Bankruptcy: one year and the slate is wiped clean
The Bankruptcy and Diligence etc. (Scotland) Act 2007 has received Royal Assent and it is anticipated that the bankruptcy sections will be introduced next month. It is understood that the legislation is designed to support the economy and encourage enterprise by allowing a discharged debtor (the individual who is declared bankrupt) to return to business, having learned from his mistakes. Highly laudable, but when a recent debtor survey showed that over 95% of those who are bankrupt are as a result of consumer debts i.e. credit cards, personal loans etc. the cynic may argue that this could well be seen as an easy alternative compared with the struggle to repay the type of financial commitment that many people have in today’s modern economy.
It is acknowledged that bankruptcy is not seen as an easy option by many and there are serious consequences. For example, a debtor can lose his assets, including the family home, and one’s credit-rating can be affected for up to fifteen years.
However, for people who are encountering financial difficulties and mounting pressure from creditors, bankruptcy has its attractions. Will the new one year process prove to be an easy way out to be taken by many Scots? If you have little in the way of assets and plenty debts, a one year bankruptcy may be an ideal solution. The legislation is silent on what it might mean to creditors but if it transpires that many more people elect for bankruptcy as a means of wiping the slate clean, there may a tightening of lending practices: which some commentators argue is long overdue.
The main changes to the existing bankruptcy proceedings are:
- Debtors will be discharged automatically from their debts after one year instead of the current three years;
- Debtors will apply to the office of the accountant in bankruptcy (the State) instead of the Sheriff Court when petitioning for their own bankruptcy. Creditors will still use the court system and have an obligation to prove to court that they have taken every step to ensure the person being pursued has received debt-advice information;
- There will be a new simplified route into bankruptcy for individuals with low income and low assets (LILA);
- The debt threshold for bankruptcy will increase from £1,500 to £3,000;
- The family home will be revert to the debtor if the trustee does not commence steps to sell it , or otherwise deal with it , within three years of sequestration;
- There will be power to impose Bankruptcy Restrictions Orders and Bankruptcy Restriction Undertakings lasting between two and fifteen years on debtors who pose a risk to public or commercial interests;
- Student loans will not be written off at the end of the bankruptcy;
- Income payment arrangements and income payment orders, which can last a maximum of three years will be introduced as a means of recovering contributions to the sequestrated estate.
Such changes bring Scotland into line with England where similar bankruptcy reform was introduced in April 2004. The changes will only affect new bankruptcies granted from the date that the legislation is introduced and the current rules will remain in force for all existing cases.
Many have forecast an increase in individuals petitioning for sequestration when the LILA procedure comes into force. For LILA to be accessed, a person must meet certain criteria in order to petition for his bankruptcy. The LILA procedure aims to simplify the process for individuals who have low income and low assets. It is understood that in order to benefit from this procedure, the individual would require to have earnings of less or equal to the equivalent of the national minimum wage and/or assets valued at less than £10,000, with no single asset being worth more than £1,000. There will be no court involvement because the petition is lodged with the accountant in bankruptcy who, it is suspected, will then act as the trustee in the bankruptcy.
If a person has few assets and limited income, the State acting for a debtor means that delivery of the service is free to the user: and paid for by the taxpayer!
The legislation also introduces rules which will allow a debtor to delay being made bankrupt by a creditor and it is hoped that the fact that a new streamlined process has been introduced will not have the negative effect of blocking valuable court time by debtors trying to avoid bankruptcy by disingenuous means, at further cost to a pursuing creditor who may already be well out of pocket.
This article was written by Michelle Byrne, insolvency manager with Meston Reid & Co, Aberdeen. The views expressed are her own and are not necessarily those of Meston Reid & Co.
Return to Top
