Can The Scottish Insolvency Scheme Help the Debt-Ridden?

By: Musa Aliyu
As everyone struggles to come to terms with the menace of the credit crunch and the fact that it makes a debtor of many of us, one important thing on the minds of most people is how to rid themselves of a debt burden. While many have taken steps to either repay or work out alternative means of settlement, a trend that is increasingly getting popular is the decision to become bankrupt.

Although this option may provide a relief for borrowers who are unable to repay debts, it does come with its price. For example there could be some credit and financial restrictions imposed on anyone who is bankrupt. Regardless of this, it is still the only outlet for many who are debt-ridden.

In Scotland the issue of debt has posed so much concern for the government and people that in April, this year, a new set of rules that would allow people take the easy way out was introduced. Intended to help people who are unable to shed their debts by other means, the policy allows those who are classed as Low Income, Low Asset debtors declare themselves bankrupt and be free of the crippling burden.

Before the introduction of the LILA rules debtors who had no means of repaying debts only had to wait for their creditors to start a legal process seeking the recovery of their money and the courts could in the end let such people become bankrupt and off the hook.

However, many creditors would rather use debt recovery companies to harass debtors until they pay up or seek a resolution, somehow, Citizen Advice Scotland lamented. This means debtors were at the mercy of their creditors, perpetually.

But the turn around in this situation was the introduction of the LILA rules, which now give an alternative means to insolvency. Even as it has been estimated that up to 5,000 people in Scotland may take advantage of it and sort themselves out, the main worry for many people is that there is a £100 application fee that must be paid to be able to access the scheme. And many debtors that are genuinely in need of help can’t afford to pay the fee.

Citizen Advice Scotland is therefore worried about this problem and argues that many people may end up not being able to shed their debt through bankruptcy. Basing its position on a report compiled by its head of social policy and public affairs, Susan McPhee, the advice agency said there was evidence that although some of its clients were able to access the scheme and get the help they needed, some could not afford to pay the fee and have been excluded. Crucially, those who are in the list of the excluded are people who are ordinarily the ones who need the scheme most, according to Citizens Advice. And in this group are the low incomes and those with health conditions.

This complaint has already drawn a response from the Scottish government, whose spokesman admitted that the rules were made to cater for the needs of those who could neither repay their debt nor use other means to become bankrupt. But he swiftly denied that the £100 fee constituted a barrier for many who would opt for insolvency through the policy.

Although the government may be right in saying that they were unaware of such claims, the fact that it comes from a credible source makes it worthy of a serious attention. One way to get round the issue is for them to properly investigate and see whether the policy is helping those it set out to help. Otherwise, it becomes unnecessarily a failure.

Musa is an author of several articles pertaining to Debt. He is known for his expertise on the subject and on other Business and Finance related articles.