AS DEBT levels spiral in Scotland, and across the UK, more people are being driven into the last resort of bankruptcy - known as sequestration north of the Border.

Debt is undoubtedly a major problem, amounting to more than £1.3 trillion in Britain, and this is likely to increase, not least because of interest rates moving upwards and the United States subprime crisis starting to have a ripple effect on this side of the ocean.

The most recent figures on debt, published last month, revealed 1,606 Scots were sequestrated in the second quarter of the year, up 23 per cent from the same time in 2006.

But there was a surprise drop in the number of Scots signing up to a protected trust deed (PTD) - a voluntary and formal agreement to pay your creditors made through an insolvency practitioner (IP) and seen as a favourable alternative to sequestration for many reasons.

Between April and June this year 1,892 Scots signed a PTD, a drop of 15.5 per cent compared with last year.

PTDs have a number of advantages over bankruptcy. For example, people will know from the start how many months they will be paying for, it may be possible to retain assets such as the family home and there are fewer restrictions on such things as being able to own a business or hold public offices or certain jobs.

Many IPs are concerned that too many PTDs are being unfairly turned down, which could be pushing more people into bankruptcy and this is partly due to a tougher stance from organisations owed money - the creditors.

For a trust deed to become protected, essentially no more than a third of creditors can vote against it. Until this year, individual creditors made their own decisions but a new body, the Insolvency Exchange (TIX), now does the negotiation for a number of large organisation.

Since January it has started to represent a number of well-known names: HSBC, HBOS, Royal Bank of Scotland, M&S Money, First Direct, Intelligent Finance and Santander credit cards.

John Hall, chief executive of debt solution firm Invocas, said: "In the past if someone owed five different lenders, we would have to contact them all separately as there was no central process. Now we just have to send one to TIX. This allows them to build a picture of debt and a database of IPs."

But because of the power TIX is seen to wield in accepting or rejecting PTDs, or individual voluntary arrangements (IVAs) as they are known in England and Wales, it has been accused of driving more people to bankruptcy.

Matt Henderson, business recovery and insolvency partner, at the accountancy firm Johnston Carmichael, said: "TIX is partly responsible for suppressing the PTD numbers as it has come out with basic hurdles over which you have to jump. I've had several PTD proposals rejected by TIX and we've had to go to sequestration.

"TIX has imposed pretty inflexible criteria that must be met. The problem is it is systematically rejecting proposals."

Martin Prigent, head of insolvency relations at TIX, said: "From the information we have to date, the objection rates are probably slightly higher than we expected.

"I think there are genuine reasons behind that, with one of the big ones being a settling-in period for us being in operation."

Admittedly this is already starting to change, with TIX saying its objection rates on PTDs fell from 41 per cent in April to 25 per cent in July.

Another reason for fewer PTDs is that banks themselves have become stricter on customers in debt as times become tougher. David Hunter, head of the insolvency service at accountancy firm Campbell Dallas, said: "Banks were fairly disinterested when everything was going well, but recently they've had to make huge write-offs and their attitude has changed."

One of TIX's main criteria is that people must agree to guarantee the creditors a minimum dividend of 10p in every pound.

Prigent explained: "Slightly over 80 per cent of objections are accounted for by trust deeds coming through that are proposing less than 10p in the pound and we feel there may be a better solution for the debtor."

But he denies TIX is being inflexible. "If a case comes in and it's less than 10p in the pound and there is a genuine reason for this, we will vote not to object," he said.

TIX also denies it has a monopoly on giving the go ahead - or not, as the case may be - to PTDs and IVAs which has led it to being accused of acting as a cartel. It says it gets instructions from individual lenders and these may differ between companies.

But if someone is sequestrated, the consequences are more far-reaching than if they can sign up to a PTD.

Andrew Kennedy, head of personal insolvency at KPMG in Scotland, said: "It can have a major effect on employment. For example if you work in financial services you could end up losing your job. Sequestration also goes on your credit rating for six years."

It seems Scotland is suffering because IVAs have become so widespread down south.

Bryan Jackson, a partner with PKF accountants and business advisers, said: "It all goes back to what is happening with IVAs in England. TIX is not taking into account the differences with PTDs and is instead taking a global approach.

"The figures do indicate creditors are taking a harder view on personal insolvency and not agreeing to payment negotiations through PTDs which unfortunately is resulting in a higher number of individuals being sequestrated which, ironically, usually results in creditors receiving a lower dividend."

But Jackson says that, while the lenders are being harsher on people struggling with debt, they are continuing to encourage them to borrow.

"The situation hasn't stopped organisations lending all this money," explained Jackson. "I recently saw an ex-bankrupt who told me he had received a letter telling him he could get a new credit card by simply signing a form. It had a 45 per cent interest rate so I obviously told him to put it in the bin.

"You have bank salespeople promoting products and sending out junk mail without thinking of what happens when it goes bad."

If you do find yourself starting to drown under a burden of debt don't bury your head in the sand.

The Scottish Executive's Debt Arrangement Scheme (DAS) may now be a more attractive option as it has recently decided to freeze interest on debt for anyone who signs up.

Kennedy said: "DAS is now a more attractive option and is something I would recommend to some people. I've recently run a scenario past one of their approved money advisers to see if they can help."

If you are struggling, your first port of call should be to speak to an adviser who does not have a vested interest in selling you a product. You could go to an independent charitable organisation such as the Consumer Credit Counselling Service, Payplan, Money Advice Scotland or Citizens Advice Scotland as they have people trained to deal with financial problems, or a licensed IP.


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