Personal Insolvency Seminar

Personal Insolvency Seminar

In the last ten years, over 183,000 Scots have been subject to Scotland’s Personal Insolvency Laws. In this seminar, Protected Trust Deeds and Sequestrations will be examined from the perspective of a money adviser

Since 2007, there has been three primary pieces of legislation that have largely dealt with this area of law, not including the consolidation act, the Bankruptcy (Scotland) Act 2016.

In that time, the law and practice relating to sequestration and protected trust deeds has seen substantial change, with a greater emphasis on adminstrative procedure, rather than judicial processes.

However, the courts continue to play a significant role in this area of law.

This one day seminar, is aimed at money advisers and legal practitioners who advise consumers on personal insolvency, before they enter an insolvency process, during those processess and after they have received a discharge.

It focuses on when insolvency is appropriate and when it is not; what form proposals can take and what are the rights and obligations of debtors who have been sequestrated or are party to a protected trust deed.

This seminar will be invaluable for practitioners who wish to gain an insight into the issues that debtors can face and will look at the law and practice that can enable them to negotiate and represent their client’s interests more effectively.

For more information see here.

Bankruptcy fees: Scottish Parliament takes evidence

Bankruptcy fees: Scottish Parliament takes evidence

Evidence was taken on the Bankruptcy Fees (Scotland) Regulations 2017 by the Scottish Parliament’s Economy, Jobs and Fair Work Committee on Tuesday the 21st March 2017.

Evidence was provided by Mike Dailly and Alan McIntosh of Govan Law Centre and David Menzies of the Institute of Chartered Accountants of Scotland.

The Fees proposed a number of changes to regulations that govern bankruptcy fees in Scotland, namely to increase the fees the Accountant in Bankruptcy (AIB) could charge when selling the home of debtors. In some cases, these fees would increase by up to 188%. Other fee amendments related to the Accountant in Bankruptcy audit fees in sequestrations and also included introducing interest at 8% for late payment of fees to the AIB by Insolvency Practitioners.

The second part of the evidence session involved evidence being delivered by the Minister, Paul Wheelhouse and the Accountant in Bankruptcy, Dr Richard Dennis.

Bankrupt Home Owners to lose out because of Fees

Bankrupt Home Owners to lose out because of Fees

Bankrupt home owners in Scotland, from the 3rd of April 2017, will pay substantially more when their home is sold by the Accountant in Bankruptcy (AIB) in a sequestration.

The massive fee hikes, being proposed by the Bankruptcy Fees (Scotland) Regulations 2017, will see the AIB increase their fees, when selling a debtors home, by as much as 188%.  What this means is where a debtor’s home is sold, more of the money realised from the sale will now go to the AIB, a government quango, and less will go to creditors or be returned to the debtor after creditors have been paid.

What makes these increases the more shocking, is they come 2 years after the Scottish Government changed the law to make Scottish debtors pay for longer: on the pretext it was necessary to increase returns to creditors.

However, the AIB’s concerns for increasing dividends appears to have subsided with the new proposed fee increase, where the Scottish Government quango will max out its potential revenue from the sale of family homes.

As the table below shows, under the old rules, the AIB took significantly less to what is now being proposed under the new regulations, with the increase being as much as 188%, where there is £50,000 equity in a home.

AIB Costs and Full Cost Recovery

There is a growing concern what lies at the heart of these fee increases, and indeed the Scottish Governments decision that debtors should pay for longer, is the need to fund the Accountant in Bankruptcy, an organisation whose entire business model appears to be to increase fees when revenue drops from falling caseloads, without making any corresponding efficiency savings to reflect their reduced workload.

As the graph below shows, despite the level of debtors seeking formal debt remedies over the last 9 years being on the decline, there has been no corresponding reduction in the AIB’s staffing levels, or costs overall to reflect this.

The irony of all this is, that many of the cases that will be impacted by these increases will be creditor petitions, where it is the creditors who makes the debtor bankrupt. These tend to be local authorities, who do so to try and recover unpaid council tax. The result will be less funds will be returned to these local authorities, who have suffered budget cuts imposed by the Scottish Government, whilst the AIB, a Government quango has been allowed to insulate itself from cuts by increasing fees on debtors, creditors and the personal insolvency industry.

Funding of Personal Insolvency

It is clearly time there was an open discussion about how personal insolvency in Scotland is funded and whether a policy of full cost recovery is sustainable, whilst the AIB make no cuts to their own staffing levels and costs.

Until there is such a discussion, there should be no further fee increases for the AIB authorised by the Scottish Parliament.

Already, it has been shown that as a result of the introduction of the Bankruptcy and Debt Advice (Scotland) Act 2014, the number of debtors applying for sequestration and the Debt Arrangement Scheme (DAS) has reduced (50% reduction in relation to DAS). Over the long term this will mean a reduction in fees recoverable by the AIB, which whilst they continue to pursue a policy of full cost recovery and no cuts to their own services, can only result in a greater short fall that will need to be met by future fee increases.

These fee increases will only result in remedies becoming less accessible by debtors and creditors and result in a further decline in numbers using the remedies.

At some point we must ask who is the intended beneficiaries of Scotland’s personal insolvency regime?

The Bankruptcy Fees (Scotland) Regulations 2017

The regulations were laid before Parliament on the 20th February 2017 and are a negative procedure instrument. The Lead Committee is the Economy, Jobs and Fair Work Committee. The report date for the instrument is the 27th March 2017.

PTD13s – Discharge on Composition

PTD13s – Discharge on Composition

Can a debtor bring a protected trust deed, granted after the 28th November 2013 to an early end, without making 48 monthly payments or paying the creditors all monies owed to them?

This is a question I have recently been asked as the assumption is that since the Protected Trust Deed (Scotland) Regulations 2013 commenced, this is not possible. I answer it below.

Composition in Protected Trust Deeds

One of the most useful tools that the Personal Insolvency Law Unit have had at its disposal in assisting our clients has been discharges on composition. In many cases, it has allowed us to finalise a debtor’s Protected Trust Deed and release them from their obligations, whilst protecting their home, which they would have lost otherwise.  

To understand what composition is, it’s worth re-reading the comments of Sheriff Reid in the case of Allison Donnelly v Royal Bank of Scotland at paragraph 58:

“….a discharge on composition is a procedure whereby the creditors agree to an absolute discharge of the debtor, usually in return for part-payment of their debts.  Composition may be judicial or extra-judicial, and it may be general (i.e. it applies to all creditors) or partial (i.e. it applies to some creditors) (McBryde, Bankruptcy (2nd ed.), 18-62).  There is only one form of judicial composition and it is general in nature (Bankruptcy (Scotland) Act 1985, section 56 & schedule 4).  In any event, the essence of a composition is that it operates as a complete discharge, freeing the debtor from all debts and obligations for which he was liable at the date of sequestration, terminating the trust or sequestration process, and reinvesting the debtor in his estate to the same extent as it had vested in the trustee (Goudy, supra, 408).

Post 2013 Protected Trust Deeds

In 2013 the Protected Trust Deed (Scotland) Regulations, stated unless the conditions in regulation 4 to 10 were met a trust deed could not gain Protected status (regulation 3(1)).

The conditions required to be met under regulation 8 were:

  • Any payment period proposed in the Trust Deed must be for a minimum period of 48 months (regulation 8 (2) (a)); and
  • This could only be for a shorter period, where the shorter period allowed all the debtors debts to be paid in full (interest included). (regulation 8 (3)).

Termination of Protected Trust Deeds

However, this doesn’t mean a debtor has to pay all 48 monthly contributions or all the debts in full to obtain a discharge and bring the Protected Trust Deed to an end.

Regulation 24 (2) (Discharge of Debtor) states to obtain a discharge a debtor must be considered to have co-operated with his trustee and met all his obligations under the trust deed.

To meet his obligations a debtor may have to make all 48 contributions (although arguably if he can show his circumstances didn’t allow him to, there is still an argument he didn’t refuse to co-operate or that he failed to meet his obligations under the Protected Trust Deed).

We need to look at the Trust Deed document itself, which will vary. Most Trust Deed documents will, however, lay out the basis in which trust deeds can be terminated. This may be because the debtor has refused to co-operate (and, therefore will be terminated by the Trustee – grounds to refuse a discharge), but equally usually includes a clause that allows a discharge on composition.

So in short, Trust Deeds, even those granted after the 28th November 2013 can be brought to an early close. It is the Trust Deed document itself which outlines how Trust Deeds can be terminated. 

A debtor who seeks a discharge on composition is not failing to co-operate or failing in his obligations, but merely bringing the arrangement to an end in line with the provisions included in the deed, if it allows composition.

The conditions outlined in Regulation 8, only need to be satisfied for the Deed to become Protected.

Discharge on composition is an inherently sensible and equitable remedy that debtors can use, with the agreement of their creditors, when the circumstances of a case make it advisable.




PPI Claims in Trust Deeds: IP’s not likely to Re-open Cases

PPI Claims in Trust Deeds: IP’s not likely to Re-open Cases

The Director of Insolvency for the Institute of Chartered Accountants of Scotland (ICAS), has said he believes Insolvency Practitioners are unlikely to try and reopen closed Protected Trust Deeds to pursue claims for mis-sold PPI (payment protection insurance).

The opinion expressed in his blog comes in light of the decision of Lady Dorrian in the case of Doneen Ltd & Others v Mond.

The decision of the Inner House of the Court of Session held in that case that Insolvency Practitioners may not be able to re-open cases depending on the wording of the Trust Deed. The case revolved around the issue of whether the effect of a discharge of a trustee in a protected trust deed and a final distribution to creditors was the equivalent of a discharge in composition, which would have the effect of extinguishing not only the debtor’s liability for the debt, but the debt itself. The court found it may do so, depending on the actual wording of the protected trust deed.

It is important to note that this decision does not affect Scottish bankruptcies, where it is clear it is possible for trustee’s to re-open the case to ingather assets that would have vested with the Trustee in bankruptcy, had they been known about prior to the trustee obtaining their discharge.

It is likely the decision in Doneen Ltd & Others v Mond, will be appealed to the UK Supreme Court.

A seperate case, Donnelly v RBOS, remains on appeal to decide whether banks can set off PPI claims where the claimant had previously granted a Trust Deed and the Deed is now closed.


Bankruptcy Policies Unravelling

Bankruptcy Policies Unravelling

Fergus Ewing has acknowledged that he got his decision to increase the application fee for bankruptcy wrong. Speaking in response to the third quarter insolvency statistics for 2013-14, he has said “Scotland’s bankruptcy legislation has to do more to provide a safety net for vulnerable, low-income debtors and their families.”

However, despite this, with the new Bankruptcy and Debt Advice (Scotland) Bill 2013, lessons are still not being learned

For the fourth quarter in a row, Low Income, Low Asset bankruptcies (LILA) in Scotland have increased as an overall percentage of all bankruptcies, now representing 39.6% of all bankruptcy awards in Scotland.

The increase, reported in the Accountant in Bankruptcy’s (AIB) third quarter insolvency statistics for 2013-14, show that LILA bankruptcies as a total percentage of all sequestrations are now returning to their pre-first quarter levels for 2012-13, when the application fee was increased by 100% from £100 to £200, which reduced LILA awards by 60%.

However, although as a proportion of all bankruptcies the numbers of LILA awards continue to increase, LILA numbers themselves remain significantly reduced from their pre-fee increase levels, with many organisations such as Citizen Advice Scotland and Money Advice Scotland, claiming many debtors are still being priced out of any formal remedy for dealing with their debts.

In acknowledgement that they got it wrong, the Scottish Government in the Bankruptcy and Debt Advice (Scotland) Bill 2013 are now proposing a new Minimum Asset Procedure (MAP) to replace the LILA route into bankruptcy.

This new type of bankruptcy it is anticipated will reduce fees to £100 or less, but it is anticipated will only be available to 75% of all current LILA applicants with debtors only being able to apply if they have debts of less than £17,000, whereas under the current LILA route, there is no debt level cap.

For those debtors unable to apply using the new route, they will have to apply for normal bankruptcy and pay the full application fee, which is likely to be significantly more.

Although it is to be welcomed that the Scottish Government are now beginning to accept that for most bankrupts the purpose of bankruptcy legislation is to provide a social safety net, with more than eighty percent of all applications being debtor applications, and more than three quarters being unable to make a contribution from their income to their bankruptcy, more needs to be done.

This includes looking again at their decision in the new bill to increase contribution periods from 36 to 48 months against overwhelming evidence from debt charity NGOs, regulatory professional bodies and even creditor organisations that such a policy is wrong. They also need to reconsider their decision to replace the Low Income, Low Asset route into bankruptcy with a more restrictive type of bankruptcy which will exclude rather than include more debtors.

They also need to ask themselves, although it is commendable that they have accepted in sequestration and protected trust deeds it is wrong (and illegal) for debtors to make contributions from social security benefits, why is it correct for those debtors to have to use those same social security benefits to apply for bankruptcy, when prior to 2008 (and the SNP minority Government) they would have been covered by a fee waiver.

Debt Arrangement Scheme

The other revealing figures from the third quarter statistics relate to the Scottish Debt Arrangement Scheme.

Although still very much the little brother of all Scotland’s formal statutory debt remedies (representing 26.1% of all remedies used), the Scottish Government have wrongly reported in their press statements that applications have increase by 20.9% on the same period last year.

The actual increase is only 10.7% (applications 3rd quarter 2012-13: 1,067; applications 3rdquarter 2013-14: 1,181).

On the last quarter, the increase is less than 1%, confirming the view of many that, allowing for occasional seasonal variations, take up of the Scheme has now plateaued.

What is increasingly of concern, however, is the number of Schemes being revoked. Although the Minister has claimed only 3% of Debt Payment Programmes under administration are being revoked quarterly, some research by others in the insolvency industry suggests this amounts to 13.9% per annum and the cumulative effect of which will mean over 50% of all average length programmes (6.8 years) will fail.

Evidence of this can be seen in the figures for 2013-14, which show although 3,551 programmes were approved by the end of the third quarter, 1,064 have been revoked.

There are clearly a significant number of debtors entering the Debt Arrangement Scheme for whom the Scheme is not suitable and for whom it is failing to provide a sustainable, lasting solution.

There was always a danger with the Debt Arrangement Scheme that it would be seen, for political reasons, as a panacea for all debtor’s debt problems, but it has never been more than just another tool in the toolbox: suitable for some, but not others.

As the fee increase for bankruptcy has shown, policy decisions in this area without supporting evidence from those at the coal face or other empirical evidence risks unintended consequences. The danger now is we will see more of those unintended consequences if the Scottish Government continues with its policy of trying to make bankrupts pay more in sequestration, whilst hailing the Debt Arrangement Scheme as a one size fits all solution for all debtors, whilst failing to research why, for so many debtors, it continues to fail to provide solutions for their problems.

Opinion column: Alan McIntosh

Opinion column: Alan McIntosh

First pubished in The Journal of the Law Society of Scotland.

The proposal to extend the contribution period in bankruptcy from 36 to 48 months is unsupported, and arguments contradict ministerial statements relating to protected trust deeds

In money advice and personal insolvency, it is accepted as a truism that the longer people pay into any debt repayment plan, the likelihood of them defaulting increases. However, this is not universally accepted. The Minister for Energy, Enterprise & Tourism, Fergus Ewing, believes debtors can pay for longer and have not been paying long enough for the last 28 years, since the Bankruptcy (Scotland) Act 1985 was introduced.

In support of this belief, he has cited evidence from the Scottish Debt Arrangement Scheme, where the average payment period is six and a half years: if these debtors can pay that long, he believes others can too. He has also made the point that only 3% of all DAS cases are revoked each quarter. Obviously a success, until you realise that some in the insolvency industry who have researched this are equating it to 13.4% per annum and, with the average lifetime of a debt payment programme being six and a half years, are suggesting the attrition rates for DAS could eventually be more than 50% for average length programmes. Not so successful, and not so supportive of the argument that paying for longer is suitable for all debtors.

The minister also believes that bankrupts can pay for longer, despite evidence heard by the Energy, Enterprise & Tourism (EET) Committee during stage 1 of the Bankruptcy and Debt Advice (Scotland) Bill. Organisations such as Money Advice Scotland, Citizens Advice Scotland, the Law Society of Scotland, Stepchange, Lloyds Banking Group and the Consumer Finance Association all opposed the change, fearing it could result in increased defaults, hardship and disputes between debtors and trustees.

Part of the problem with the Government’s proposal is that many feel it is completely left field and was never consulted on. The minister has said it was consulted on, and supported by respondents. He cites question 10:41A, where respondents were asked whether they would support an extension of the payment period in one particular type of bankruptcy product. Only 27 supported retaining the three-year period, while 32 supported a rise to five years.

This ignores, however, that the original consultation had proposals for five different bankruptcy products, and, in relation to another product, question 10:47A, in identical terms to question 10:41A, produced 33 responses for keeping the three-year period and only 28 wanting it extended.

What has been overlooked, however, in relation to both questions is that more than half of the 129 respondents ignored both questions, and many indicated they did not feel any additional products were required. Eventually, the proposal to have five different products was shelved.

The minister has argued that the extension is necessary as payment periods must be harmonised with those for protected trust deeds which, since 27 November 2013, now last a minimum of four years. Without harmonisation, it is said, debtors may opt to use bankruptcy as an easier option for dealing with their debts.

However, on 11 October 2013, while giving evidence to the EET Committee on the Protected Trust Deed (Scotland) Regulations 2013, which extended the minimum payment period to four years, the minister dismissed concerns that introducing such changes ahead of the bill being commenced would result in debtors using bankruptcy as an easier way to deal with debts.

He pointed to the rest of the UK, where individual voluntary arrangements, which normally last five years, remain popular despite bankruptcy only having a three-year payment period. Debtors, he argued, did not take the easiest remedy for dealing with their debts and wanted to pay back what they could.

In my view, the real problem here is that the Scottish Government’s proposals to extend bankruptcy payment periods have not been thought through, and are not supported by research. They are not supported by the vast majority of civic Scotland, who make up the key stakeholders and, bizarrely, for once the debt charities and the trade body of payday lenders are all singing from the same hymn sheet.

The four-year period appears to be completely arbitrary, and the arguments in favour of it are weak. They have also been inconsistent, with the minister arguing one minute that harmonisation is not necessary and the next that it is vital.

The Institute of Chartered Accountants in Scotland has called for more research before stage 2 of the bill to explore what, if any, net benefits there would be for creditors. I would support that, but suggest such research should also extend to consider how debtors will be affected.

The Scottish Government may be launching a new Financial Health Service, but it is no National Health Service, and it is not even clear whether it has a Hippocratic Oath of doing no harm.

The BADAS Bill

The BADAS Bill

(First Published in the January 2014 edition of SCOLAG).

There is a joke in the money advice industry that the Bankruptcy and Diligence Etc (Scotland)
Act 2007 was the BAD Act, but the Bankruptcy and Debt Advice (Scotland) Bill is the BADAS

Is it living up to its name?

The Bankruptcy and Debt Advice Scotland Bill passed stage
one in its parliamentary journey on the 18th December with
thirty-three votes against and seventy-three votes in favour.
The objections were from the parliamentary Labour Party. How-
ever, it has not only been the Labour Party who has objected to
elements of the Bill. A wide range of Civic Scotland bodies have
also raised their concerns with aspects of it, particularly Clause
Four, which allows the Accountant in Bankruptcy (AIB) to
award Debtor Contribution Orders against debtors.
Debtor Contribution Orders unlike the current Income Pay-
ment Orders differ in a number of respects. First they are not
granted by the Court, but by the Accountant in Bankruptcy
and secondly, unlike Income Payment Orders, they last for 48
months instead of 36.
Power to Grant
The power to grant a Debtor’s Contribution Order is an
example of what is arguably the most controversial aspect of
the Bankruptcy and Debt Advice (Scotland) Bill: that is the pro-
posal to transfer large amounts of decision making powers from
the courts to the Accountant in Bankruptcy, an executive agency
of the Scottish Government.
The fact these currently judicial decisions will in future be
made by the executive has not gone unnoticed, with concerns
being raised by the Law Society of Scotland, the Insolvency
Practitioners Association and The Institute of Chartered Ac-
countants that where decisions do not relate to administrative
or non-contentious matters they should remain with the courts.
Even the Sheriff’s Association has called for caution, stating
that where decisions affect the rights and obligations of indi-
viduals these should be made by the courts, while accepting
purely administrative decisions can be safely transferred.
The danger of transferring potentially contentious issues
from the courts to the AIB can be seen in clause four, where if
debtors disagree with the decision of the AIB as to what they
can afford to pay towards their bankruptcy, it will fall upon
them to request an internal review of the decision by the AIB
and then appeal the decision to the sheriff court. This will trans-
fer the onus and cost of challenging decisions onto the debtor
where previously, with Income Payment Orders, if an Income
Payment Agreement could not be agreed it was for the Trustee
in Bankruptcy or the AIB to apply to the courts for the Order.
The fear is many debtors, where they disagree with the
decision of the AIB will not raise an appeal to the courts, de-
terred by the cost and a procedure they do not understand.
Instead non-cooperation with trustees will increase and there
will then be an increase in the number of deductions being made
directly from earnings.
Common Financial Tool
The Scottish Government have argued, however, such dis-
putes are less likely to occur with the adoption of a common
financial tool in the Bill, not just for Sequestration, but for all
formal statutory debt remedies in Scotland. This common fi-
nancial tool of choice, it has been agreed, will be the Common
Financial Statement (CFS) that is produced by the Money Ad-
vice Trust and the British Bankers Association and is already
widely used by the free and private sector money advice in-
dustry. The Scottish Government’s argument is that as the CFS
is generally accepted to be more generous than other financial
tools, such as the Stepchange debt charity figures which the
Scottish Government still currently use for sequestration, the
scope for disputes will be minimised. However, although there
is an element of truth in this, it must be said that even the CFS
still allows an element of discretion for trustees as to what is a
reasonable expense and will not remove the possibility of dis-
Forty-Eight-Month Contribution Periods
The Scottish Government have also seized on the use of the
CFS to justify the extension of the payment period in bank-
ruptcy from 36 months to 48 months, stating that as people
will now be allowed more generous living costs, they will be
able to continue making payments for longer. However, what
the Scottish Government has omitted to mention is that the CFS
has already widely been used within Scotland by the insol-
vency industry to determine what are reasonable living
expenses for debtors and their families. For these debtors, there-
fore, extending bankruptcy payment periods by 12 months will
not simply allow more time to pay to bankruptcy, but will mean
paying more and for longer: longer, in actual fact, than any-
where else in the UK for formal bankruptcy.
In defence of 48 month payment periods Fergus Ewing, the
Minister for Energy, Enterprise and Tourism, argued such ex-
tensions were necessary to harmonise the payment period for
bankruptcy with that for Protected Trust Deeds, which was
extended to 48 months on the 27th November 2013. If the pay-
ment period was not extended, he argued, debtors would just
choose bankruptcy as an easier option.
However, on the 11th of October 2013, whilst giving evi-
dence to the Energy, Enterprise and Tourism Committee in
support of the Protected Trust Deed (Scotland) Regulation 2013,
the Minister made a completely contradictory argument after
concerns were raised that extending the duration of Protected
Trust Deeds ahead of the commencement of the Bill would re-
sult in increased numbers of debtors applying for sequestration.
On that occasion the Minister argued, using the example of
England and Wales, that contribution periods for insolvency
arrangements could be different, such as those for formal bank-
ruptcy and Individual Voluntary Arrangements in England and
Wales without fear that debtors would use the easier option.
Debtor’s, he argued, preferred to try and pay what they could
back to their debts.
He also used the example of the Debt Arrangement Scheme
(DAS) to support his argument for longer payment periods,
citing the fact that use of the DAS was on the increase and that
average payment periods were 6.8 years. In response to those
who argued such extended payment periods led to increased
level of defaults, he drew attention to the fact only 3% of DAS
cases were revoked each quarter. What the Minister failed to
acknowledge was evidence from the debt charity Stepchange
which showed in their own Debt Management Plans the level
of defaults increased by 15% between 3 and 4 year repayment plan.

He also demonstrated the same level of dexterity a payday
loan company does when it sets out to misrepresent its interest
rates by focusing on the daily, rather than the annual rates.
Revocation rates in the Debt Arrangement Scheme may well
just be 3% per quarter; however, research conducted by others
in the Scottish insolvency industry1
shows these figures could
be as high as 13.4% per annum and ultimately the cumulative
affect could mean less than 50% of average duration Debt Pay-
ment Programmes (DPPS) succeeding: meaning no long-term
solution for those debtors. An illustration of this can be found
by just looking at the last quarter statistics for the Debt Ar-
rangement Scheme where 1,170 Debt Payment Programmes
where approved but 347 were revoked. In the quarter before
that, 1,200 Debt Payment Programmes were approved with 438
being revoked.
Clearly significant numbers of debtors in the Debt Arrange-
ment Scheme are finding such longer payment periods are not
suitable or sustainable.
Payment Breaks
Another argument the Scottish Government have relied on
to defend the extension of bankruptcy payment periods to 48
months is the insertion of payment breaks, by clause four, into
the Bankruptcy (Scotland) Act 1985 (1985 Act). Previously no
formal payment break existed in the 1985 Act for bankruptcy.
Quite simply, if a debtor could not afford to make a payment
because a drop in income or a reasonable increase in expendi-
ture, they did not have to pay anything.
The new section 32F that is to be introduced into the 1985
Act, however, allows a debtor to apply for a payment break
where their disposable income falls by 50% and is caused by a
number of particular events. These events are unemployment,
a change in employment, a period of illness, the birth or adop-
tion of a child, the breakdown in a marriage or civil partnership
or the death of a partner who jointly cared for the dependant of
a debtor.
Why a debtor in those circumstances would apply for a
payment break is not readily easy to see. They are not com-
pelled to do so and under existing rules they would simply be
deemed to be unable to pay towards their bankruptcy. Why
would they then request a payment break and a possible 6-
month extension of their payment period in a bankruptcy?
The point has also been made that the introduction of a
formal payment period would also be more useful, not for those
debtors who experience a drop in disposable income, as they
are simply unable to pay anything, but for those debtors who
are able to make a payment but experience an emergency such
as a broken boiler or car and need to prioritise use of dispos-
able income for those purposes. They could arrange for the
repairs to be carried out, avoiding hardship and then catch up
on their payments to their bankruptcy.
The introduction of a payment break into sequestration
makes no sense and it is difficult to perceive how it will work.
For example, debtors who suffer an income drop because the
death of a spouse (where there are no dependants) or the break-
down of a relationship other than a marriage or civil partnership
will not be able to apply, but trustees will not be able to ignore
these factors when deciding whether a debtor is still able to
make a contribution.
Scotland’s New Financial Health Service
For many it will appear ironic that such regressive meas-
ures are being introduced into Scotland’s bankruptcy laws
under the guise of Scotland launching a new Financial Health
Service. The Minister, Fergus Ewing, even suggested in the
Stage One debate the new Service may be like a new Financial
National Health Service for Scotland.
If it is like a new National Health Service, it will not be one
underpinned by the type of principles that most Scots associ-
ate with that other post-war institution. It will not be free at the
point of service and arguably, unlike that other institution, is
not driven by the principle of doing no harm.
The fact that the Scottish Government are likely to drive
ahead with Clause Four in its present form, ignoring the con-
cerns raised by a wide range of organisations, including Money
Advice Scotland, Govan Law Centre, Citizen Advice Scotland,
Lloyds Banking Group, The Consumer Finance Association,
the Law Society of Scotland, The Church of Scotland, The STUC,
Stepchange and the Institute of Chartered Accountants speaks
The BADAS Bill is indeed living up to its name.
*Alan McIntosh is the Legal and Social Policy Manager of The
Carrington Dean Group. He writes here in a personal capacity
and his opinions are his own.

The Cuckoo in the Nest: Four Year Bankruptcies

The Cuckoo in the Nest: Four Year Bankruptcies

In the campaign for Independence, the campaign for social justice is a key battle ground.

The idea being Scotland’s commitment to social justice is best served by ruling ourselves than relying on Westminster to protect the poor and vulnerable.

Typical sentiments are “we believe in Society”; “we believe in supporting the weak and vulnerable”; “we do not believe in the coalition’s welfare reforms”; “we will abolish the bedroom tax post-independence”…et cetera, et cetera.

Then you come to the Scottish Government’s position on bankruptcy law and if you support independence, it’s bewildering: the Scottish Government’s social justice gear in this area is completely in reverse.

In Clause Four of the Bankruptcy and Debt Advice (Scotland) Bill 2013 it is proposed in future Scottish bankrupts will pay for four years instead of three, meaning Scots will pay more and for longer than elsewhere in the UK.

The reasons behind this being the Scottish Government have said they want to create a Society where people pay their debts (don’t the majority of us already?) and wants to rebalance bankruptcy laws towards the rights of creditors.  

On the face of it, this appears reasonable, but there is a problem. The vast majority of bankrupts in Scotland apply only as a last resort and usually because their income is too low to apply for other formal debt remedies like Protected Trust Deeds and the Debt Arrangement Scheme. So making bankrupts pay more and for longer doesn’t make a lot of sense, unless your committed to punishing the poor.

Even if this point is lost on the Scottish Government, it is not lost on many of the largest creditors in Scottish bankruptcies.  Both the Lloyds Banking Group and the Consumer Finance Association got the point and made it patently clear when they gave evidence to the Scottish Parliament: stating bankruptcy was about allowing people a fresh start and paying for three years, and not four, in line with the rest of the UK, seemed reasonable.

Money Advice Scotland, Step Change, Citizen Advice Scotland, The Law Society of Scotland, Christians against Poverty, The STUC and The Church and Society Council of the Church of Scotland all agree, as do many individual advice agencies and advisers.

Even many Insolvency practitioners, who arguably could benefit from the changes, have voiced their concerns that forcing people to pay for four years instead of three, will lead to more defaults and disputes arising with debtors.

So what is driving the policy?

The Credit Union movement is in favour of it, possibly because they are less able to suffer the losses and are disproportionately affected by debts being included in bankruptcy. However, they represent less than 0.5% of all bankruptcy debts in Scotland: so it’s ridiculous that Scottish Government policy in this area should be driven by them.  There may be an argument that their debts should be treated differently in bankruptcy, however, that’s a separate matter and although the Scottish Government consulted on it, have chosen not to bring anything forward on it in the bill.

If the truth be told there is little logic driving forward this policy, but there is a wilful ignorance being shown by the Scottish Government to the effects such a policy will have on low income debtors. It will leave many of them having to subsist for longer on only essentials, whilst forcing them to pay back more as they struggle with rising living costs, stagnating wages and unexpected financial emergencies.

It will not just affect debtors, but also their families and with over 60,000 having been made bankrupt in Scotland in the last five years, it’s not unreasonable to suspect tens of thousands, not including their dependants, will be affected in coming years.

In real terms this means cars not being repaired, boilers remaining broken and children continuing to wear last year’s winter coats, whilst going 4-5 years without even the most humble of summer holidays.

The Scottish Government’s policy of extending bankruptcy payment periods from three to four years is a cuckoo of a policy in a pro-independence social justice nest. Unlike the bedroom tax and other cut backs, it cannot be blamed on Westminster. It is wholly Scottish in its making, with nothing else as regressive being proposed elsewhere in the UK and should be a cause of concern for those SNP members that believe in social justice.

How such a policy, less than a year before the independence referendum, has found its way into a SNP Government Bill, is beyond me.

Should you sign a Trust Deed?

Should you sign a Trust Deed?

Five Things To Ask First

I recently explained in a blog how the Scottish Government were taking action to stop the human trade of debtors in the Scottish Protected Trust Deed market.

They have now released regulations that will take effect from the 28th of November.

It’s hoped these regulations will prevent such lead generation firms targeting financially vulnerable debtors and selling on their details to other firms, sometimes for as much as £2,000.

The problem is so bad, Glasgow MSP, Bob Doris, recently highlighted the issue in a speech in the Scottish Parliament and called on the Scottish Government to go further and create an approved scheme for such firms, so they are better regulated.

The problem is when such middle men are receiving such lucrative fees, how can anyone be certain they are receiving “best advice”.

Other possible debt remedies don’t earn them the same kind of money, so there is an incentive for the less scrupulous to wrongly advise.

So if you are thinking of signing a Protected Trust Deed, ask yourself some questions first.

How do you know a Trust Deed is the correct solution?

If you have not yet had advice from a money adviser, how do you know a Protected Trust Deed is right for you?

Keep an open mind.

Protected Trust Deeds are only one option. There are others and some less severe.

Are you speaking to the correct person?

If you have not spoken to someone, make sure you do speak to someone who is reputable. If they are not a licenced insolvency practitioners, a Citizen Advice Bureau or your local authority, ask them for their consumer credit licence number.

Only licenced insolvency practitioners can actually sign you up for a protected trust deed, so deal with one directly – miss out the middle man.

Alternatively, contact your local free advice agency.

If you have been contacted by someone offering you a Protected Trust Deed, ask if they are actually insolvency practitioners. If not, say no thanks.

What happens to your home?

If you have been advised to sign a Protected Trust Deed and you are a home owner, ask what will happen to it.

Trust Deeds are a form of insolvency, so your Trustee acquires a right in your home when you sign. This does not necessarily mean your home will be sold or that you will have to leave it, but you have to be sure before your sign. A reputable Trustee will tell you before you sign how your home will be dealt with.

They will also tell you what is expected of you.

Is it affordable?

If you cannot afford for the next three or four years to pay what is being asked of you, you may be making your situation worse.

If you sign a Protected Trust Deed and then stop paying, the Trustee can hand you back all your debts, plus interest . You could end up owing more than you started with and lose the money you have paid in.

If it is not affordable there may be other solutions.

Ask about Bankruptcy and the Debt Arrangement Scheme. These may be viable alternatives.

Set up fees

If you are being asked to pay a set up fee, refuse.

Never agree to pay money to setup a Protected Trust Deed, they can be set up quickly and you should not have to pay anything until it is protected.