Thousands of consumers in Scotland go bust despite "protection" - GLC's Personal Insolvency Law Unit report

Many consumers in Scotland enter into personal insolvency solutions believing that they will resolve their financial difficulties and secure much needed light at the end of a dark tunnel of unmanageable debt.

The aim is to take back control, repay debts as best as possible, and provide financial rehabilitation and a fresh start for those who have generally been through life crises. In many cases insolvency solutions work reasonably well, but there are far too many cases where things go horribly wrong. In our experience, both consumers and creditors lose out.

Govan Law Centre (GLC) was concerned with the high incidence of poor outcomes for extremely vulnerable consumers, which is why we appointed Alan McIntosh to head up the first ever pilot Personal Insolvency Law Unit in Scotland. The project has so far been self-funded by GLC on a pilot basis in order to properly assess the scope, and need, for a dedicated and free specialist service in Scotland.

Our Personal Insolvency Law Unit Unit has been ingathering evidence from casework in Scotland since the summer, and today we publish our interim findings. You can download our report here (opens as PDF).  We provide evidence of widespread mis-selling of protected trust deeds across Scotland. A failure of regulation in Scotland's personal insolvency market which is costing Scottish consumers millions of pounds for virtually no real service.

Our report, written by the Unit’s Project Manager, provides compelling evidence that there is an overwhelming need for a dedicated free specialist service; a service that can provide both second tier support to front line advice agencies but also undertake complex and contentious casework for consumers.  Our report evidences a number of important market and systemic failures, including a high level of failed protected trust deeds and the failure to protect a consumer’s home from repossession. 

We agree with today's editorial in The Herald. The Scottish Government needs to reconsider protection for debtor's homes, and review the licensing and regulatory framework for those who sell trust deeds in Scotland. This is a devolved matter.
  
A protected trust deed failure rate of 9 out of 10 must send alarm bells ringing to members of the Scottish Government and Scottish Parliament. As The Herald says, the evidence is "disturbing". Behind the statistics are human tragedies. Insolvency can and does happen to anyone.  The prospect of paying thousands of pounds for a service that all to often is doing nothing to help either consumer or creditors in Scotland is unacceptable.

Read further coverage of this story in The Herald here.

Thousands of consumers in Scotland go bust despite "protection" - GLC's Personal Insolvency Law Unit report

Overwhelming unmet need for specialist personal insolvency advice in Scotland: update on the work of the Personal Insolvency Law Unit at GLC

Here, Alan McIntosh, Project Manager of Govan Law Centre's (GLC) Personal Insolvency Law Unit provides a brief update on some of the innovative work of our new service.

Over the last few months we have found that there is a overwhelming unmet need for specialist advice and support for clients in Protected Trust Deeds (PTDs) and who are bankrupt in Scotland. It has found many debtors are failing to obtain appropriate advice and representation in relation to:

• Protecting their homes in PTDs and Bankruptcy; and
• Obtaining advice and representation when their PTDs are at risk of failing.

The majority of cases that our specialised Personal Insolvency Law Unit has been dealing with have involved the debtor’s home when they have been threatened with being sold. Sometimes this has been as creditors have made the debtor bankrupt, but increasingly also involves cases where debtors have sought advice from advice services, like Citizen Advice Bureaux and insolvency practitioners and entered into solutions on their advice.

In one case Renfrewshire Law Centre working alongside with GLC's Personal Insolvency Law Unit, was able to make an offer of composition which was accepted by creditors, after an application to eject the debtors from their home had been in front of the sheriff for over a year. The PTD had been granted almost ten years earlier, despite initially only being expected to last three years.

Alan McIntosh, Project Manager

The problem with this case was when it was signed the proposal was that the debtor would not deal with the property to the end of the Protected Trust Deed, at which point they could re-mortgage. However, in that time the credit crunch occurred and clients were not able to re-mortgage, meaning despite continuing to pay their mortgage they lived with the threat of losing their home over that period.

In a similar case, granted around the same time, the £27,321 of debt the client granted the Trust Deed for grew to £52,507, due to statutory interest of 8% per annum being added. The case is still ongoing, however, when the client signed the Trust Deed he was advised he could re-mortgage at the end of the three years, but was not able to. Since then, with three children still living in the home, the mother of the family has passed away.

Another cases involved a client who had been referred onto an insolvency practitioner by a Citizen Advice Bureaux, in 2010, after the credit crunch, with the proposal being that the client could re-mortgage at the end of the Protected Trust Deed and deal with their equity then. The Trustee is now raising court action to sell the home, as the client has predictably struggled to re-mortgage in the current financial environment and with the credit rating they now have.

There have been other successes, however, with some lenders being prepared to show forbearance to debtors when the client’s circumstances have been explained, including that there have been disability issues in the family. However, even when these lenders are majority lenders in the bankruptcy, this has not always provided a solution and there is a number of on-going issues in such cases relating to technical procedural matters, that may still prevent a satisfactory solution being found.

The reality is personal insolvency law in Scotland is extremely complex and many debtors who are now trapped in solutions are struggling to source the specialist help they require to provide them with advice and assistance. Nearly all of Scotland’s free sector advice services are designed to advise clients on how to enter into bankruptcy and protected trust deeds, often with as we have found disastrous consequences, but there are no specialist services available to help people when things go wrong.

We aim to publish an interim report on our findings, based on our case work and relevant empirical evidence.  In the short time our Unit has been operating, it is clear there is a dearth of specialised advice available to clients who are in personal insolvency solutions, despite the serious consequences it can have for clients, risking their homes, often after they believed they had received best advice by people that should have been helping them.  

Sadly, all too often the initial advice given to clients was wrong, not impartial and the administration of the case has been flawed and contributed significantly to the risk of the case failing or the debtor losing their home.

Overwhelming unmet need for specialist personal insolvency advice in Scotland: update on the work of the Personal Insolvency Law Unit at GLC

Time to end the unfair financial windfall of creditors from Scottish debtors

Govan Law Centre (GLC) has written to the Minister for Business, Innovation and Energy in Scotland, Mr Paul Wheelhouse MSP, expressing our concern that many creditors are gaining a massive financial windfall at the expense of financially vulnerable people in Scotland who are finding it tough to make ends meet.  

The financial windfall for creditors occurs because of a lacuna in the law. Scotland's judicial rate of interest has remained at 8% per annum, at a time when inflation has been at a historic low for many years; as has the Bank of England's base rate, which remains at 0.5%.

To give a practical example. GLC has a client who entered into a protected trust deed just over a decade ago with a mix of unsecured loans, credit cards and overdrafts in the sum of £27,321. Our client owns a house in Glasgow South West with equity, has four dependent children and his wife has recently died from cancer. This family now face repossession. 

Our client made his monthly payments over the years without fail to the trustee, and was advised by the insolvency firm to enter into this arrangement with a view to re-mortgaging at a later date, however, this was prior to the financial crisis. Just over a decade later and our client owes those creditors a staggering £52,507. We believe this is grossly unfair. 

A further additional £14,736 is owed for the fees of the trustees and their solicitors (the overall sum due is £75,474 on a debt of £27,321; and this sum is growing daily).

 GLC's Principal Solicitor, Mike Dailly said:
"Any member of the public investing savings in an ISA or savings vehicle would expect to gain interest of 0.5% to 1%. Yet, creditors are entitled to 8% interest on debts which are subject to a protected trust deed or sequestration. We believe this is an unjust windfall, and a lacuna in the law which could easily be rectified by the Scottish Government reducing the judicial rate of interest on debts to a percentage more aligned to the base interest rate by way of a Scottish statutory instrument".

"We would be happy to meet with the Minister for Business, Innovation and Energy and/or his officials to provide further examples, and discuss how this issue could be best addressed to minimise the need for avoidable repossessions, and striking a fair and equitable balance between the interests of creditors and debtors in Scotland".

Time to end the unfair financial windfall of creditors from Scottish debtors