Friday, January 25, 2008

A record 14,000 Scots were declared bankrupt last year as warnings grew that the worldwide credit crunch and rising mortgage payments will push thousands more over the edge.

A new poll has found one in four Britons felt they were struggling with debt as the UK annual interest bill for credit hit £93bn.

Scotland has still to publish official figures for personal bankruptcies.

However, PKF, a firm of accountants, calculated that by the end of 2007 it had affected 13,994 people north of the border. That figure has quadrupled in a decade.

Financial experts say rising fuel and food costs, allied to a double hit of rising mortgage payments and falling house prices, mean the effects of the sub-prime crisis will hit the UK hard.

Bryan Jackson, corporate recovery partner at PKF, said: "What these figures show us is that indebtedness in Scotland is continuing to increase at a historically high rate. Given that most individuals made bankrupt in the last year were people who had started getting into financial trouble in 2005 and 2006, we still have some way to go before the true impact of the credit crisis of last year is revealed."

The Scottish Government, as The Herald reported yesterday, intends to make bankruptcy easier for the poorest and most vulnerable debtors. These are the so-called "Ninas"- people with no income and no assets.

Community Safety Minister Fergus Ewing announced plans for a £100 "cheapie" bankruptcy for those borrowers who need protection from their creditors but have not been taken to court. That, too, is almost certain to increase the number of bankruptcies next year.

Many households are on track for a tight January after continued high spending at Christmas, much of it on credit. Last-minute shopping is thought to have added £2.1bn to credit card debt in the UK.

Another accountancy firm, Grant Thornton, predicted one-third of people who become insolvent during the first three months of the year will have been tipped over the edge by excessive Christmas spending.

It estimated 28,000 people UK-wide will be unable to cope with their debts during the first three months of 2008, and will either file for bankruptcy or take out an individual voluntary arrangement.

Last night uSwitch.com, the price comparison website, published research showing that as many as 9.5 million Britons had "maxed out" one form of credit or another during the last six months. Fully 38% of people have had a credit card application turned down in the same period and 19% have been rejected for loans. Experts reckon that is a clear sign that - as the sub-prime home loan crisis squeezes financial institutions - credit may be harder to come by in 2008.

Total personal debt, including credit cards, loans, overdrafts and mortgages has reached £1.39trillion, uSwitch.com said. Many borrowers have turned to debt consolidation loans in a bid to keep down repayments.

Uswitch.com, however, found that nearly two-thirds of these failed to close down their existing credit facilities and instead went on to rack up a further £2300 of debt on average.

Overall, the research found that the average household has now amassed unsecured debts of £4281, made up of £2684 owed through loans, £1204 on credit cards and £393 on an overdraft.

Households now pay a yearly average of £3744 in interest on debt, including their mortgages, which is £517 more than they paid last year.

Mike Naylor, personal finance expert at uSwitch.com, believes that consolidation may still be the best route for most borrowers. "Anyone with multiple debts and a poor credit history could be vulnerable to the impact of the credit crunch and should seriously consider consolidation while the option is still available," he said.

The figures from PKF combined those people being sequestrated in Scotland, the legal term for being made bankrupt through the courts, with those who had taken out a Protected Trust Deed (PTD), a form of bankruptcy negotiated with creditors.

Debt consolidation is certainly better than bankruptcy, which, experts believe, is getting harsher as well as more common. Bryan Jackson at PKF warned that Protected Trust Deeds, the soft landing version of bankruptcy which enables debtors to negotiate with their creditors, may not be so easy to get.

"That the level of indebtedness is increasing should surprise no-one given the level of sub-prime lending that the banks admitted to in the latter part of 2007," Mr Jackson said.
"There is no doubt that lenders are becoming less amenable to payment schemes like PTDs and more keen on the harsher, lower return route of sequestration. Those facing financial problems need to act sooner rather than later to resolve their financial issues."

Source:http://www.theherald.co.uk/news/news/