, it seems that creditors are taking a harder line with debtors and refusing their application for PTDs., if they do not meet certain criteria. The result of this is a sharp increase in bankruptcy petitions."

And experts expect to see record insolvencies in the first quarter of this year.

Matt Henderson, a business recovery and insolvency partner at Johnston Carmichael, said: "You often see a drop-off in the figures in the last few months of the year, but people try to deal with their debt around this time.

"When the figures are revealed at the end of March, I'm almost certain they will break through the 14,000 mark for the 12-month period for the first time."

He added that the primary cause of debt is "imprudent" over-spending rather than "unfortunate entrepreneurs".

He said: "People should realise it can take 25 years to clear a £2,000 credit card bill if you are only making the minimum repayments. That's a financial commitment akin to a mortgage.

"Credit card debt has also become more expensive with recent increases in charges, particularly for making cash withdrawals. The result is that Scots who have large loans or credit card debt are finding their finances coming under increasing pressure."

Henderson continued: "It also takes time – perhaps a year or 18 months – for the real effect of increased interest rates to be seen in personal insolvency statistics, as people struggle to make ends meet."

There are a variety of reasons why people get into debt, including marriage break-ups, unemployment and health problems.

Anyone entering a financial agreement should ask themselves if they can afford repayment if their personal circumstances change.

Vince Chudy, manager of Glasgow Central Citizens Advice Bureau, said that store and credit card debt is the biggest problem faced by his clients as people do not consider the interest rates.

Chudy said: "People don't relate one commitment to another and when they come to us with one debt they inevitably have others."

Mortgage borrowing is not often included in official figures on debt – Experian has calculated areas where people have mortgages with the highest loan to value. This is the proportion of the value of a property borrowed on a mortgage. If someone is highly mortgaged, there is often more danger they could fall into negative equity.

Motherwell has the UK's highest level of debt in relation to local property prices. And Sighthill in Glasgow has the most "highly geared" homeowners with people having average mortgages of 95 per cent of their property's value.

KEY QUESTIONS ANSWERED

Q What does sequestration/bankruptcy mean?

AIn Scotland, the legal term for bankruptcy is sequestration, when the court orders that your assets are transferred to a trustee. The debt must be £1,500 or more.

The debtor is subject to various restrictions, including on asking for more credit for around three years. This is expected to be reduced to 12 months in April.

QWhat is a protected trust deed (PTD)?

AIn a trust deed you sign a contract to pay the creditors as much as you can afford. A trust deed does not stop creditors from taking enforcement action. It can become "protected" if most of the creditors don't object to the planned payment.

In that case creditors are bound to accept the payment offered.

The agreement generally lasts three years.