Scottish Gov To Introduce UKs Longest Bankruptcy
As the Scottish Government host on Monday, the 24th Annual General Meeting of the International Association of Insolvency Regulators, their surroundings will be far from those where most bankrupts spend their time.
The conference itself will be hosted in the Edinburgh’s plush George Hotel and be opened by Scottish Government Minister, Fergus Ewing.
Later there will be a drink’s reception in the Great Hall of Edinburgh Castle and a formal conference dinner on the Royal Yacht Britannia.
The event is expected to be attended by insolvency regulators from 24 countries, including the Republic of Ireland which, like Scotland, is currently modernising its own bankruptcy laws.
Unlike Scotland, however, whereas the Irish are liberalising their laws to reduce the time someone will be bankrupt from 12 years to 3 years, Scotland, under Minister Fergus Ewing is introducing new legislation, which will may see Scots remaining bankrupt for longer than anyone else in UK.
Currently under existing legislation, bankrupts throughout the UK are only bankrupt for 1 year, then they receive a discharge from their bankruptcy.
Where debtors can afford to pay something towards their bankruptcy, however, they have to pay for three years.
New proposals being made by the Scottish Government, however, will see this change.
First, they are proposing removing the automatic discharge of debtors from their bankruptcy after one year and leaving it to the discretion of their trustees to decide when they should be discharged.
Second, they are changing the law so bankrupts don’t just pay for three years, but for four years, one year longer than anywhere else in the United Kingdom.
Many insolvency practitioners have already indicated that if it is left to their discretion when a debtor is discharged, then they will likely only discharge debtors when all payments to the bankruptcy have been paid, meaning for most Scots, bankruptcy will last four years.
The poor are being trapped in a cycle of debt
Last year over 40% of all Scottish bankrupts were low income, low asset bankrupts (LILA), which mean they were either entirely dependent on means tested benefits or living on less than the 40 times the national minimum wage and didn't own their own home.
Previously these types of bankrupts in Scotland composed a larger number of those who went bankrupt, but applications by LILA debtors dropped by 60% last year after Fergus Ewing increased the cost of applying for bankruptcy from £100 to £200.
Since then many Citizen Advice Bureau and local authority money advisers have reported a sharp increase in the number of poor debtors unable to find solutions to their debts and who are now trapped in a cycle of debt.
Low Income, Low Asset Bankruptcies
The Scottish Government are now proposing a new procedure for Low Income, Low Asset debtors, but the procedure will be more restrictive than the current procedure and it is not expected as many debtors will be able to apply.
It will, however, allow those do meet the criteria to be discharged automatically after 6 months, but with the maximum amount of debt in such bankruptcy’s being restricted to £10,000 (average level of debt in LILA’s is £17,000), many low income debtors will be forced into the more formal, longer bankruptcy procedure.
The problem is the Scottish Government has not produced any evidence to suggest debtors in Scotland are able to pay for longer than anywhere else in the United Kingdom and no research has been undertaken to discover if this will increase hardship for bankrupt debtors and their families, although most money advice agencies are expecting it will.
Even if the motivation is to raise more money for creditors, it is expected four year bankruptcies will also increase the costs of administering bankrupties and any increased returns will be minimal.