SCOTTISH PEOPLE are going bankrupt at an alarming rate. The number of personal insolvencies in Scotland reached an all-time high in the second quarter of the year, according to the latest figures from the Insolvency Service.

There were 4735 personal insolvencies between April and June, an increase of 44.6% on the previous quarter and a jump of 35.6% on the same quarter of 2007. The annual total is now expected to rise from almost 14,000 to 18,000 - that's equivalent to 50 people a day going bust.

Andrew Kennedy of KPMG's personal insolvency practice blames the big jump in the numbers partly on the credit crunch. He says: "In recent years, consumers have been cushioned from the reality of high debt by a strong housing market, but these figures show that the debt burden has now become unmanageable for many. Rising fuel and energy prices, an increase in the cost of food shopping, together with a slowdown in the housing market are having a real effect, and as a result, consumers are now struggling to pay back their loans. The worry for many is what will happen if the cost of living continues to rise."

An analysis of debtors by PKF, an accountancy firm, shows that a third of all debtors in 2007 were homeowners and the average debt at the time of personal insolvency was £40,115. The firm's estimates for 2008 indicate that not only is the average debt much higher but that more homeowners are on the brink of bankruptcy. Changes to the insolvency laws that came into effect earlier this year also helped swell the bankruptcy figures. Bryan Jackson, corporate recovery partner with PKF, says: "The changes to insolvency legislation made it easier for Scots to make themselves bankrupt, resulting in the highest ever quarterly figure for personal insolvency in Scotland."

There were two big changes. The first opened up a new route to sequestration for people with low income and low assets, known as LILA. It's a straightforward process and costs just £100. But not everyone is eligible. Rob Caven of Grant Thornton says: "Low income means no more than the national minimum wage and low assets means no single assets worth more than £1000 and total assets worth less than £10,000. LILA sequestration is also not available to homeowners."

Most experts welcomed the LILA as an exit route for desperate people. Jackson says: "People who are living on or near the poverty line often find it very difficult to borrow money from mainstream firms, which leaves them vulnerable to doorstep lenders who charge very high rates of interest. It's therefore easy for them to fall into a debt trap, but it's not always to get out. The LILA at least gives people on low incomes a chance to escape their debts."

The second big change was the introduction of the 12-month discharge, which wipes the bankrupt's slate clean after one year - and this was less popular with some experts. Jackson says: "I fought against the 12-month discharge because it does nothing to change our attitude to debt. Acceptance of severe indebtedness has become normalised and we now see individuals racking up enormous debts in a relatively short time. I also think it makes bankruptcy more appealing when it should always be a last resort."

HOW TO DEAL WITH DEBT Face up to the problem. It won't go away. Do not be tempted to take on more debt to clear existing debts. You are just piling on the debt pounds.

If your debt problems become overwhelming, seek help from an organisation such as Citizens Advice Scotland (www.cas.org.uk), National Debtline (www.nationaldebtline.co.uk or 0808 808 4000) or Money Advice Scotland (www.moneyadvicescotland.org.uk or 0141 572 0237). They all offer free advice.

You might be able to come to an informal arrangement with your creditors to pay off the money you owe in manageable monthly instalments. It is usually best to get some advice, but don't pay a fee to a company to draw up a debt management plan. Chris Tapp, director of Credit Action, says: "If you are struggling with debt there is absolutely no need to pay a debt management firm when there are plenty of free counselling and advice services to help." Again, Citizens Advice, National Debtline or Money Advice Scotland can help.

Scotland's Debt Arrangement Scheme is similar, but it's a statutory scheme and must be made through an approved money adviser. At the moment, no approved advisers charge a fee for their services. Again, you have to pay off the debt in full, although if you stick to your repayment schedule, interest will be written off.

If you cannot afford to clear all your debts within a realistic time frame, you could consider a protected trust deed. A trust deed is a formal arrangement between you and your creditors to repay as much of your debt as you can afford, usually within three years. It must be arranged through a licensed insolvency practitioner who will draw up a proposal for a reasonable repayment schedule based on your income and assets. The insolvency practitioner will normally deduct a fee from the monthly contributions you make and he or she will be paid before any creditors, who must also agree to the proposal before it is implemented.

There are several advantages to protected trust deeds, namely that some of your debts are written off and the repayment schedule lasts a maximum of three years. Also, trust deeds do not involve the courts. But they are not a soft option. They could limit your ability to get credit in the future and affect your career choices.

If you have fallen seriously behind with your debt payments, a creditor is entitled to petition the local sheriff court for sequestration - or bankruptcy. You will have to disclose details of all your assets and income. The creditors can then order the sale of those assets to pay off the debt - including the family home. If you co-operate, you will automatically be discharged from sequestration after one year. However, any contributions from income can continue for up to three years. Sequestration is more punitive than a protected trust deed and it can affect your credit rating for up to six years.

LILA sequestration is open to people with an income of £220.80 or less a week before tax and National Insurance. People who receive social security benefits or working tax credits can also apply, even if their total income is more than £220.80 a week. You are not eligible if you own any land or property, or if you own any individual asset worth £1000 or more. The total value of the debt must be at least £1500. LILA sequestration is dealt with by the Accountant in Bankruptcy and the application fee is £100. Again you can be automatically discharged after a year. But details of the sequestration will stay on your credit file for six years.