THE number of Scots being made bankrupt may have fallen slightly in the first quarter of this year, according to new Insolvency Service figures, but it is clear that this is merely the calm before the storm. There has been an upward trend in the figu
res for decades and the past five years have witnessed an exponential growth in personal insolvency.
The figures, unfortunately, speak for themselves. In 1998 there were 4,465 personal insolvencies in Scotland. By 2003 this had almost doubled to 8,780 and this year we predict the numbers will reach around 15,000.
There are a number of reasons for this, some cultural and some legislative. It is clear that debt has become both easier to accumulate and less stigmatised. The easy availability of credit over the past eight or so years, backed by rising house prices, led both lenders and borrowers to believe that uncontrolled credit was a good thing that would never end.
Of course we now all know that this period of credit-fuelled economic growth ended with the credit crunch, the overall impact of which has yet to be fully determined.
The problem is that consumers have got used to spending and lenders have got used to lending and both would like to return to the status quo as soon as possible. But this is unlikely to happen and it is possible that the last few years could prove to have been the exception rather than the rule. If so, we may well be returning to a period of more sanguine lending that is less reliant on rising property values and more attuned to income and creditworthiness.
However, for many who embarked on a spending spree during the good times, much of their indebtedness has yet to filter through to the personal insolvency figures. If we have a period where property prices fall and individuals find themselves in negative equity, then the boom times may be about to give way to the bust times.
While this may sound unduly gloomy, the reality is that the delay between an individual starting to get into serious debt and becoming insolvent is generally about 12 to 18 months, although this may shorten if creditors become more aggressive in their lending policies.
If the economic climate gets worse then the numbers will undoubtedly rise at an even faster rate. We already know that the second-quarter personal insolvency figures will be higher because new legislation introduced on 1 April has already seen hundreds more declared insolvent. The new legislation is contained in the Bankruptcy & Diligence etc (Scotland) Act 2007, which makes it easier for certain debtors to declare themselves bankrupt. In particular the low income, low asset (LILA) legislation allows for easier debtor applications for sequestration.
This has effectively opened the floodgates for many individuals who had waited until 1 April to apply to make themselves bust. The concern is that every time new legislation has been introduced making it easier to be declared bankrupt, the numbers have risen dramatically (the last two times were in 1986 and 1993). When similar legislation was introduced in England and Wales in 2004, bankruptcies soared by 70 per cent in just three years.
We now face a situation where many people already in debt and facing growing financial pressures due to external factors, such as rising utility and food prices, see sequestration as an apparently easy way to resolve their debt problems. While this does resolve the issue in the short term, it has serious long-term implications for an individual's creditworthiness.
The concern is that the only lenders who will be interested in providing future finance for previously bankrupt individuals are the ones with the highest interest charges and the most punitive costs for lending. We may, therefore, create a cycle of indebtedness which spans generations and consigns thousands of Scots to a life of debt, bankruptcy and more debt.
? Bryan Jackson is a corporate recovery partner with accountants and business advisers PKF (UK) LLP
The full article contains 680 words and appears in The Scotsman newspaper.
