Bankruptcy and Debt Advice (Scotland) Bill 2013

Too Late, Too Late for Debt Advice Services?

Too Late, Too Late for Debt Advice Services?

0 comments

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

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

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

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

Supply and demand

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

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

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

National agency?

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

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

Equitable fees

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

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

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

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

Past experience

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

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

The Scottish Debt Advice Landscape

The Scottish Debt Advice Landscape

0 comments

A presentation I delivered recently at the AMI Financial Solutions Ltd Xmas Lunch and Learn for Free Sector Money Advisers. The presentation focused on the provision of free debt advice services in Scotland.

Many of the figures come from an Improvement Service report which will be published in full in January 2018.

The presentation was delivered to an audience of money advisers working in Scotland’s free advice sector, and focused on the funding challenges that local authority debt advice services are facing, with anticipated funding cuts for the financial year 2018-19.

It examined possible ways of introducing transformational changes into how debt advice services in Scotland are delivered. This included possible changes to the Debt Arrangement Scheme and the use of open banking technology.

Are Bankruptcy Fees Immoral and Illegal?

Are Bankruptcy Fees Immoral and Illegal?

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

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

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

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

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

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

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

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

Or they could just join their clients in bankruptcy.

Personal Insolvency Seminar

Personal Insolvency Seminar

0 comments

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.

Opinion: Personal Insolvency

Opinion: Personal Insolvency

Despite the numerous reforms, casework has shown up many failings of the personal insolvency system in Scotland, and a structure based more on principles and less on regulation is needed. I considered this issue in the January 2017 edition of the Journal of the Law Society of Scotland.

Personal insolvency in Scotland is a dysfunctional market. Thousands of debtors and small creditors each year receive a poor service, which although maybe not representative of the whole industry, means significant numbers of service users are being failed.
Poor services take the form of some firms refusing discharges from protected trust deeds (PTDs) in up to 88% of cases, almost always meaning no dividend for creditors.
We have also found in a number of cases, particularly creditor sequestrations, where debtors have assets and may be solvent, justified concerns in relation to overbilling, with strong evidence of “time dumping” to increase fees. However, challenging such fees is prohibitively complex and costly, which leaves these cases impenetrable to any scrutiny.
Equally, statements that there is no desire for families to lose homes except where absolutely necessary sound hollow, when in almost two thirds of cases we have undertaken, this outcome is avoided once independent advice and assistance is provided.
In our experience, attempts to intervene have been less welcomed in cases where the Accountant in Bankruptcy (AiB) is the trustee than with private trustees, who tend to be more prepared to take a commercial, commonsense approach.
We have no way of knowing whether similar results would be produced over a larger group, but feel it is incumbent on the Scottish Government and the industry to find out. Even if not, it would bring a better understanding of the reasons why and the frequency with which people lose their homes: at present there is a dearth of such information among the plethora of statistics collected by AiB, indicative in itself of the importance afforded this issue.
Arguments for more regulation, however, predictably meet resistance from practitioners. They claim they are already overregulated: that resonates as true when you consider the layers of regulation that they need to comply with from professional bodies, AiB and, where it applies, the Financial Conduct Authority.
Practitioners are frustrated with the cost and burden of constant legislative change, which never seems fully to address the evil it targets, but takes a broad-brush approach to all in the industry, and does not reduce the scope for new controversial practices to be developed, such as in relation to trust deeds where the debtor is balance sheet solvent or is rich in equity, which does not get realised for creditors.
Yet bad practice continues: debtors are sold solutions, not advised; homes are lost when not necessary; dividend levels for creditors in PTDs, AiB is reporting, are plummeting. All of which means the arguments for further reform are overwhelming.
The problem is the market innovates and adapts faster than legislation and those with supervisory responsibilities, resulting in poor regulation despite the layers of rules. Equally, professional bodies protest they cannot discipline members, as those with supervisory responsibilities fail to report them, claiming no rules have been broken, while complaining they are unhappy with practices.
Even from discussions with AiB, it is hard not to sense that regulatory fatigue has set in. This at a time when all the evidence points to the need for further reform. Debtors feel a similar fatigue when trying to avoid the sale of their homes: a sense that obtaining independent advice is pointless, that there is no point engaging.
The inevitable conclusion is that a new approach is needed, one focused more on higher level principles and ethics than a strict rule based system. Less tinkering, but a peeling back of the layers of regulation to allow less burdensome but more effective oversight. Arguably, AiB needs to consider whether the remedies would be better served by their retreating from some areas where they are not effective.
Debtors need to obtain independent, specialist advice. Too often it is assumed every option has been exhausted, when it hasn’t. We have seen cases where debtors pay thousands, borrowed from family members, but are not linked to any specific process, like recall or abandonment of a property. Sometimes it is nothing short of a ransom payment to avoid action to sell a home, when the action is raised later anyway.
The personal insolvency industry needs change, but not just for the sake of it and not just more rules to correct for a lack of foresight last time, otherwise we will always be chasing solutions. It needs regulatory leadership to be provided which protects the interests of all stakeholders.
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
Bill.

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-
putes.
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
volumes.
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.
1. www.trust-deed.co.uk/news/debtarrangementschemefailurerateincreases.php

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.