THE Scottish Government has seriously underestimated how many people would take advantage of its new bankruptcy rules.
New legislation brought into effect on 1 April last year enables those classed as low-income, low-asset debtors (LILA) debtors to petition for their own bankruptcy. In the past, creditors showed little appetite for legal action against those owing relatively small sums and with few if any assets to their name. Unable to petition for their own bankruptcies, such debtors had insufficient means to pay off their dues and could only watch as the interest on outstanding credit rolled up.

Now, the law allows individuals in this position actively to petition for insolvency and escape a debt trap that would otherwise ensnare them indefinitely.

Initially, the government predicted that LILA bankruptcies in the first year would be as low as 2,000, although it has since upgraded the forecast to between 3,500 and 6,500. Unfortunately, it seems unlikely that the total number of LILA bankruptcies will fall within the 6,500 upper limit forecast for the year, given the insolvency figures recently published by the Accountant in Bankruptcy (AIB).

In the first three months from 1 April 2008 there were 1,709 LILA debtor applications. In the following quarter the figure jumped by 62 per cent to 2,773, making a total of 4,482. Even if the next six months only return the same number of applications, which would appear highly unlikely given the increases in unemployment, that would make a grand total of 8,964 LILA applications for the year.

This is 2,464 above the top estimate of 6,500 and given the numbers involved, it seems unhelpful that the government's review into LILAs, which had access to the latest AIB insolvency figures, is so sanguine over the number of bankruptcies it expects to see from this channel.

Why is this so important? In the first instance, it is worrying that the government is apparently in denial over the extent of the problems faced by those struggling with debt. If we are to deal effectively with the problems that lie ahead, then factually sound and incisive analysis of the figures is a must. There is also a huge cost to be borne by the Scottish economy, given the amount of debt that is being written off through LILA bankruptcies. The average debt in such cases is £17,288 and in light of the 2,464 cases that are due to come in over and above what has been publicly estimated, there will be a further £42.6 million of debt to write off.

History has shown us that failing to confront a problem simply leaves us with a bigger one to deal with tomorrow and it would be much better to be realistic about the size of the financial commitment we are going to have to make as a nation if the new LILA rules are to be kept in place.

Equally, let's not scrap the legislation and heap more misery on those who can least afford it.

Instead, we need a frank and accurate appraisal of the data so that we can deal effectively with what is coming our way.

For those facing debt, seeking independent, professional advice as early as possible will help then stave off bankruptcy, whether brought on voluntarily or not.


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