Bankruptcy

Child Maintenance: whose money is It?

Child Maintenance: whose money is It?

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In the 1970s, Margaret Thatcher was accused of being a “milk snatcher” when she attempted to end free milk in schools for all over sevens. It was a name that haunted her for the rest of her career.

It would be a sad indictment on the Scottish Government, so soon after they passed the Child Poverty (Scotland) Act 2017, if they were now to acquire a new moniker of being the “Maintenance Snatchers”, but the recent approach of the Accountant in Bankruptcy (AiB) to child maintenance appears to make this inevitable.

It appears the Accountant in Bankruptcy has recently received legal advice that when assessing how a debtor’s contribution in bankruptcy is calculated any maintenance for a Child must not only be used in making that calculation, but is also available to take a contribution from.

This is despite Scottish and UK legislation clearly stating otherwise, but as legal opinions are never made public, it’s unclear how the AiB are reaching the conclusions they are.

Debtor Contributions in Bankruptcy

In Scotland when you apply to enter a formal debt remedy, like sequestration (bankruptcy), a Protected Trust Deed or a Debt Payment Programme under the Debt Arrangement Scheme, the first step you must take is to complete a Financial Statement.

A financial statement has two parts to it, the first shows your income and expenditure, the second part shows your assets and liabilities .

The reason for this is both parts perform two separate solvency tests. The first, is known as the “pay your debts as they fall due” test. This looks at whether, once all your essential expenditure has been allowed for, you have sufficient disposable income left to make the minimum contractual payments due on your debts. If you don’t, this is known as “practical insolvency” and basically means you cannot pay your debts as they fall due.

The second part is known as the “balance sheet test” and compares all your assets with your liabilities. This is to see if your liabilities outweigh you assets, and can be useful to see if you have any non-essential assets that could be used to pay off your debts.

If your assets are outweighed by your liabilities, then this known as “absolute insolvency” (you owe more than you own).

Where you fail the practical solvency test, this allows the AiB to see what you can pay. In the case of a bankruptcy this payment, known as a contribution, then has to be paid for 48 months.

However, in drafting a financial statement, the AiB will look at all the income coming into a household, including child maintenance money, which is reasonable as child maintenance money is supposed to pay for the maintenance of a child, so should contribute to the costs of feeding them, housing them and clothing them.

However, what happens when there are funds left over after the household expenditure and some of this can be identified to being made up of some of the child’s maintenance money? The current view of the AiB is that can be used to pay the parent’s contribution towards their debts

Example:
Take the case of a single parent. She is in receipt of Employment Support Allowance, Child Benefit and Child Tax Credits. She also receives child maintenance from her child’s absent Father.
It is not disputed that no contribution can be taken from the Mother’s benefits, as these are “inalienable” in law. However, if there is a surplus left over once all the family’s reasonable expenditure has been calculated, can this be taken?

It would appear the AiB’s legal advice states they can, providing it is equal to or less than the total amount the Mother received in child maintenance (as, therefore, it cannot be coming from her benefits).

Whose Income is It?

Section 1 (1) of the Family Law (Scotland) Act 1985 (Obligation of Aliment) states:

(1)From the commencement of this Act, an obligation of aliment shall be owed by, and only by—
(c)a father or mother to his or her child;

It is, therefore, clear the obligation to pay maintenance is one owed by the absent parent to the child, not to the guardian parent.

Likewise, in terms of the Child Support Act 1991:

Section 1: For the purposes of this Act, each parent of a qualifying child is responsible for maintaining him.

Again this clearly suggests the obligation to pay maintenance is owed by the absent parent to the child, not to the other parent.

Furthermore, if you consider section 7 of the Child Support Act it states:

Right of child in Scotland to apply for assessment
(1) A qualifying child who has attained the age of 12 years and who is habitually resident in Scotland may apply to the Secretary of State for a maintenance assessment to be made with respect to him if—

This further suggest that child maintenance income belongs to the Child and not the parent, if they themselves can request a maintenance assessment when they turn 12.

Contributions from Income of Children

It is clearly wrong the idea that where a child is paid an income, even if that income is paid to their parent as their guardian, that income should be considered to be available by a government agency to pay the parent’s debts.

It is one thing to say it can be used in drafting a financial statement for the household, as clearly many of the expenditure items in the financial statement will relate to the child’s maintenance, which is clearly the purpose of the income. However, to say where there are surplus funds and some of those funds are identifiable as child maintenance, a contribution can be taken from it, does not only appear to be legally wrong, but morally akin to being a “milk snatcher”.

If you want to share your experiences of how child maintenance has been treated in a formal debt solution in Scotland, you can contribute to our Forum.

Bankruptcies Down, Protected Trust Deeds Up

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The Accountant in Bankruptcy in Scotland have released their third quarter Statistics for 2017-18.

The figures show that the number of sequestration in Scotland have fallen, whilst the number of debtors granting protected trust deeds has increased.

There has also been a slight increase on the number of debtors who have entered debt payment programmes under the Debt Arrangement Scheme.

Speaking on the release of the figures, the Minister for Business, Innovation and Energy Paul Wheelhouse said: “The longer term trend for bankruptcy is very much a downward one and it is heartening to see this reflected in these recent figures.

“There is absolutely no doubt in my mind the UK Government’s persistence with its failed policy of austerity is causing real hardship and strain for financially vulnerable families all across Scotland. They face even more challenges once the impact of the UK Government’s reckless determination to pursue an economically damaging Brexit becomes known.

“However, these Accountant in Bankruptcy figures indicate the numbers of people falling into bankruptcy and signing protected trust deeds are around half of what we saw eight or nine years ago. The Scottish Government is doing what it can to mitigate the worst of these Westminster policies.

“The Debt Arrangement Scheme is the only statutory debt management programme in the UK and we are rightly proud of its success in providing a viable option for those seeking to pay their debts without plunging into insolvency.”

The full report can be accessed here.

Can Benefit Overpayments be Recovered during a Formal Debt Solution?

Can Benefit Overpayments be Recovered during a Formal Debt Solution?

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It is not unusual for clients in formal debt solutions to find they are still subject to debt recovery action by the Department of Works and Pensions (DWP) for benefit overpayments, when they believed such action should have stopped.

So can the DWP still recover overpaid benefits whilst a claimant is in a formal debt solution?

The answer depends on whether the debt owed is included in the solution or not.

How do you know?

Personal Insolvency

In terms of personal insolvency in Scotland, there are two types of formal solutions: the first is a protected trust deed and the second is sequestration (which includes bankruptcies accessed through the Minimum Asset Procedure).

In terms of both these solutions all debts are included up to specific dates. For sequestration, that date is known as the “date of sequestration”. So any benefits overpaid up to that date are included.

In terms of Protected Trust Deeds, the relevant date is the date when the trust deed was granted.

Date of Sequestration

What date constitutes the date of sequestration depends on the route that was taken to make the debtor bankrupt.

If a creditor makes the debtor bankrupt, then the date of sequestration is the date the petition to sequestrate the debtor was warranted by the court. This is also known as the first order date ; and is always before the date when the court awards the bankruptcy.

Where the debtor has applied for their own bankruptcy, the date of sequestration is the date the bankruptcy is awarded.

Can the DWP recover debts that are included?

In essence, the DWP don’t, although arguably they could during the bankruptcy or protected trust deed if they were to use direct deductions from benefits or a Deduction from Earnings order.

The Department of Works and Pensions recover benefits according to guidance (see here).

This guidance states in relation to personal insolvency, at paragraph 6.3:

Once the insolvency period has commenced, any deductions from benefit
should cease, and any deductions made after the start date of the insolvency should
be refunded to the debtor. This includes any monies recovered for a fraud debt

And at paragraph 6.7 in relation to sequestration, it states:

Where the recoverable overpayment period is entirely before the start date of the bankruptcy order, or where the overpayment period spans the bankruptcy order, recovery should be suspended until after the end date of the order. This is regardless of when the overpayment decision is made, for example a decision could be made after the order date. On discharge the outstanding balance is written off unless it is a fraud overpayment, when normal recovery action should commence.

What, is important, therefore, is the date the overpayment occurred, not the date that it was decided there had been an overpayment.

Protected Trust Deeds

In terms of Protected Trust Deeds, the law is similar, although the important date is not the date of sequestration, but the date the trust deed was granted.

It is also important to note the guidance only applies to trust deeds that are protected and not unprotected trust deeds. Recovery action, therefore, does not cease until the trust deed actually becomes protected.

It also important to note, that the overpayment is only written off when the debtor is discharged. If the debtor is refused a discharge by his Trustee, recovery action can be commenced again.

In terms of whether the debt is included or not, all debts are included providing they arose in a period prior to the trust deed being granted.

The relevant paragraph in the guidance is at 6.9, where it is stated:

The recoverable overpayment(s) must be included in the Protected Trust Deed and any debts not included will not be discharged at the end of the period. Recovery is suspended until discharge at which point any debt included in the Protected Trust Deed is written off unless it has been classed as fraud when normal recovery action can commence, or recommence. Unprotected Trust Deeds are not considered a form of insolvency and recovery will continue as normal.

The Debt Arrangement Scheme

The Debt Arrangement Scheme is different from protected trust deeds and sequestration, in that it is not a form of personal insolvency, albeit it is a formal debt solution.

Debts remain owed until they are paid off in full, although all interest, fees and charges are stopped from the date an application is made to the scheme, providing it is subsequently approved.

In terms of benefit overpayments, this is also covered by the DWP guidance at paragraph 6.15, where it states:

DAS is NOT insolvency, but is a government-run, voluntary debt solution administered by the AiB [Accountant in Bankruptcy], but not involving the courts. It allows the debtor to freeze any interest, fees and charges on their debts whilst repaying their debts in full over a longer period by way of a Debt Payment Programme. The debtor makes agreed regular payments to an approved payments distributor who then makes payment to DWP Debt Management if included in the DAS. If our debt is included in the DAS we would suspend recovery until the period ends, but where it is not included we would continue with deductions throughout the DAS period.

All debts are normally included in debt payment programmes, but unlike with trust deeds and sequestration, where they are included by operation of law, in the Debt Arrangement Scheme the claimant must notify their adviser they have the debt and the adviser must include it.

If the debt payment programme is subsequently revoked, the debt again becomes recoverable .

The Money Advice Service: has it over-reached itself in Scotland?

The Money Advice Service: has it over-reached itself in Scotland?

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The UK Money Advice Service (MAS) has released a new report, Debt Solutions in the UK: Recommendations for Change.

Now as a Scot, I am instinctively suspicious of such reports. It is not the role of the Money Advice Service to make policy recommendations for formal debt solutions in Scotland.

These are devolved matters, exclusively for the Scottish Parliament to consider and are devolved under the Scotland Act 1998.

Policy Over-Reach?

The question needs to be asked, is this policy over-reach by the Money Advice Service?

We arguably have seen this before, with the Standard Financial Statement and the efforts to get it adopted as a UK wide tool (Is it Time to Call in the Common Financial Tool).

If it is, we need to be cautious. It would be the ultimate irony if, at this point in Scottish legal history, the independence of our debt laws were now eroded.

Scotland’s debt law have always been distinct, they even pre-date the Union. The Diligence Act of 1469 remains on the statute books, as does the 1661 Act of the same name, alongside the Adjudication Act of 1672.

This is legislation that existed not just prior to the modern day Scottish Parliament, but before the Act of Union and was made by the Parliament that sat in the current home of Scotland’s Court of Session, half a mile down the road from its successor. These laws survived 300 years of being in the custody of Westminister.

Even prior to devolution and the Accountant in Bankruptcy taking over as the policy lead in this area, this area of law has always been developed in Scotland, even if it was not made here. There are no shortage of historic Scottish Law Commision reports, concerning all areas of law in Scotland, relating to debt.

You could say we are not lacking in expertise.

There is certainly, however, a risk of erosion as the information revolution continues apace, and banks retreat from the High Street. With money now flowing seamlessly across borders and lenders increasingly lending on a volume basis, using algorithms to decide who to lend to, Scotland’s unique debts laws will increasingly feel like an inconvenience to them.

However, a country’s debt laws are a personal statement: how a society treats it’s debtors says something about that society.

This is what devolution was all about surely? About making these decisions ourselves. About steering our own path as the different parts of the UK continue to diverge.

However, I don’t believe this means we cannot learn from each other and even co-ordinate our direction of travel.

We have seen this before when England and Wales got one year bankruptcies with the Enterprise Act in 2003; followed by Scotland in 2008. Or that England and Wales followed the Scottish example of Low Income, Low Asset Bankruptcies with the adoption of Debt Relief Orders in 2009.

This legal dialogue has not just been restricted to the legal borders of the UK, however, but extended to the Republic of Ireland in 2012 with their Personal Insolvency Act and the creation of Debt Relief Notices and Debt Settlement Arrangements.

Maybe their Personal Insolvency Arrangements, which are used for mortgage debts, will find their way to our shores one day.

Another example of this exchanging of ideas and lessons can also be found in the Money Advice Service’s new report, with proposals for the introduction into England, Wales and Northern Ireland, of a form of the Scottish Debt Arrangement Scheme.

The report also makes other recommendations, such as a review in England, Wales and Northern Ireland of debtor fees in Bankruptcy, including the reintroduction of fee remissions when people cannot afford them.

This echoes a call that was made by Govan Law Centre after the UK Supreme Court decision on Employment Tribunal Fees (see here), which I supported.

The Accountant in Bankruptcy is currently consulting on their fees and how they are funded, and I largely support their policy objectives, as outlined in their consultation document.

However, I would urge them to now extend their consultation to accept the MAS recommendation for a debtor application fee review.

The Scottish Government cannot come to Money Advisers and ask them to accept Money Advice Service initiatives, such as the Standard Financial Statement, when, as it stands, it is likely to make our clients situation worse, and then ignore other recommendations, which may benefit them.

Likewise, the Money Advice Service need to be aware of the risks of policy over reach. They cannot produce financial tools that are detrimental to consumers, and which contain financial trigger figures that have to be kept a secret from consumers and then expect them to be rubber stamped through the Scottish Parliament.

As has always been the case and is a major feature of the UK: for the Union to succeed, there must be mutual respect between the different legal systems and traditions.

It has been that respect that has ensured there are still laws that predate Mary Queen of Scots on the statute books (although we do want to get around to repealing them).

Harmonisation of debt laws across the UK may not be possible, but to borrow a phrase from Brexit, broad regulatory alignment probably is and may even be desirable.

The Money Advice Service Report, Debt Solutions in the UK, can be downloaded here.

Money Advice Service Release Recommendations for Changes to UK Debt Solutions

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The UK Money Advice Service have released its recommendations for change for UK debt solutions (albeit only a couple of the recommendations will impact on Scottish debt solutions).

The recommendations are contained in a report that can be downloaded here and follows on from a comprehensive study that was carried out by the Money Advice Service into UK debt solutions.

In carrying out the research, the Money Advice Service and the University of Bristol engaged with the Money Advice Sector through expert workshops, interviews, group discussions and a consultation process, which approximately 60 individuals and organisations responded to.

A summary of the recommendations are:

  • A review into fees for debtor applications for bankruptcy in England, Wales and Northern Ireland;
  • The re-introductoon of fee remissions for low-income applicants;
  • Better online information about going bankrupt;
  • More prominent and easy to understand information and tools on the online bankruptcy application portal;
  • Further exploration of debt rehabilitation, including better recognition of debt repayment;
  • The introduction of a statutory debt management scheme for England, Wales and Northern Ireland;
  • Innovations in the equity release market for people who are asset rich, but cash poor;
  • The development of one online income and expenditure portal.
Panorama Bankruptcy Expose Misses the Target

Panorama Bankruptcy Expose Misses the Target

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Monday evening’s bankruptcy expose by BBC Panorama, of former millionaires, now bankrupt and still apparently living the high life, was confused and misleading (Millionaire Bankrupts Exposed).

The investigation, which looked at a handful of bankrupts, attempted to show how they were still enjoying the benefits of luxury mansions and cars, whilst their creditors were being left out of pocket.

The investigation tried to apportion blame for these abuses on the UK state run Insolvency Service and the Accountant in Bankruptcy’s Office, and concluded with, Fiona Coulson of Moon Beaver Solicitors stating the only way to avoid such abuses was through increased use of private sector trustees.

However, where the programme fell short was it first focused purely on abuses that arose from formal bankruptcies, primarily provided for by the public sector, whilst ignoring the same abuses that occur in protected trust deeds and individual voluntary arrangements, which are wholly administered by the private sector.

The second shortcoming, was it presented the case of Alan Yeoman, a Derbyshire businessman, as an example of the abuse and fraud which occur in bankruptcy. However, Yeoman’s fraudulent attempts to hide assets was eventually uncovered by the Insolvency Service (IS), and Yeoman received a custodial sentence for an assortment of offences, which only became known as a result of their investigations.

It also presented the case of the ex-treasurer of the Scottish Conservative Party, Malcolm Scott, who after making himself bankrupt, attempted to hide his assets. Fortunately, this was uncovered by the Accountancy in Bankruptcy, and Scott was awarded a five-and-a-half-year Bankruptcy Restriction Order (BRO) by Edinburgh Sheriff Court.

However, in the case of Scott, the BBC have accused him of being in breach of his Bankruptcy Restriction Order, by being involved in the formation and management of companies. Conduct prohibited by his Order. These allegations were put to Dr Richard Dennis, the Accountant in Bankruptcy (AIB), during the programme.

Who is Responsible for Bankruptcy Restriction Orders?

This revealed another mistake made by the programmers, in assuming the AIB was responsible for monitoring and enforcing BROs.

The uncomfortable truth for Panorama, is it isn’t. In terms of Malcolm Scott, if he fails to abide by the terms of his BRO, then he may be committing an offence. Like other offences in Scotland, this is a matter for the Police and the Lord Advocate’s Office, not the Accountant in Bankruptcy.

The reality is, although the AIB can award BROs, and can apply to Court for them (when the order requested is for more than 5 years), the responsibility for enforcing them does not lie with them.

Equally, as Panorama highlighted, if Scott has been able to form a company, then responsibility for this lies with Company House which allowed him to do so, despite the Court ordered BRO, and not because of the actions of the Accountant in Bankruptcy (or lack of them).

Interestingly, since the programme has been broadcast, it has been revealed the number of BROs awarded by the AIB, fell by almost two-thirds in 2016/17, when compared with the previous year. The reason for this being the AIB are now using new powers, introduced in April 2015, to refuse non-cooperative debtors discharges, thereby allowing the AIB to retain scrutiny powers over debtors when they are non-compliant.

The programme also highlighted other bankrupts, with high levels of debt, who still appear to be driving around in high value cars, but failed to show in the programme where ownership of these cars lay. This is a common problem which arises in bankruptcy and a frustrating one for creditors, who often assume the debtors own the assets they have access to.

However, it is not unusual when things are good, for many people to share the benefits of their success with their family: so, homes do get put into the name of spouses; and children do acquire assets. These assets do not vest with a trustee in bankruptcy, once a debtor is made insolvent, and, therefore many bankrupts still have access to them during their insolvency, to the frustration of their creditors.

However, in some cases, it’s also true some debtors do dispose of assets in anticipation of their bankruptcy, either by sale or “gifting” them, or by moving them offshore. In the examples of this presented during the programme, it appears many of them were discovered, and appropriate action was taken against the debtor.

Bankruptcy Scrutiny is Robust, but also Proportionate

The final error the programme appeared to make was in suggesting that checks in bankruptcy were not robust enough. However, this is wrong. There are obviously routine checks performed in all bankruptcies, and then there are investigations which are performed when intelligence becomes available to suggest they are warranted.

Routinely, those applying for bankruptcy must provide 3 months bank statements, wage slips, proof of benefits, proof of employment and even proof of routine expenditure. In addition to this credit reports are run, and land searches are performed to find undisclosed assets.

If the aim of the programme was to suggest that a greater detection of abuse would be possible by the private sector, then this would also be wrong.

In Scotland, for example, most bankruptcies are already administered by private sector firms, who have service agreements with the Accountant in Bankruptcy. The cost of administering these cases are usually paid for from the public purse, but are now nowhere near what they used to be when between 1985 and 1993, they rose from £86,000 per annum to £26 million. This was at a time when only private sector insolvency practitioners could be trustees in bankruptcy.

Today the AIB’s costs are just over £12 million and most of these costs are recovered from cases themselves in the form of fees, minimising the impact on the tax payer.

The Panorama programme exposed, quite correctly, that there are some who do try and abuse the bankruptcy process: but rather than showing the system was failing, it showed a system, overall, that was working, as most of the abuses revealed had been detected.

However, if anything is required, it is probably greater awareness within the creditor industry and the public, that Trustees in Bankruptcy are heavily dependent on information being provided to them to stamp out abuses. That information, where it is available, therefore must be provided.

Equally, the limitations of Bankruptcy Restriction Orders must be appreciated. These are civil sanctions. If people want more severe sanctions to be used against the worst abuses, or for those who flagrantly ignore the restrictions of BROs to be punished, then the solutions lie not in the civil, but the criminal courts.

Panorama: Millionaire Bankrupts Exposed

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BBC’s Panorama will tonight be running an investigation into the millionaire bankrupts who abuse the bankruptcy process and system.

The programme will be particularly galling for many money advisers to watch when they work with clients struggling to pay their monthly contributions and make ends meet.

The investigation includes convicted fraudster, Barry Hughes who the BBC report declared himself bankrupt owing £10 million, then claimed he had no assets, but was seen with his wife driving a line of luxury cars worth £500,000.

It also covers Malcolm Scott, a former treasurer of the Conservative Party in Scotland, who was given a Bankruptcy Restriction Order in 2015, after he was found to have transferred shares, secretly sold a luxury car, without declaring the proceeds, and failed to declare a speedboat and other assets in the Bahamas.

The Accountant in Bankruptcy for Scotland, Richard Dennis appears in the programme and admits no-one is pro-actively monitoring and enforcing Bankruptcy Restriction Orders.

The programme runs on BBC One at 8:30pm on the 8th January 2018 and, thereafter, will be available on the Iplayer.

Too Late, Too Late for Debt Advice Services?

Too Late, Too Late for Debt Advice Services?

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With levels of personal debt reaching pre-credit crunch levels and money advice services facing further funding cuts, is it too late for transformative change in support for such agencies? I considered the issue in December’s Journal of the Law Society of Scotland.

Money advice services in Scotland are in bad shape, arguably the worst they have been in since 2003. Unlike the years that followed 2008, however, when the sector rose to the challenge of the credit crunch, it is now questionable whether it could cope with another financial crisis.

With years of funding cuts and legislative reform, provision for free money advice services in Scotland is now fragmented, and in some areas, of little consequence to many of those they are supposed to help.

This was illustrated recently by the BBC documentary, Country Council, which spotlighted the challenges faced by Scottish local authorities in delivering services. In Argyll & Bute, a vast area that covers Helensburgh, Dunoon, Lochgilphead and Oban, the local money adviser, Des Middleton, was featured as one of only two employed to cover that huge swathe of the country. Across Scotland, however, it is not just councils that are facing cuts: some citizens’ advice bureaux are also looking at up to 100% of their core funding being axed in 2018-19.

Supply and demand

This dire situation comes just two and half years after the introduction of the Bankruptcy and Debt Advice (Scotland) Act 2014 (BADAS Act), which placed significant demands on money advisers and the work they undertake for their clients in assisting them to access formal debt solutions. These demands have seen the number of debtors accessing the Debt Arrangement Scheme fall by 46%, the number accessing sequestration drop by 23% and the number granting trust deeds decline by a third. Meanwhile, across the border, by contrast, individual voluntary arrangements are at their highest level in three decades.

UK consumer debt also continues to rise and is now again at pre-credit crunch levels, topping £200 billion for the UK. With inflation at 3% and interest rates rising, all the evidence points to a sector that will face increased demand in the coming years.

Much of this has been confirmed by a recent review, carried out by the Money Advice Outcomes Project, funded by the Money Advice Service and Improvement Service, which found that local authorities need to implement wide-ranging, transformative changes to maintain money advice services going forward and mitigate the effect of cuts.

National agency?

What form these transformative changes will take is up for debate, but there are some obvious mistakes that can be avoided. An overreliance on remote telephone and internet services would be an error, although they have their place. There will always be a class of clients who require face-to-face interventions and whom such remote services cannot satisfy. Evidence of this can be found in the recent admission by Stepchange, the national debt charity, that it lacks the capacity to provide face-to-face interviews for clients who are struggling to complete financial education modules introduced by the BADAS Act.

Transformation, however, could be aided by the creation of a new executive agency, that could act nationally as Scotland’s Money Advice Service. Such a body could be the recipient of the financial levy for debt advice which is collected by the Financial Conduct Authority from lenders and will be devolved in 2019-20. It could also ensure funding is invested and distributed in a way that not only increases the provision of local services, but could undertake strategic investment in new technology, such as open banking, which could revolutionise the way money advice services are delivered by providing a valuable tool to advisers. Such an agency could also prescribe a single set of national standards for advice agencies in Scotland, cutting back on duplication.

Equitable fees

Another obvious improvement could be reforming the current fee structures for formal debt solutions in Scotland. At present the Debt Arrangement Scheme only recovers half the £1.2 million it costs to deliver the service, but in 2016-17 distributed £37 million to creditors. A minimal increase in fees could easily recover the rest.

However, a more radical, transformative change could be achieved with the introduction of a statutory fair-share scheme, based on the voluntary one currently operated by clearing banks, for organisations like Stepchange. This allows organisations to retain a percentage of the funds collected to fund their services. On a statutory basis, such a scheme could allow private sector fees to be abolished and the Debt Arrangement Scheme to be provided free to clients, by the public, voluntary and, importantly, also the private sector, increasing capacity, but with no increased risk of consumer harm.

Fees for formal debt solutions on a wider basis should also be reviewed. In March 2017, the Scottish Government withdrew draft bankruptcy fee regulations, after evidence was provided by Govan Law Centre and me that showed they would, among other things, result in fee increases of up to 188% for debtors who had their homes sold. No replacement fees have since been forthcoming, although the Accountant in Bankruptcy remains committed to the principle of full cost recovery. It would appear, however, that that principle only operates when the fees are being charged to those least able to afford them – the consumers. Yet statutory debt relief and debt management remedies returned £80 million to creditors in 2016-17.

A fee of less than 1% on those funds could easily remove any bankruptcy application fees for debtors, and ensure access to justice is based on need and not ability to pay. A lesser amount could easily fund services like Govan Law Centre’s pilot Personal Insolvency Law Unit which operated between July 2016 and March 2017 and provided independent advice to those in formal debt solutions: a need the unit showed to exist, but which remains unsatisfied.

Past experience

The last time the free money advice sector in Scotland experienced the type of transformative change it currently needs was in 2003. It followed the introduction of the Debt Arrangement and Attachment (Scotland) Act 2002. Ringfenced funding of £3 million per year was provided until 2005 and was then increased to £5 million per year until 2007. Fortuitously, when the credit crunch hit and the Bankruptcy and Diligence etc (Scotland) Act 2007 was introduced, Scotland’s money advice services were able to cope.

As someone who has worked in the sector for more than 16 years, I witnessed that transformative change and how, with the rising tide of debt, all boats were lifted. However, with the current budget cuts, the consequences of the BADAS Act still looming over us and personal debt at record levels, the waterlines for Scotland’s money advice services are still submerged. If the opportunity to introduce meaningful change does come, I fear it will already be too late, too late.

Re-opening sequestration for whose benefit?

Re-opening sequestration for whose benefit?

In a recent note, issued by Glasgow Sheriff Court, Sheriff Deutsch, has refused an application to re-open a sequestration, which he found failed to provide sufficient evidence that re-opening the sequestration would benefit anyone, but the professionals involved.

The application to re-open the sequestration, after the trustee and the debtor were discharged, was to allow the trustee to be re-appointed in order that he could take possession of funds that had become available from a mis-sold payment protection insurance claim.

As these funds related to a claim that would have vested with the trustee during the sequestration, if it had been known about, s63 (1) (b)  of the Bankruptcy (Scotland) Act 1985, allow a trustee to apply to the court to re-open a sequestration in order that the funds be ingathered and distributed to the creditors of the sequestration.

In this case, the problem was there were none, or at least any who had submitted a claim.

Exercising his discretion, the sheriff could see insufficient benefits that would arise from the re-opening of the case, other than for the professionals involved, and declined to do so.

Of the £2,817.91 available to the trustee, it was shown approximately only 16% of this would be available to be distributed to the creditors, none of whom had made a claim in the previous sequestration, and £2,344.38 would be consumed by the fees and outlays of the trustee and his legal advisers.

Consignation of Funds

Interestingly, the solictors acting for the trustee, suggested to the sheriff that if the sequestration was not re-opened, the funds would have to be consigned to the Accountant in Bankruptcy (AiB). This is a process that allows for funds to be deposited with the AiB at the end of a sequestration, where funds have been allocated to a creditor, but not uplifted or cashed, or which have been allocated to a claim by a creditor that has been set aside.

In the sequestration in this case, however, no claims were received by creditors, so it is not simply a case they had not been uplifted of cashed. The only apparent grounds for consigning the funds, therefore, would be the creditor had failed to make a claim and provided reasonable reasons for failing to submit one, under section 52 (8) of the 1985 Act.  However, it would appear no reasonable reasons were provided by those creditors that failed to submit claims.

As the Trustee is no longer in office, and the court clearly decided to not allow the case to be re-opened, it must be wondered what capacity they would have to take any funds, even to just consign them to the AiB.  Equally,  it must also be wondered what would be the statutory basis for the AiB  accepting the funds. No claims were made in the sequestration and apparently creditors did not provide reasons for failing to submit claims.

Multiple Poinding

Sheriff Deutsch, however, suggested there may be other routes, even informal  ones available for dealing with the funds. One option he suggested, was an action of multiple-poinding. Multiple poinding is an action that can be raised when there are multiple competing claims that need to be dealt with. However, in this case, there are no claims, presuming the trustee himself has no fees and outlays outstanding from the original sequestration.

Offer of Composition

Another informal route that could be used is to make an offer of composition to the creditors in full and final settlement of the debts. There are, however, also problems with this. First, the trustee has no official capacity to do this and until the funds are released to the debtor, they lack any means of implementing it.  It would also require creditors to submit claims and, there may still be problems agreeing the claims submitted.

Personal Bar

Possibly a better way of dealing with a case like this, is where no claims have been received, or reasons for failing to submit a claim have been made prior to the trustee being discharged, is to take a view that the creditors have personally barred themselves from making a claim in the future. This would allow the funds to be reverted back to the debtor.  It cannot be argued they didn’t have sufficient time to make a claim or at least submit a reason for why they had not.

This would appear more sensible. Its one thing re-opening sequestrations where creditors have made claims which are unsatisfied, or have submitted reasons why no claim has been submitted prior to a trustee receiving their discharge; its another thing to re-open a case where no claims are known about and no fees are owed to the trustee in the original seqeustration.

It also has to be questioned on what basis someone else’s property is being consigned to a government agency to be held in trust for creditors, who have made no claim or failed to provide any reason for failing to make a claim. It would appear fairer to assume all debts have been paid and the funds should be reverted back to the debtor.

 

Are Bankruptcy Fees Immoral and Illegal?

Are Bankruptcy Fees Immoral and Illegal?

The Scottish Government’s decision to reject a call by Govan Law Centre for a fee waiver for consumers wanting to use bankruptcy laws, is not only disappointing, but ultimately likely to be an expensive mistake, resulting in £8.6 million of fees having to be repaid if legal challenges are successful.

There have always been application fees for people who want to go bankrupt; however, prior to 2008 the process was carried out by the courts, and as such, where someone was not able to afford the fee and in receipt of certain benefits, they could get a fee waiver or apply for legal aid.

In 2008 this changed, when the function was transferred to an officer of the court, the Accountant in Bankruptcy (AiB). With that change, fee waivers and legal aid were removed. The effect of this is we have people crippled with debt, surviving on £73.10 per week, who must find £90 to apply for their bankruptcy, or £200 where their debts are over £17,000.

The nature of the remedy has not changed, so why abandon the principle of helping people access justice when they cannot afford it? An AIB spokesperson has said that they are “fully satisfied that fees for accessing bankruptcy are fully compliant with the law”, but provide no explanation as to why,in light of the Supreme Court ruling in relation to Employment Tribunal Fees.

We do not know how many people who apply for bankruptcy can afford to do so and the AiB have never explained it, particularly when they are on benefits. The irony is that once a debtor is bankrupt and their only income is Jobseekers Allowance or Income Support,they are not required to pay anything towards their debts, as their income is too low, yet we expect them to find £200.

They can pay the application fees in instalments, but considering the subsistence lifestyle of many, there is irrefutable evidence that this causes hardship.There is also evidence many are forced to borrow money, which is a reckless situation for the Scottish Government to create, knowing as they do, that those wanting to apply for bankruptcy cannot afford to repay the debts they already have.

The problem with the Scottish Government bankruptcy fees are they do not recognise some people cannot afford to pay them and don’t offer any form of fee waiver or remission on the grounds of affordability. That is what is likely to make them illegal. They lack proportionality.

This inevitably will mean, considering the Supreme Court ruling, there will be challenges and if it is found the fees are unlawful, the AiB may have to refund the £8.6 million in fees they have collected since 2008.

Or they could just join their clients in bankruptcy.