Redundancy is leading to rise in personal insolvency in upper income bracket, writes Linda Barr, director and insolvency practitioner at French Duncan

In these uncertain recessionary times, it’s not just those on a lower income bracket that are falling into financial difficulty. In fact, recent years have seen a marked rise in the number of professionals, consultants and other higher earners falling into personal insolvency.

The cause is often due to individuals encountering problems keeping up with their mortgage payments and servicing substantial credit card bills as a consequence of unforeseen redundancy. The sudden loss of a regular monthly income stream in the event of redundancy can lead very quickly to severe financial difficulties.

In addition, in the self-employed sector, consultants and freelance workers are struggling to make ends meet and keep enough money aside to pay their self-assessment liabilities, when a stream of demands for non-filing lands on the door step together with details of all the interest and penalties that will be applied due to late filing and late payment, sometimes the only way out is to seek formal insolvency advice to gain debt relief.

Personal Insolvency Statistics in Scotland

Official figures released recently by Accountant in Bankruptcy report over 2,472 personal insolvencies in Scotland in the second quarter of 2016-17, similar to the 2,460 personal insolvencies in the previous year at the same time.

In total there were 1,124 awards of bankruptcies and 1,348 of protected trust deeds awarded in the second quarter of 2017 showing an increase of 0.5 per cent on the same period from the previous year.

Faced with demands for payment from creditors, the first step for such individuals should be to seek advice from an insolvency practitioner who will be able to suggest various solutions to address debt problems, such as trust deeds and sequestrations.

What is a Trust Deed in Scotland?

A trust deed, is a voluntary agreement between a debtor and his creditors to repay part of what he owes. A trust deed transfers the debtor’s rights to his non essential assets and any equity in property to a trustee (an insolvency practitioner) who will realise them to pay creditors part of what is owed to them, realisation can either be by sale or by agreement with a family member or third party to purchase the trustee’s interest in the assets. A trust deed will normally include a contribution from income for a specified period, usually three years.

What is Sequestration?

Sequestration, or bankruptcy, is a formal method of dealing with debts, normally if other options have failed or are deemed inappropriate. Sequestration can either be creditor led or can be by debtor application. Sequestration is similar to a trust deed in that, at the date of sequestration, the debtor’s assets vest in the trustee.

A debtor will be able to keep some assets deemed essential for everyday living, though they may be required to make some payment from their income. It is the duty of the trustee to realise the debtor’s assets and equity in any property and to use the sums received to pay the costs of managing the sequestration; and pay creditors a percentage of what the debtor owes them if sufficient assets are realised to allow this.

There will always be individuals facing financial difficulties, whatever the economic outlook. With the latest economic statistics suggesting that the impact of Brexit, an increase in interest rates and a freeze on wages rises will offer little relief to lower and upper income bracket families, there would appear to be little prospect for any significant downturn in the number of personal insolvencies in Scotland arising any time soon.