Bankruptcy

Trust Deed Bubble to Burst

Trust Deed Bubble to Burst

No one should be in any doubt, the Scottish Government’s new proposals for Protected Trust Deed reform is about taking the heat out of the Protected Trust Deed market and ending the trafficking of debtors between lead generation and personal insolvency firms.

It’s no secret that with some firms now reportedly paying in excess of £2,000 for referrals, Scotland’s Trust Deed market has become an overinflated bubble with debtors being “mis-sold” products as new lead generation firms sprout up daily and chase down every possible lead for the lucrative fees that some firms are now dangerously paying.

The exorbitant fees have resulted in saturation level TV and radio campaigns that push and sell statutory remedies as products and don’t promote best advice. For some firms, the use of the products themselves in their company names, like Trust Deed, give away the game.

However, what many debtors are unaware of is in actual fact many of these firms are just lead generators whose entire business model is about trafficking debtors to insolvency firms for ridiculous referral fees. In addition to this, many debtors don’t realise that such levels of fees have created a high risk culture of mis-selling, with many being pushed into solutions that are not appropriate and are destined to fail when payments are not maintained and debts are handed back; but only after the lead generator has been paid and the debtor has made months of contributions towards a remedy that was never going to work.

The practice of paying fees has been allowed in Scotland since 2008, but only for work done. The logic being where someone else has gathered information about a debtor and passed it to an Insolvency Practitioner, then it is acceptable for that practitioner to pay that intermediary for the work they have done. This removes the need for the practitioner to do the work and prevents duplication, although they are still obliged to validate the information provided.

However, whereas such fees began at £2-300, they have exploded in recent years with some English firms now paying in excess of £2,000 per referral, allowing them to buy up significant portions of the Scottish Market.

However, the new Protected Trust Deed regulations which will be laid before the Scottish Parliament in early September and are expected to come into force by November are the clearest sign yet that the Scottish Government intends to curb the practice and clamp down on the mis-selling culture.

The new provisions that will be introduced will no longer allow trustees to recover referral fees as part of their outlays for a case and instead will require them to include them as debts into the case, where they will only receive a dividend on the fees and be treated like other creditors.

The way trustees charge their fees against cases will also change, meaning they will no longer be able to charge on a time and line basis and will have to propose a setup fee at the outset to creditors, with proposals thereafter only to take a percentage of the ingathered funds from the case. Effectively this will mean trustees will have to share the risk of the case failing with the creditors throughout the lifetime of the case and, logically ensure only those cases likely to succeed are taken on at the outset.

In addition to this new provisions will be brought forward extending the minimum time a trust deed lasts from 3 to 4 years, whereas the duration a debtor pays into a bankruptcy will, for the time being anyway, remain at 3 years. This means many debtors faced with the prospect of having to pay a trust deed for 4 years are more likely to opt for a bankruptcy where they will only pay for 3 years; or alternatively where they want to avoid that remedy and can repay their debts within a reasonable timeframe, a debt payment programme under the Debt Arrangement Scheme.

The only obvious conclusion that can be drawn from a consideration of these proposals, is that the Scottish Government are determined to take the air out the over inflated bubble that is the Scottish Trust Deed market.

And who can blame them?

The current state of the market is now at a dangerous level. The risks of mis-selling are high and many vulnerable debtors are now being targeted by firms, who to put it simply should not be advising anyone on anything and it would not be unfair to call them rogues.

The end result will probably be more sequestrations and a greater uptake of the Debt Arrangement Scheme by debtors. It will also probably mean that the high profile TV and radio campaigns will also come to an end as the commercials behind such campaigns will no longer be sustainable. We are also likely to see more insolvency firms, who are far better regulated by regulatory professional bodies, having to market themselves directly to consumers.

If this leads to better advice and less mis-selling, then that’s no bad thing.

I am looking forward to it and being able to breathe again.

Do No Harm: Scotland’s New Financial Health Service

Do No Harm: Scotland’s New Financial Health Service

As the Scottish Government announces plans to launch their new Financial Health Service with the introduction of the Bankruptcy and Debt Advice (Scotland) Bill 2013, there is a real opportunity in Scotland to create a new system of debt management and relief.

The idea that should underpin such a service is that our legal system should contain provisions that allow for financially distressed debtors to be nursed back to health and no more than we would expect a doctor to amputate a broken leg, should we expect this new service to leave distressed consumers permanently disabled or disadvantaged.

On the face of it the Scottish Government appears to recognise this and in introducing the bill have identified three broad principles they want to underpin the new legislation, these are that:

• the people of Scotland should have access to fair and just processes of debt advice, debt management and debt relief; that
• those that can pay their debts, do pay their debts; and that
• the best returns for creditors are secured by balancing the rights of debtors with those of creditors and businesses.

At first glance, who could disagree?

However, the new bill does give rise for concern. The first problem is the Scottish Government views it as their response to not only the credit crunch, but the economic and social changes that Scotland has undergone over the last 28 years: from being a society where there was more social housing than in cold war Poland, to one where now over two thirds of homes are privately owned; and from a society where once credit was difficult to access, it is now widely available.

But the problem with this analysis is it is behind the times. We no longer live in a society where an abundance of credit causes problems, but one where the suffering caused by austerity and falling living standards makes it a harder for more and more consumers to maintain their financial commitments.

So the question needs to be asked, is the Scottish Government on the right page in their approach to bankruptcy and debt advice?
Well one of the major changes that will be introduced with the new bill will be the extension of the duration people in sequestration and protected trust deeds have to pay, from a three year minimum to four years. They will also introduce new provisions which will abolish the current low income, low asset route into bankruptcy and replace it with a more restrictive remedy known as a No Income, No Asset bankruptcy, only accessible to those with less than £10,000 of debt and who are in receipt of social security benefits.
Other measures that will be introduced will be a new Common Financial Tool that will aim to ensure people pay more to their debts than they currently do.

There will also be a significant transference in power from the courts to the Accountant in Bankruptcy (AIB), meaning in future more decisions will be executive decisions rather than judicial ones and not just in relation to non-controversial matters. This will include the right to award Bankruptcy Restriction Orders and make Debtor Contribution Orders and will reverse the current position where the Accountant in Bankruptcy has to apply to the courts for such powers. In future, if debtors disagree, they will have to incur the cost and trouble of appealing.

Other changes will include an end to automatic discharges for debtors in sequestration, introduced in 1985, ironically to deal with the numbers of debtors that were left lingering in bankruptcy for lengthy period of times without a discharge.

So is this a Financial Health Service that will nurse more debtors back to health? I don’t think so.

Personally I feel like there is an element of mis-representation taking place.

Why? Well I suspect the real purpose of the bill is to help the Scottish Government to realise its goal of making the Accountant in Bankruptcy’s office fully self-funding and I suspect it’s also because policy development has been left to the AIB’s office, which see it as an opportunity to implement self-serving reforms.

If I was to summarise the new Bankruptcy and Debt Advice (Scotland) Bill 2013, I would not call it a Financial Health Service. I would describe it as a drifting out of the tide of progressive debt reform in Scotland and a return to a system which debtors will view as being overly coercive and hostile.

The Scottish Government are correct, Scotland has changed, its economy has also changed – many times over since 1985 – but when other legal systems are looking to liberalise their bankruptcy laws, it appears bizarre Scotland is heading in a different direction.
I am reminded of the comments of Kenneth Galbraith in his book the Great Crash of 1929, that the best form of protection is memory, with the problem being once people forget they repeat their mistakes. I suspect we are displaying those signs just now and are in danger of forgetting many of the lessons that led to the Bankruptcy (Scotland) Act 1985.

Just don’t break your financial leg.

Civic Scotland Owes Scotland

Civic Scotland Owes Scotland

Civic Scotland Owes Scotland

Alan McIntosh looks at the recent scrutiny of the new Debt Arrangement Scheme Regulations and argues a debt is owed to the people not just by the Parliament, but Civic Scotland.

Alan Cochrane, Editor of the Scottish Telegraph recently wrote a wonderful piece on the Scottish Parliament Committee’s that summed up what many are thinking but few have expressed: that the committees are no longer doing their job[i].

The cause of such failure? The iron clad fist of the Scottish Government which refuses to tolerate dissent from its MSPs.

It’s definitely one of the drawbacks of the SNP’s 2011 landslide and has exacerbated the weakness inherent in our unicameral system.

Cochrane cited the example of the Justice Committee and their consideration of the proposals to close 10 Sheriff Courts and 7 Justice of the Peace Courts; and featured the example of Roderick Campbell MSP, one moment expressing his disappointment Justice Minister, Kenny MacAskill wouldn’t reconsider his plans, but who then voted for them anyway, despite the fact his constituency’s Cupar Sheriff Court would be closed.

Another example was provided last week by the Economy, Energy and Tourism Committee and their consideration of the new Debt Arrangement Scheme Regulations. In addition to the Committee failing in its functions to provide proper scrutiny, what was also revealing was the growing political weakness of Civic Scotland. ­­­

The committee invited only three organisations to make written submissions and of these, the two that represented the advice sector both failed to identify key issues affecting their members’ client’s interests.

One of these was the fact the new regulations fail to go as far as they could to protect consumers from the now ubiquitous pay day lender. The new regulations do allow interest on debts to be frozen earlier, but fail to bring protections forward to the earlier point of when a debtor intimates that they intend to apply: a proposal that was overwhelmingly supported by the advice sector during the consultation stage of the Regulations.

The arguments for such increased protection is strong and would benefit not only debtors, but also other lenders who often see their proportion of a debtor’s total debt being reduced during the time it takes for a debtor to get advice and apply to the Scheme. The effect of this is socially responsible lenders then receive less each month and wait longer for their debts to be repaid.

In defending his decision not to make such changes, the Minister, Fergus Ewing, cited the fact currently only 41% of those that intimate an intention to apply actually apply. However, this ignores the fact most advisers only submit an application once the intimation period expires.

Also as the current intimation procedure only protects debtors’ from diligence, where there is no threat from those procedures, intimations are rarely use, which is in the majority of cases. Were, however, it to provide an interest freezing facility, it would be used in almost all cases.

In addition to this Fergus Ewing argued that such increased protection would only create additional problems, in that interest would be frozen and then have to be reapplied if the debtor didn’t make an application; however, as money advisers know, in the majority of cases interest never ceases to be applied anyway and is only written off at the end of successful plans.

In addition to this, another issue that Civic Scotland failed to raise was the implications of new provisions that will see the possibility of all interest and charges being reapplied to a debtor’s debts when they pass away during a plan, despite the adverse effects this may have on their family.

Rather than allowing balances to be frozen at the date of death, to allow a debtor’s estate to be wound up and the outstanding amount paid off, it would appear the Scottish Government is content to allow payday lenders to reapply interest at 4,000% APR to debts that may have been in programmes for several years. In addition to this they failed to raise the issue of what happens in a joint plan when one member of a couple passes away and the other participant only has 21 days to reapply before the interest on their debts are reapplied. Maybe money advice services need to be provided from local co-operative funeral parlours.

These aren’t the only issues that were missed by Civic Scotland. There are others, such as the limiting of payment breaks to 6 months, despite the fact this may result in new mothers being unable to avail themselves of family friendly policies like 9 months statutory maternity pay and may see those that do being penalised; but essentially the big issue is the failure of not only the committee to hold the Minister to account, especially in relation to some of the poorly informed evidence, but also the failure of Civic Scotland to identify and raise issues of concern to their broader constituencies. This may not be surprising considering Kenny MacAskill’s threat to the UK’s Supreme Court that “he who pays the piper, calls the tune” and possibly also the funding crisis that many Civic Scotland organisations are facing. However, the Scottish people deserve better from both the Committees and from Civic Scotland.

Arguably, however, the failure of Civic Scotland is the greater of the two. MSPs are political animals and can often be expected to try and perform the role of a herdsman rather than that of a champion of their constituents. Civic Scotland, however, it could be argued have a moral duty, if not a political one to perform the functions of a second house in our unicameral system and ensure legislation is properly scrutinised and the voices of the people heard. This is what they did with the Scottish Constitutional Convention in the 1990?s when the democratic deficit was at its most acute and arguably has always been their role; arguably even prior to 1707 the General Assembly of the Church of Scotland (an earlier manifestation on its own of Civic Scotland?) did this by wielding not only moral, but political power.

The current weakness of the Scottish Parliament’s committees is a major cause for concern, especially as other legislation such as the new Bankruptcy and Debt Advice (Scotland) Bill will soon be passing through them and if implemented will see huge amounts of powers transferred from the courts to the Accountant in Bankruptcy’s office, creating access to justice issues.

It may be unrealistic to expect Government MSPs to speak out, but it is imperative Civic Scotland does with all its constituent parts, and performs its moral and historical duty of ensuring parliament is held to account.

Scotland’s Bankrupt Debt Strategy

Scotland’s Bankrupt Debt Strategy

It goes without saying that policy that underpins the decision to make legislative reforms, or not as the case may be and is based on premises that are not supported by evidence, produces bad laws or allows bad laws to remain in place.

We have already seen this in relation to the Bedroom Tax and calls to amend S16 of the Housing (Scotland) Act 2001. The Scottish Government’s position is that such reforms are not necessary because if local authorities adopt no eviction policies, then there will be no evictions. However, as tenants throughout the country begin receiving threatening eviction letters from Housing Associations (and councils), such reassurances deliver no comfort.

Equally as dubious is the Scottish Government’s stated intentions that in the coming year they will rebalance Scotland’s personal debt laws by introducing a series of legislative reforms that will make it fairer and more effective.

This may appear reasonable, but when the premises that such legislation is being built on is unfounded, such as the Scottish Government’s view that financially distressed debtors are not paying enough, it should come as no surprise to realise we may end up with debt laws that are unfit for purpose and cause untold hardship.

Evidence of this is transparent in the first of the Scottish Government’s measures to reform the law in this area. The Debt Arrangement Scheme (Amendment) (Scotland) Regulations 2013 should send a warning blast from the whistle of Scotland’s personal debt flagship. It’s not that it doesn’t introduce some welcome reforms, such as the ability for debtors to get adverse decisions reviewed and widens access for joint couple applications; but it also introduces provisions that will reduce the length of time many will be allowed as payment breaks and most worryingly, it doesn’t use the Parliament’s full powers to protect debtors from the rising problem of pay day loans by freezing interest at the earliest opportunity.

This is particularly concerning as arguably a more pressing issues is the number of Debt Payment Plans (DPP) that are being revoked. There is some evidence to suggest that if the Debt Arrangement Scheme was any other financial product, promoting it to debtors could be mis-selling. Recent statistics show that although the numbers applying last year increased by 39.6%, other figures show the number of cases being revoked are now averaging 12% annually, which with the average lifespan of a DPP being 7.2 years, suggests significant numbers will never be successfully completed (in actual fact the figures for the last quarter of 2012-13 showed 21% revocations).

There is no evidence based insights into why such levels of revocations are occurring; however, a strong likelihood must be that in these times of austerity, debtors are struggling to sustain long term repayment plans. Considering it is the Scottish Government’s intention to try and make the Debt Arrangement Scheme the default remedy for all debtors, unless they can satisfy some contrived test that personal insolvency is the better option, this must be a cause for concern. Debtor’s paying for years and getting no resolution to their problems is not a remedy.

It also comes as no comfort, in light of this, that the Scottish Government has also recently announced it intends to draw up new spending guidelines which all debtors will be required to use when calculating how much they can pay towards their debts. These figures they have previously announced will be more stringent than those currently used by advice agencies in the UK and which are accepted by the British Bankers Association and Financial Leasing Association.

It’s not as if there are no recent examples of bad policy making that the Scottish Government could learn from. Last year they made another presumption that wasn’t evidence based and which they didn’t consult on: that low income, low asset bankrupts could afford a 100% increase in the application fee from £100 to £200. Despite evidence to the contrary from Money Advice Scotland and Citizen Advice Scotland the changes were rushed through and the result was a 58% reduction in the number of poor debtors who were able to access the remedy.

It must be accepted the Scottish Government have made some concessions on their initial debt law proposals, but most of these have been to the money advice, creditor and insolvency industry. Those that have not been consulted yet have been the consumers who are financially distressed and who will be most affected by the reforms that are in the pipeline.

It can be in no-one’s best interest for tens and over the long term, hundreds of thousands of consumers to be left cash strapped and impoverished because of debt; particularly as the vast majority of those creditors they owe are in actual fact high street banks and lenders who have been bailed out by the public purse (and very often have sold on the debts for pennies to debt purchasers who speculate on profiting from diminished returns).

The truth is the proposition that is being advanced by the Scottish Government that debtors are not paying enough and can afford more, has no evidential basis. The arguments are based on the same Jeremy Kyle School of thought that underpins much of the UK Government’s benefit reforms. On the contrary, there is substantial evidence of poverty being a problem for many debtors and the only evidence of systemic failure that exists, is not in Scotland’s current debt laws or insolvency industry, but in the credit industry that left so many debtors with unaffordable levels of personal debt.

Over the next couple of months I hope to review in more detail the Scottish Government’s plans for legislative reform, highlighting the good, the bad and the ugly of what is being proposed. I also hope to show what is being developed is a personal debt strategy that in many ways risks being based on unfounded premises, antiquated prejudices and in some cases an outdated, Dickensian attitude towards debt in a modern, credit based economy.

The Good, the Bad and the Ugly

The Scottish Government have released their response to the consultation they held earlier this year on bankruptcy law reform. Alan McIntosh takes a look at the implications.

After 10 years of progressive modernisation of Scotland’s debt laws and increased debtor protections being introduced by the Scottish Parliament, the current Government have now set out a number of proposals that can best be described as the good, the bad and the ugly. Considered as a whole, the proposed reforms can only be viewed as a backward step and instead of reforming our current system to ensure its fit for an era of austerity, will only likely exacerbate the effects of that austerity on many Scottish consumers and creditors.

The Good is the length of payment holidays in debt payment programmes under the Debt Arrangement Scheme will be increased as will the accessibility of the scheme for joint applications to be made; a new 6 week moratorium period will be introduced for all of Scottish formal debt remedies that will see interest , fees and charges on debts being frozen at an earlier stage and debtors will be provided with protection from enforcement action; there will be earlier discharges for those debtors who qualify for a new “no income” route into bankruptcy; and there will be a common financial tool introduced to harmonise how much debtors pay, regardless of the remedy they use.

The Bad is there are the proposals for a new route into bankruptcy, which will be known as a “no Income product” and be far less accessible than the current Low Income, Low Asset route; there will be an increase in the length of time that debtors will have to pay contributions in Protected Trust Deeds and Sequestrations, from three to four years; there will also be no automatic discharge after one year and debtors will have to apply for this, which will be linked to financial education and co-operation with trustees, increasing uncertainty; the power to make income payment orders will be taken off sheriffs and transferred to the Accountant in Bankruptcy’s office, creating Article 6 issues under the ECHR in relation to the right to a fair hearing as the Accountant in Bankruptcy will also be the trustee in most cases.

The ugly will be the exclusion of debts accrued within 120 days of the debtor entering a protected trust deed or bankruptcy, which will benefit the payday loan companies and others who prey on distressed debtors and only force debtors to delay in seeking protection; there will also be the introduction of a statutory minimum dividend for Protected Trust Deeds, which will limit accessibility to a wealthy few and force thousands more each year to become bankrupt.

To understand the thinking behind these policies, the temptation may be to think it’s the fear of creating a moral hazard that the Government is guarding against, which may lead to people believing it’s too easy to just not pay their debts; but this is unlikely considering it was this Government in 2010 which made it easier for debtors to go bankrupt; and where is the need to guard against such a hazard in a system where the numbers going bankrupt each year has been in decline for the last three years?

More plausibly, at the heart of the Scottish Government programme for reform is the need for the Accountant in Bankruptcy to be fully self funding. Already their level of public funding is at a 20 year low and saw 40% of cuts this year on top of the 37% of cuts the year previous to that.

In actual fact, it’s only when you place the events that surrounded the announcement of this consultation and its execution in this context, does any of it make sense.

In August last year, the Scottish Law Commission at the behest of the Accountant in Bankruptcy began a consultation on consolidation of bankruptcy law. All the indications were the Scottish Government were getting ready to let this much reformed area of law bed in. Then in December, unexpectedly it was announced there would be a root and branch reform of Scots law on bankruptcy to make it fit for the 21st century. No-one had anticipated such a move, especially as the implementation of the Bankruptcy and Diligence Etc (Scotland) Act 2007 and Part 2 of the Home Owner and Debtor Protection (Scotland) Act 2010 had only been implemented; but then it was probably around such times the decisions were made to further slash their public funding.

Then the consultation was hurried. It ran only between February and May this year. There was no underlying, unifying theme underpinning the consultation and when the eventual 124 page consultation document was released, it was made up of what some described as a ragbag of ideas that you wouldn’t expect to appear in the same strain of thought. There was no clear analysis of what was wrong or what the challenges were for the future.

Then there was the bizarre events during the consultation when the AIB announced they were developing a triage advice tool, with funding from the Money Advice Service, despite the fact this was an issue still being consulted on; then an advertisement was sent out to money advisers asking them to apply to be seconded to the AIB to provide an in house advice service, despite the fact they was no statutory role for them to perform such functions.

Then with little notice, it was announced the bankruptcy application fee was to be increased by 100% across the board for debtors, which resulted in a 36% increase in debtor applications as debtors hurried to beat the fee hike and was followed by a 50% decrease in the latest quarterly insolvency statistics.

We now have a non cohesive programme of reform. The good are to be welcomed, but none are that urgent to justify the bill that is being proposed or the hurried consultation process. The bad clearly appears driven to help the AIB meet the financial needs of their service, largely caused by the funding cuts, and the ugly are just that, policies with no evidence underpinning them and almost definitely will have consequences that will harm the vast majority of creditors and debtors.

There was a hope, albeit a tentative one at the beginning of this process, that the Scottish Government was going to rise to the challenge of the economic crisis and use imagination and innovation to develop a system that would help Scottish consumers and creditors tackle the problems facing both.

That hope, I believe, was dashed yesterday with the Government’s response to the consultation on bankruptcy law reform. It’s not all ugly, some of it is good, but on the whole its bad and arguably we’d be better off with what we have.

 

DAS: The debtor’s panacea to bankruptcy?

DAS: The debtor’s panacea to bankruptcy?

First published in Scottish Legal News

Historically, in Scotland, if you were facing a creditor’s petition for sequestration, there was little to be done. Options under the Bankruptcy (Scotland) Act 1985 were limited. You either had to show it was not competent to award sequestration, or you had to be in a position to repay the debt in full or offer sufficient security for it.

For such reasons, over the years the threat of sequestration has been an invaluable tool in the debt recovery toolbox, especially in relation to debtors with assets that could be put at risk. The threat of an expired charge or the delivery of a statutory demand for payment was often sufficient to motivate the debtor into action.

Since 2004, however, the effectiveness of these debt recovery tools has been eroded with the Debt Arrangement Scheme. Under current regulations, introduced in July 2011, not only is it possible to defeat a creditor’s petition by applying for a Debt Payment Programme, but it’s also possible to prevent one being raised. This could provide an explanation why even in the last year the number of sequestrations awarded on the basis of creditor petitions has fallen by almost 25 per cent, despite the total number of sequestrations in the same period (2011/12) only having dropped by just 3 per cent.

The Debt Arrangement Scheme, however, is much more than a bankruptcy stopper. Launched in 2004, it suffered from a slow start, but last year saw over 3,300 programmes being approved by the Accountant in Bankruptcy in her capacity as DAS Administrator.

It is unique in that it provides individual debtors with a multiple debt remedy that is not a form of personal insolvency and does not require assets to vest in a trustee. It also prevents creditors using diligence or sequestration once a debtor is in a programme and freezes all interest, fees, penalties and charges. Other features are it provides a payment distribution service and an intimation procedure which can be used to obtain six weeks interim protection to allow an application to be made. It also is increasingly being used for not only consumer debts, but also for business debts by sole traders, partners and company directors, where personal guarantees have been provided for corporate loans.

In one recent case we acted in, a client who owned commercial property of significant value was cited to appear in front of a sheriff to show why sequestration should not be awarded. We assisted him in securing a continuation to allow an application to be made to the Debt Arrangement Scheme, which eventually was successful. The petition for his sequestration was dismissed and he was able to enter into a repayment programme with his creditors, allowing his assets to be protected.

In another case, a sole trade who employed six staff and ran a haulage firm was able to protect not only himself, his home, his business assets, but also his business and staff’s employment by applying for a programme.

In all cases, whether its business or consumer, the key is pulling together credible offers for creditors and presenting them as such. As with protected trust deeds, creditors get a right to object, but where none do, they are deemed to consent. Where creditor objections are received, the DAS Administrator applies a fair and reasonable test to see whether she believes it should be protected or not.

Increasingly, we are finding the use of discretionary conditions in applications, such as proposing assets will be realised during the scheme, is widening the availability to more clients, particularly business clients who would not be able to repay their debts within a fair and reasonable time (ten years being the maximum period accepted). Such proposals, however, do tend to take more planning and professional expertise to put realistic valuations on property; where businesses are involved it’s also necessary to ensure proposals are realistic and credible and will assist the business in not only surviving but flourishing.

For creditors, however, although the scheme may make sequestration harder to secure, it does provide more attractive returns. Even in the longest running scheme, it is likely at least 30p in the pound will be received back within the first three years: few bankruptcies will pay so much. The added benefit in this is even after three years, if the scheme has not been completed, the debtor continues paying.

The scheme is also increasingly been seen as a possible tool in the Scottish Parliament’s toolbox that could allow them to use it more effectively and deal with the growing problem of payday loans. Consumer credit law and interest rates are out with their legislative authority, but debt isn’t and Govan Law Centre’s principal solicitor, Mike Dailly has drawn up a discussion paper proposing a new payday loan, fast track, DAS programme.

The future for DAS is bright: the Scottish Government have indicated they are fully behind the Scheme and consider it a growing success and one they wish to encourage as an alternative to bankruptcy and protected trust deeds. From what I can see, they have already achieved that and, for once, I share their optimism.

1,000s could go bankrupt as a result of law reform

1,000s could go bankrupt as a result of law reform

First published in Scottish Legal News

Alan McIntosh explains how the Scottish Government’s response to its Bankruptcy Law Reform Consultation will lead to thousands more debtors unnecessarily becoming bankrupt.

When the Scottish Government announced late in 2011 that it intended to consult on bankruptcy law reform, it came as a surprise to most who worked in the industry. The Bankruptcy and Diligence Etc (Scotland) Act 2007 had only been passed a few years earlier and part two of the Home Owner and Debtor Protection (Scotland) Act 2010 had only commenced in November 2010.

There had also been an announcement in August 2011 that the Scottish Law Commission had been asked by the Scottish Government to consult on consolidating Scottish Bankruptcy law, suggesting the intention at that time was to allow this much reformed area of law to bed in for the foreseeable future.

Then there was the announcement by the Scottish Government that it intended to consult on further reform to create a system suitable for the 21st century.

In its response to that consultation yesterday, however, it became clear although there a number of admirable reforms being proposed, at the heart of the reform agenda are changes that will not benefit debtors or creditors, but instead result in thousands of debtors each year being forced into sequestration in an attempt to address the funding crisis that the Accountant in Bankruptcy’s office is facing due to the Scottish Government’s policy of full cost recovery.

Public funding of the Accountant in Bankruptcy’s office is now at a 20-year low, with 40 per cent of cuts this year following on from 37 per cent of cuts last year. To address its current funding crisis, other than making cuts themselves, the AIB, has to find other sources of revenue. This is only possible in two ways: one is by increasing the fees it charges; and the other is by increasing its market share of the personal insolvency work it undertakes.

In relation to increasing its fees the AIB has already done this in relation to debtor application fees, where it raised the fee in June 2012 by 100 per cent from £100 to £200. This resulted in a 50 per cent decrease in the last quarter in the number of debtor’s applications being made. Fee increases, therefore, carry problems: the more they increase the more that is added to the cost of the remedy and the less people will use that remedy, resulting in falling fees and increasing costs per unit of work you undertake. It’s a vicious circle.

Increasing market share, however, provides more potential, although to do that you must compete with the private sector, except in relation to Low Income, Low Assets bankruptcies, where only the Accountant in Bankruptcy’s office is allowed to be appointed. In relation to other types of sequestrations, the AIBs office is the default trustee, meaning where a debtor chooses or cannot appoint a Licensed Insolvency Practitioner, the AIB acts. Previously the AIB had attempted to increase its market share of bankruptcies when part 2 of the Home Owner and Debtor Protection (Scotland) Bill was announced by proposing only they could act as trustee when the new route of certificate of sequestration was used. However, that proposal was controversial and a breach of competition rules and had to be dropped.

Since then, there has been increasing debtor and money adviser dissatisfaction with how the AIB treats debtors when they are the trustee and this has resulted increasingly in debtors appointing their own licensed insolvency practitioner. The main source of this dissatisfaction has surrounded the level of contribution the AIB agents are seeking from debtors once they are in place, whereas private insolvency practitioners can normally advise on this before being appointed.

In response to this, the Scottish Government have now proposed they will create a common financial tool which will harmonise the amount debtors will pay regardless of the remedy they use. This will allow debtors to know beforehand how much they will pay prior to signing up to any remedy and to that extent is a commendable proposal, although as the AIB will be deciding on the details of any financial tool, much of what is contained in the detail will be crucial.

Of more concern, however, is the proposal that a new statutory minimum dividend of between 35-50p in the pound be introduced for protected trust deeds. Protected Trust Deeds are voluntary, less formal type of personal insolvency in Scotland and over 9,000 people entered into them last year. They generally provide better returns for creditors than sequestrations and, although the majority only last 3 years, significant numbers do run for four to five years to allow debtors to buy out equity in their properties and pay additional amounts to satisfy creditor criteria for the deeds to be protected.

Legally, all Protected Trust Deeds in Scotland, therefore, are agreed to by creditors as they do get an opportunity to object. The effect of protection being legally all creditors are deemed to have acquiesced in the agreement.

Currently, the average dividend payable in a protected trust deed is approximately 16 pence in the pound. If the level of dividend is statutorily fixed at 35-50 pence in the pound, as opposed to it being agreed freely between the parties involved, the simple reality will be thousands of debtors each year will not be able to afford to such remedies and instead will have to enter more severe and damaging sequestrations. The alternative to this will be to enter into a Debt Payment Programme under the Debt Arrangement Scheme, which could see many debtors being trapped in repayments plans lasting up to 12 years.

This is only one feature of the current proposals being made by the Scottish Government and not all should be condemned, but it must be asked, as the AIB cannot act as trustee in Protected Trust Deeds, whether it is being proposed such criteria should apply to Protected Trust Deeds in the knowledge that it will kill off that remedy or restrict its use. The resultant effect being more will have to use sequestration and with the common financial tool, it must be in the AIB’s calculations that this will increase their market share of sequestrations and, therefore, their income from such work.

If this is the case and part of the strategy of the AIB becoming fully self-funding, the proposals must be condemned. A bankruptcy system that we all know will increase damage to the interests of debtors and creditors cannot be a system that is fit for the 21st century, nor can it be in the interest of the country as a whole to force more people into such a drastic remedy. If it’s not, then the question must be asked, why introduce statutory criteria into what is already currently a very popular remedy?

The Rangers Effect (or is it Sevco 5088…?)

The Rangers Effect (or is it Sevco 5088…?)

As the Scottish Government considers creating a new business Debt Arrangement Scheme, Alan McIntosh explains how the current scheme works and how it can be used to help flailing businesses and consumers.

If you are like me, you will have followed the demise of Rangers football club with some interest and probably participated in many discussions about Company Voluntary Arrangements (CVAs), Administration and Corporate liquidations that seemed to spring up everywhere, including online, over the water cooler and at dinner.

Remarkably much of it has been well informed and has led me to wonder whether there could be a Ranger’s effect: a silver lining in those dark clouds where more businesses, now their awareness has been heightened, begin seeking advice and assistance when they begin to experience financial difficulties.

I have seen a number of small businesses over the last year that fit this description, whether it’s been the result of rising fixed costs, adverse weather, falling sales or HMRC pursuing a more aggressive recovery strategy.

Although CVAs, Administrations and Corporate liquidations are inappropriate for these types of business models the Scottish Debt Arrangement Scheme can be used to assist them. A formal debt management tool that was introduced in 2004 by the Scottish Government, the Scheme was created to help debtors manage their personal liabilities and was provided for initially by the Debt Arrangement and Attachment (Scotland) Act 2002 and the Debt Arrangement Scheme (Scotland) Regulations 2004.

It was updated in 2007 to include provisions which allowed the freezing of interest and charges and again in 2011 to widen access to the scheme. The Scottish Government is now seeing over 4,000 applications being made each year to the Accountant in Bankruptcy, in her role as Debt Arrangement Scheme Administrator.

If debtors wish to apply to the Scheme they must do so through an approved money adviser or insolvency practitioner, who gives holistic advice to the debtor on their finances and options and then makes an application on their behalf. Creditors of the debtor get 21 days to agree or object to a plan and if they fail to do so are deemed to have consented. If no creditor objects or responds the plan is automatically approved. Where someone does object, it is sent to the Accountant in Bankruptcy who applies a fair and reasonable test to see if the plan should be approved.

Where plans are approved, it is not possible to sequestrate the client, execute a earning or bank arrestment or carry out any other form of diligence. Where an earnings arrestment has been executed, it is formally recalled.

Although an application to the Debt Arrangement Scheme will prevent a petition for bankruptcy being raised in the sheriff court by a creditor, where it has been raised prior to an application being made or intimated, the debtor can seek a continuation from the sheriff under s12 (3C) of the Bankruptcy (Scotland) Act 1985 to allow the DAS application to be decided.

The effect of approval is the debtor gets full protection and is allowed to repay their debts each month through an appointed payment distributor to the Scheme.

What makes the scheme suitable for sole traders and individual partners is not only does it protect individual debtors, but Regulation 25 (3) of the 2011 Regulations allows the DAS Administrator when considering whether a programme should be approved to consider anything she considers relevant. The fact certain business assets may have to be kept, therefore, to produce an income is relevant and means the owners of such businesses can often enter the scheme, obtain protection and continue trading to help pay off their debts.

Discretionary conditions are also possible in making an application to the Scheme and it can be proposed that the realisations of assets will be delayed until a later date or if at all or where it is known assets will become available, that at that point these will be used to reduce the outstanding balances.

The many businesses that are using this scheme at present may not be on the scale of Rangers Football Club, but it is providing many with vital breathing space to reorganise their affairs and seek advice for the first time. It is a credit to the scheme that this has been possible and is providing many small Scottish businesses with a life line during the current economic turmoil.

It also provides fantastic returns for creditors with the longest scheme running generally no more than 10 years, meaning in reality creditors receive a 10 pence dividend for each year a plan operates. These results compare favourably with other remedies such as protected trust deeds and sequestrations.

It may be some time before the Debt Arrangement Scheme attracts the same attention that corporate insolvency has, barring a high profile application being made by someone, but its popularity is only likely to continue to grow.

Yesterday’s Chip Wrapping, Today’s News

Yesterday’s Chip Wrapping, Today’s News

Just in case you missed it, in a scene that was like a throwback to the days of New Labour spin, Scotland’s Accountant in Bankruptcy yesterday re-released a press statement from last month.

She was re-announcing that her office had entered a partnership with North Ayrshire Citizen Advice Service (NACAS) to provide an in-house advice service at their office in Kilwinning. Ominously, in the statement NACAS had been elevated to the status of being a Nationally Accredited Information and Advice Provider.

As is often the case in public relations and politics, terminology is crucial: the changing of a word in a statement can change its meaning; change a phrase and you can change a policy. So although it’s true to state NACAS are accredited under the Scottish National Standards for Advice and Information Providers, by calling them a Nationally Accredited Information and Advice Provider we could be saying something else. Especially when such a description is used in the context of also highlighting that they are dealing with clients from as far away as Inverness and Arbroath.

North Ayrshire Citizen Advice Service is an excellent local service, but there is a danger the AIB is now attempting to represent them as being the embryo of a new national advice service for its own political reasons.

Recently the Scottish Government had floated the idea that the AIB should be given an advice function. This idea was overwhelmingly rejected by almost all in the advice, insolvency and creditor industries at every consultation event held. It would appear, however, the true purpose of providing such a function was really to take forward the idea of creating a national helpline service in Scotland. This was made clear in a statement released by the AIB to money advisers the day after the first consultation event, when the strength of opposition became evident. They sought two money advisers to work in a pilot “national” advice project. Challenged in The Firm as to how they could operate such a project, Rosemary Winter Scott, the Accountant in Bankruptcy, later denied the project would be part of them.

It has transpired since then, however the national project was being heavily promoted and funded by the beleaguered and discredited Money Advice Service, which only last month was flogged publicly by its own stakeholders and the celebrity journalist, Martin Lewis, when they gave evidence to the Treasury Sub Committee at Westminster. It was accused of being unfocused, overly involved in brand building and duplicating existing services that still had capacity, such as helpline services.

It is now clear that the Accountant in Bankruptcy’s office has become contaminated by the illness that infects their new funding host, the Money Advice Service and seems destined to repeat the same mistakes. There is no need for a national helpline service in Scotland. We already have organisations such as the National Debtline and charities like the Consumer Credit Counselling Service, both of which still have capacity.

There is a danger the AIB, in receipt of the Money Advice Service’s funding, is listening to them rather than listening to the debt advice sector in Scotland.

In these times of austerity, additional resources should be used to fill gaps not duplicate existing services; help should be given to those that cannot access telephone help lines or internet services, but need the support of face to face services in communities like Inverness, Arbroath and Kilwinning.

The advice sector in Scotland does not need spin, or yesterday’s chip wrapping becoming today’s news, it needs support. It doesn’t need the Money Advice Service’s folly becoming the Accountant in Bankruptcy’s.

The Iron Fist of Debt Recovery

The Iron Fist of Debt Recovery

It has been a decade since statistics were available into the use of diligence in Scotland. New figures show a country ridden with increased aggression in debt recovery, and a Sheriff Officer profession largely sustained by the enforcement actions of local authorities.

New Scottish Government figures have provided the first real look at how the use of diligence in Scotland has evolved over the last ten years with the abolition of poinding and warrant sales and the implementation of the Bankruptcy and Diligence Etc (Scotland) Act 2007.

What is revealed is that the use of diligence has increased by 134% in the last ten years and that local authorities are now responsible for 84% of all the 387,945 diligences executed in 2011/12. It is also clear Councils are now spending millions more in debt recovery than previously, with 76% of the total 338,701 charge for payments being served being done so for local authority summary warrants (prior to 2008 there was no requirement to serve a charge to execute diligence using a summary warrant.)

Non earnings arrestments have also increased with local authorities now executing more than three times the number they executed in 2002, which indicates increased aggressiveness by councils, but also possibly that more arrestments are failing and being repeated because of changes introduced by the 2007 Act, which introduced protection for minimum amounts in bank accounts.

Earning arrestment figures have also doubled, indicating changes in recovery strategy for councils and other non summary warrant lenders, but also possibly the success of the new s70A of the Debtors (Scotland) Act 1987, which introduced a new requirement on employers to inform creditors of employee’s new employment details when employment with them has ceased.

Not all diligences have, however, proved popular. The replacement to poinding and warrants sales only saw 2,758 attachments and 51 exceptional attachments being executed. Contrast that with the number of poindings in 1997 (18,980) and its clear to see the corporeal property of debtors is now safer than ever.

Money attachments have also not proved a hit with only 502 being executed nationally.

Some diligences are more common amongst certain creditors than others. HMRC, for example, most commonly use non earnings arrestments (6,437) rather than earning arrestments (467). They also are more likely to use money attachments than local authorities and other non summary warrant lenders.

Local authorities most commonly use non earnings arrestments (219,905) than earning arrestments (116,703) and rarely appear to use any other type of diligence.

Non summary warrant creditors in contrast are more likely to use earning arrestments (17,127) than non earnings arrestments (7,643) and are also the highest user of attachments (1,755), possibly indicating more intelligence based recovery as they are more likely to have information on debtors employment, unlike statutory creditors like local authorities. In one sheriffdom there were more earning arrestments executed for summary warrant debts than non earnings arrestments, but that was the exception.

A number of conclusions can be drawn from these statistics.

First, recent criticism that Scotland has become overly debtor friendly is not true, but clearly local authorities are struggling to recover local taxes.

Second, it is also obvious that although many of these problems may disappear should Scotland introduce a Scottish Income Tax, collected at source this will have a dramatic effect on Scotland’s legal debt enforcement system as sheriff officer firms are clearly over dependent on local authority revenue.

Third, if the whole purpose of the review carried out by the fist Scottish Executive into debt recovery which culminated with the Striking the Balance Report was to create a less coercive system then it’s failed. Even allowing for changes in tactics, no one could have imagined a 134% increase in the use of diligence. The recent growth in schemes like the Debt Arrangement Scheme, which now see over 3,000 people applying per year, is still not enough, when over 338,701 Charge for Payments are being served, 134,297 earning arrestments are being executed and 233,985 non earnings arrestments are being applied for. It is clear the collaborative approach that was hoped for is still not being achieved and legal debt recovery is still, in relation to local authorities at least, based on a hit and miss, threat based approach rather than one based on intelligence and working with debtors.

It also doesn’t help that the Scottish Government has still not implement S74D of the Debtors (Scotland) Act 1987, which requires lenders within 48 hours of executing a non earnings arrestment to serve on the debtor a Debt Advice and Information Package advising them where and how to seek advice on how to deal with their debts.

There is no easy answer to the current problems, but encouraging more people to seek advice and agreements with their creditors should be a priority for the Scottish Government; also a further review of local authority enforcement powers under the summary warrant procedure is now long overdue. It should be borne in mind that widespread abuse of these powers and the diligence of poinding and warrant sales is what eventually discredited that diligence and led to its abolition: we can avoid repeats with other diligences by acting now.