New Bankruptcy Fee Regulations Laid

The Accountant in Bankruptcy have laid new Bankruptcy Fee Regulations.

The Regulations, which are subject to the Negative Procedure of the Scottish Parliament are due to come into force on the 1st of June 2018.

They follow a consultation that was carried out by the Accountant in Bankruptcy, and unlike earlier Regulations that were withdrawn in 2017 (see here), are not expected to have any negative effects on debtors.

The Regulations can be found here.

Prescription (Scotland) Bill

Prescription (Scotland) Bill

The Prescription (Scotland) Bill 2018 should be welcomed, but the Scottish Parliament needs to ensure all obligations to pay debts arising from personal contracts and statute should be covered by short term negative prescription, with few exceptions.

Scotland’s law of prescription governs when an obligation to pay a debt is extinguished and no longer owed. This includes debts owed for credit cards and personal loans, but also debts such as council tax arrears, benefit overpayments and outstanding tax debts owed to the crown.

At present the framework for this area of law is provided for by the Prescription and Limitations (Scotland) Act 1973 (1973 Act), which the Scottish government aims to amend and clarify with the Prescription (Scotland) Bill 2018 (2018 Bill), currently at stage one in the Scottish parliamentary process.

Prescription Framework

The current framework under the 1973 Act provides that if a debt is specified in paragraph one of Schedule One of the Act, it is covered by short term negative prescription, which means the obligation to pay the debt expires after five years, unless the person owed the debt takes certain steps to protect their claim (or the debtor makes a relevant acknowledgement of it). Paragraph Two of the Schedule, then specifies which obligations are not covered by the five-year rule, whilst Schedule Three lists obligations which are never extinguished.

Where an obligation is neither covered by short-term negative prescription, or exempt from being extinguished, it is covered by long-term prescription, which means the obligation can be recovered for up to 20 years, with, as the law currently stands, that period being restarted if a creditors makes a relevant claim for the debt within that twenty year period or the debtor makes a relevant acknowledgement of it.

It was the operation of this long-term prescription rule that meant that even in 2014 some Scots still owed poll tax debts, which dated back as far as 1989, and led to the passing of the Community Charge Debt (Scotland) Act 2015 to write off the remaining debts owed.

However, as was entirely predictable, attempts by the 2018 Bill to simplify the law in this area have already been derailed, with certain statutory creditors arguing their debts are different and in need of special treatment. So, in section three of the 2018 Act, a new provision that aims to include all statutory obligations to pay a debt into the five-year rules, unless provided for elsewhere, has now led to several provisions which provide otherwise elsewhere.

This includes debts owed for council tax, non-domestic rates, benefit overpayments (under UK legislation) and tax debts owed to the crown.

Few Exceptions

The Scottish Parliament should resist these attempts to protect the “special interests” of certain statutory creditors, with a view to preserving the overall principle that all debts, with few exceptions, that arise from personal contracts or statute should be covered by the five year rule and creditors, who wish to protect their claim, should be required to take certain steps to do so.

This could easily be achieved in relation to debts for council tax, non-domestic rates, and crown tax debts by extending sub-paragraph (a) of paragraph two of Schedule One of the 1973 Act to include debts legally constituted by decrees or documents of debt. This provision currently states the five-year rule does not cover obligations if they relate to an obligation to comply with a decree of court, an arbitration award or an order of a tribunal or authority exercising jurisdiction under any enactment. By extending it to include decrees and documents of debts, this would mean debts that are constituted by summary warrants, which all local authorities and HMRC have the power to issue for the above debts, and regularly do so, would be covered by long-term negative prescription. It would also mean in future, where new statutory obligations are created, and there is a wish to allow the statutory creditors to protect their claim easily, it would not be necessary to further amend the 1973 Act, but instead to allow for a means of recovery that allows the summary warrant procedure to be utilised.

In relation to benefit overpayments, however, that are owed to HMRC and the Department of Works and Pensions, the Scottish government should bring forward rules to provide that UK benefit overpayments, owed under the Social Security Administration Act 1992 and the Tax Credits Act 2002, are expressly included into the five-year rule. This would ensure all UK benefit debts are treated the same as Scottish benefit overpayments, which because of section 38 of the Social Security (Scotland) Bill 2017, will be covered by short-term negative prescription. It makes no sense that debts which are essentially the same in nature, should be covered by different prescription rules, simply because the source of the debt is UK legislation, rather than Scottish legislation.

Equally, however, if the purpose of section 38 the Social Security (Scotland) Bill 2017 is to provide a short recovery period for benefit overpayments, it may be necessary to further restrict sub-paragraph (a), of paragraph two of Schedule one of the 1973 Act. The reason being is that it makes clear that debts that are constituted by a tribunal or authority exercising jurisdiction under any enactment are not covered by the five-year rule: this could include both benefit UK and Scottish benefit overpayments. Also, it may wish to consider whether the running of short-term negative prescription for these types of debt can be interrupted by claimants making relevant acknowledgements of the debt, such as in making payments towards them. The reason being most benefit overpayments are recovered by direct deductions from existing awards of benefits, meaning every payment constitutes a relevant acknowledgement of the debt and the five-year prescription period begins running again. Most people will, therefore, clearly still be paying back benefit overpayments, long after the expiry of five years.

Bill to be Welcomed

However, the new Prescription (Scotland) Billis to be welcomed. For many years, because of the omissions in the 1973 Act, it was not even clear if HMRC tax debts could be extinguished.

Also, section 6 in the 2018 Bill makes it clear it will no longer be possible for long-term prescription to be interrupted by a creditor making a relevant claim or the debtor making a relevant acknowledgment, meaning a repeat of the problems that arose with poll tax should no longer arise, with debts still be being owed long after the expiry of twenty years.

Also, section 14 of the 2018 Bill also introduces into the 1973 Act a new burden of proof on creditors who are pursuing a debt through the courts, to show, where a question arises, whether that debt is prescribed or not. With the increasing use of litigation by debt purchasers to protect claims for distressed debts, this will hopefully help stamp out the practice of them obtaining decrees for extinguished obligations.

Long term Prescription – Is it too Long?

However, the question does need to be asked, with the similar law in other parts of the UK being governed by the Limitations Act 1980and the prescriptive periods being six and 12 years, is the long-term negative prescription period in Scotland too long? There appears little reason it should be possible for debtors in Scotland to be pursued for the same types of debts, owed to the same organisations, for almost double the duration of debtors elsewhere in the UK. Arguably, a shorter period of long-term negative prescription of 10 or 15 years should now be adopted.

Beware the Danger of the Return of Warrant Sales

Beware the Danger of the Return of Warrant Sales

THERE have been calls of late for the Scottish Government to reintroduce warrant sale-style procedures; these seem now to have found a sympathetic ear.

The Accountant in Bankruptcy (AIB), a Scottish Government agency that advises ministers on matters relating to debt law, has said it is prepared to consider how the replacement procedure that was introduced, known as Exceptional Attachment Orders, can be simplified and streamlined to allow more easy use.

The process of poindings and warrant sales, which allowed sheriff officers to enter people’s homes and remove their household possessions for sale, was abolished by the Scottish Parliament in 2002, after becoming synonymous with the poll tax campaign. Tommy Sheridan, who would later be elected to the Scottish Parliament and introduced a private member’s bill which led to the abolition of the procedure, famously went to prison after disrupting the first attempt to hold one for the poll tax.

The AIB has also said it will consider whether the current procedure that was introduced, and requires a judge to authorise an order, could be removed. Sheriff officers could then threaten use of the procedure more easily against those who cannot pay their debts.

However, if the AIB position is adopted, this could well herald the return in Scotland to a Dickensian-style system of debt recovery laws which allows people to be threatened with humiliation and home intrusion, unless they can find the money to repay their debts, even if that means driving them into the hands of illegal and predatory money lenders. It was this legal abuse that led to poindings and warrant sales being abolished in the first place. In 1999, for example, the year Mr Sheridan’s bill was introduced, there were 16,585 poindings (although thousands more were threatened), but only 110 warrant sales executed. The reason being, warrant sales themselves were never an effective method of debt recovery, whereas the threat of humiliation and home intrusion was. Even people who genuinely couldn’t afford to repay their debts would be panicked into a response where they would do anything to raise the money.

Sheriff officers know this and it is why some are now claiming the new procedure is no longer effective and needs to be made easier for them to use as a threat (there has been no exceptional attachment orders executed in Scotland since 2012).

Responding to a consultation carried out by the AIB, sheriff officers Scott & Co stated, that in their experience the

“proceeds of auction in most cases are very low due to the poor value of second-hand goods and tendency towards hi-spec electrical items being subject to finance agreements.”

The question then needs to be asked, why does the AIB believe it would now be appropriate to increase the use of such procedures, even when sheriff officers acknowledge they are likely to fail? The only logical reason is the hope that by issuing such threats to the poorest in society, more people will then seek advice for their debt problems.

However, although some may well do so, many will struggle to find services or solutions that can assist them, with funding to local authority money advices services having been cut by 44 per cent in the last three years. More likely is many will become prisoners in their own home, fearful of every knock at the door, whilst suffering the stress and anxiety of believing their home will be invaded and their possessions seized with those of their family.

First published in The Herald on the 16th April 2018.

Standard Financial Statement: Is it fit for purpose in Scotland?

Standard Financial Statement: Is it fit for purpose in Scotland?

The Credit Services Association (CSA), a trade body that represents debt recovery and purchase organisations, has raised its concerns that new guidelines for the Standard Financial Statement (SFS) may exacerbate the position many consumers find themselves in when struggling with problem debts.

The Standard Financial Statement, which the Accountant in Bankruptcy (AIB) have recommended be adopted as the new financial statement for formal debt solutions in Scotland, is produced by the Money Advice Service and is intended to be a common financial tool for all creditors and debt advisers to use in determining how much consumers can afford to pay towards their debts.

The CSA, which is part of the governing body for the SFS, is concerned that new trigger figures, which are used to create a rebuttable presumption that someone’s expenditure may be excessive, are concerned that new guidelines for the figures may be excessive after being updated by as much as 30% in some category areas.

Their fears are that by indicating some consumers have less to spend on their debts, consumers may enter repayment plans that may last longer and, therefore, keep the debtor in debt longer, whilst others may feel a type of insolvency may be a better solution for them, when it isn’t.

However, in Scotland, fears amongst money advisers and the AIB are that the figures are already too austere for consumers, who are in repayment plans, and the SFS’s predecessor, the Common Financial Statement (CFS) which adopts a similar methodology to the SFS, has been instrumental in large numbers of Debt Payment Programmes under the Debt Arrangement Scheme failing.

Scottish Government Minister Paul Wheelhouse has recently announced plans to introduce new rules that even if the SFS is used for the DAS in future, it will not be necessary for consumers to propose paying all their disposable income to their debts each month.

Comparative Studies

The problem with the Standard Financial Statement, like the Common Financial Statement is both seek to determine what is a “reasonable” level of expenditure by looking at the average expenditure of the lowest 20% in the Office of National Statistics Living Costs and Food Survey. This survey looks at what people are actually spending, rather than what they require to be spending to maintain a reasonable standard of living.

The consequences of this can be seen in the guidance notes for the Common Financial Statement 2018, which actually saw “trigger figures” for categories of expenditure reduced, despite inflation running at 3%.

However, as both the CFS and the SFS both look at what people are spending, rather than what is needed for a reasonable standard of living, the methodology used can result in expenditure amounts being downgraded at a time of rising living costs. This is for the simple reason that with stagnating income levels, rising living costs and much expenditure in recent years being driven by consumer borrowing, which is now becoming harder for lower income groups to access, people are now being forced to spend less.

This has led to some uprating of figures in the SFS, by removing for example, some of the lower income groups in the Living Costs and Food Survey sample group. This has included those in receipt of Universal Credit and has contributed to the uprating of the average expenditure overall within the study group.

Scotland’s Dilemma

The problem for Scotland is whether now to adopt the SFS, which the Accountant in Bankruptcy have recommended or whether to seek an alternative to the Common Financial Statement 2018 when it expires in 2019?

The problem is the SFS has proven volatile in the first year of it’s existence, with initial concerns in Scotland that the trigger figures for the SFS 2017 were too low and would have led to more consumers being presumed, albeit the presumption is rebuttable, as having unreasonable expenditure amounts.

There was also a concern many consumers who were wishing to utilise the Minimum Asset Route into bankruptcy may be found to have disposable income and, therefore, be deemed ineligible to apply, forcing them to use full administration bankruptcy procedures instead. This in turn leads to complicated debates as to what types of income can consumers legally be expected to pay their debts from. There is no question, for example, that consumers cannot be forced to pay towards bankruptcy from benefit only income, although the AIB do hold that contributions can be taken from child maintenance money (for a fuller debate on this issue, see here). The consequence is that people whose only income is benefits and child maintenance, may be forced to use full administration bankruptcy simply because the AIB believes it is legitimate to take a contribution from income that is paid to a child via their parent and the CFS or SFS help determine that the consumer can afford a contribution.

In support of adoption of the SFS 2018 guidelines, however, the AiB have released a comparative study of financial statements which they believe shows the SFS 18 guidelines are more favourable than the CFS 18 guidelines (although a smaller study by Money Advice Scotland suggests this may not be the case). What the AIB have not released, however, is a comparative study between SFS 18 and CFS 17, which still applied in Scotland until a few weeks ago, or any response to the recent downgrading of expenditure items in CFS 18 that resulted from the methodology that can see average expenditure amounts fall at times of increasing living costs.

In addition to this, no explanation has been provided as to why the CFS 18, in the guidance notes, was not given the same corrective treatment that SFS 18 received by removing lower income groups from the sample group.

The problem is now likely to be exacerbated as the Scottish Government have announced that even if SFS 18 is adopted in Scotland, new changes will not require applicants to the Debt Arrangement Scheme to propose 100% of their disposable income to repayment programmes. The fact the Credit Services Association already believes the SFS 18 is overly generous, it’s likely their members would not accept DAS proposals that only offer say 75% of a Debtor’s disposable income as payment, although the AIB will be able to force acceptance using their fair and reasonable test under the Scheme.

The Way Forward

The problem for the Scottish Government is there is no clear way forward.

It was only in 2016/17, for example, that for the first time more debt payment programmes were successfully completed than were revoked. One of the main reasons believed to be behind this being that consumers have been finding that they are being told to pay more than they can afford.

The AIB, however, are reluctant to see contribution levels in any formal solution reduce, as they themselves realise much of their operating costs from fees charged against cases where contributions are made and are expecting, because of a reduced number of cases, a shortfall of approximately £4.2 million in their funding.

The problem is, however, section 89 of the Bankruptcy (Scotland) Act 2016 (2016 Act) requires Scottish Ministers to establish a Common Financial Tool (CFT) to determine contribution levels, that allows for reasonable levels of expenditure by debtors. Whether that has been achieved by CFS 18 that has seen trigger figures reduced for certain categories at a time of rising living costs is questionable.

Whether designating the SFS as the new CFT will achieve this is also debateable, considering it’s volatility and the fact key stakeholders are already questioning the recent uprating of figures and calling for a further review as soon as possible.

The question now must be asked, as the CSA, is part of the governing body for the SFS and accepted the 2018 figures, whether other governing body members also have concerns?

The question also has to be asked if a further review of the SFS or even the CFS were to see a further downgrading of the figures at a time of rising living costs, whether Scottish Ministers would be fulfilling they obligations in creating a tool that allowed for reasonable expenditure by consumers?

The danger being that in designating either the CFS or the SFS as the Common Financial Tool, Scottish Ministers are delegating this legal responsibility that they have under section 89 of the 2016 Act, to a third party that does not have such a legal responsibility, is not accountable to Ministers or Parliament and does not publicly release it’s trigger figures for public scrutiny or comment.

Mis-Use of Trigger Figures

One argument is that much of the problem arises from a misunderstanding of how trigger figures should be used.

Creditor and AiB concerns are they are used as an allowance by money advisers for their clients, whereas money advisers complain they are used as a cap by the AIB and creditors to drive down the reasonable living expenditure of consumers, which if you wish to exceed places an increased administrative burden on the money adviser and evidential burden on the consumer.

You then get anecdotal stories from money advisers of clients having to provide evidential proof of purchasing incontinence pads, or having to explain how the Disability Living Allowance of their children is spent or of having to fight to ensure contributions are not taken from the child maintenance money of children to pay towards their parent’s debts.

The problem is there is a lack of understanding by the Money Advice Service as to how trigger figures are in practice used. They are clearly a key battle ground for the AIB, money advisers and creditors alike, as recently evidenced by the concerns raised by the Credit Services Association and their calls for them to be downgraded.

A Scottish Solution?

There is now a clear and comprehensive case for Scotland to devise it’s own Common Financial Tool.

There is no overwhelming case for a UK wide solution, albeit it is clear it would be preferable from the perspective of UK wide financial service organisations and also debt advice bodies.

However, there is no UK wide system of laws for dealing with debts; debt law historically always being different under Scotland’s legal system and being devolved to the Scottish Parliament.
Also, unlike the rest of the UK, the Common Financial Tool was placed on a statutory footing in Scotland in 2015 and carried with it particular legal responsibilities for Scottish Ministers that the Money Advice Service, who own the SFS and the Money Advice Trust, who own the CFS, don’t have either in Scotland or elsewhere in the UK.

In addition to that, it is clear that Scotland, with the recent proposals by Scottish Ministers as to how contributions in the Debt Arrangement Scheme are determined, has already begun to diverge further from what is likely to be considered good practice across the UK and by the SFS governing body.

Clearly it would now be more advisable for the Scottish Government to look to establish it’s own Common Financial Tool, that is best suited to the peculiarities of the Scottish system of debt laws, with 48 month payment periods in Bankruptcy and a Debt Arrangement Scheme, where not all a debtor’s disposable income has to be offered as a contribution in a payment plan.

Scottish Debt Policy is Broken

Scottish Debt Policy is Broken

Originally published in the Herald, as an Agenda piece, I make the argument that Scottish debt policy is broken, was explored.

Despite personal debt levels in the UK now having returned to pre-credit crunch levels, new figures released by the Improvement Service, reveal that free, local authority-funded debt advice services have now seen their funding cut by more than 44 per cent in the last three years. The latest figures paint a picture of services that are not only lacking capacity to deal with current demand, but should Scotland face another personal debt crisis, will not cope with future demand.

The tragedy of this is the modernisation and humanising of Scotland’s personal debt laws was one of the earliest and most notable achievements of the Scottish Parliament, from the abolition of poinding and warrant sales to the introduction of a new debt management scheme, known as the Debt Arrangement Scheme. Even Scotland’s bankruptcy laws were made more consumer friendly, making it easier for those with no other options to be permitted a fresh start, whilst free debt advice services were heavily invested in between 2003 and 2007.

By 2011, the progress that had been made meant it could reasonably have been stated Scotland had some of the most forward-thinking and progressive debt laws in Europe with well-funded advice agencies that could deal with the modern-day problems of over-indebtedness.

The benefits of this were all too evident in the aftermath of the credit crunch, when hundreds of thousands of Scots accessed both formal and informal debt solutions, and substantial levels of unmanageable consumer debt were addressed.

Then in 2012-13, the Scottish Accountancy in Bankruptcy (AIB), the agency which leads on debt policy for the Scottish Government, removed the wheels from these progressive policies that were driving such change. It concluded the law had become too debtor friendly and less than five years after the credit crunch, decided the law had to be re-tilted back in favour of banks and other financial institutions.

The effect was that within a year of the new rules being implemented in 2015, the numbers applying for bankruptcy fell by 44 per cent, whilst the numbers applying for the Debt Arrangement Scheme fell by 49 per cent.

It is now reasonable in my opinion to state the system is broken, incapacitated by funding cuts, but also by laws that have become the victim of “agency capture” by the AIB and are now developed to satisfy institutional needs of slotting everyone into formal solutions that can generate fees, rather than developing a system that benefits the whole of the community.

An example of this was evident last week, when the AIB declared the Debt Arrangement Scheme was a huge success, as it had recovered £200 million for creditors, whilst overlooking the fact more debt programmes had failed than had been successful.

Also, the Improvement Service produced another report that showed of the 49,000 people in 2016-17 who had sought advice from free, council-funded debt advice services, fewer than 21 per cent had their problems addressed through a formal solution, but more than 50 per cent had relied on their free sector advice agencies to negotiate solutions on their behalf.

It is now these free advice services that are facing cuts, with North Ayrshire Citizen Advice Service and Renfrewshire Law Centre only the latest to go in another round of cuts, closing their doors last week. More inevitably will follow.

Our debt laws may be world-recognised, but unless there are adequate resources and political will, they will not work.
The problem is they are no longer working and when Scotland faces another personal debt crisis, this will become all too obvious, but by then, it will be too late.

First published in The Herald, 4th April 2018