Bankruptcy Law Reform

Blue Sky Thinking Scotland’s Debt Law

Blue Sky Thinking Scotland’s Debt Law

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On the 19th April the Scottish Government’s consultation into Protected Trust Deeds closed. For many the process will have felt like being trapped in a spinning hamster wheel.

The expression Groundhog Day doesn’t do the experience justice.

Another consultation on debt, more forewords littered with un-insightful arguments, and soundbites. 

I don’t believe Minister write these forewords, so hopefully without the risk of offending them, I will say I do think they speak volumes as to the lacklustre mindset that exists within the whole process of developing policy in relation to debt.

I recognise many of the arguments, I may even originally have made some of them in articles ten years ago, but re-reading them now, a decade later, still echoing around policy documents, is despairing.                                                                                 

Scotland’s debt laws are exceptional; the most progressive in Europe; we are the only part of the UK with a statutory repayment plan; we were the first to introduce a statutory moratorium; we need to strike the balance between the debtor and the creditor; those that can pay, should pay…ad infinitum.

The UK Government is playing catch up with Breathing Space, Statutory Repayment Plans, and tougher regulations for bailiffs, but at least their policy development has oomph and is responding to the needs of our time.

I have seen this before, in other countries, such as Ireland, where they may come late to the party, but the process can bring together new people, fresh ideas and perspectives and an enthusiasm to learn from other systems.

For those systems that don’t change, the risk is their complacency finds them stuck on the same track and the gloss fades quickly.

This is Scotland, caught in a post BADAS Act regulatory loop.

And I hesitate to say this, because inevitably the conclusion will be that even the most hardened in the industry are suffering consultation fatigue and this will be an argument for future inaction.

I am, however, suffering consultation fatigue. Fatigue from the same old lacklustre and tired ideas being reheated. Fatigue from the same over-used soundbites.

In 2011, I enthusiastically argued that Scotland’s debt laws were the most progressive in Europe. That was a long time ago and we have been eating out on that accolade for too long.

Debt law and policy began going wrong in 2013, underpinned by the completely unevidenced argument that the pendulum had swung too far in favour of the consumer and only creditors were allowed to make money from debt. The rest of the industry were only there to have their costs driven down by the AIB and to pay rising fees.

I honestly don’t understand why the Trust Deed consultation was run. If it was to ask whether Trust Deeds should be abolished, I could have understood that (although it’s not something I support), but we all know that the AIB are not about to slaughter the goose that lays the golden egg for their fees.

If it was to ask were failure rates too high, I could understand, but the AIB don’t discuss failure rates about any of their products, DAS or Protected Trust Deeds.

If it was to pick up the discussion on protecting equity in personal insolvency, which was shelved in 2010 and has never been revisited, I would have enthusiastically welcomed it.

Instead it’s about making Trust Deeds less accessible and driving down IP fees and forcing more consumers into paying longer in Debt Payment Programmes.  How is that progressive?

In their defence, the AIB argued this is what Creditors and the advice sector want. For Creditors, this means credit unions; and for the advice sector, I would challenge the AIB to evidence this assertion. I thought we were more concerned about consumer welfare, not maxing out creditor returns or minimising what they may pay in fees. Silly me.

In terms of Credit Unions, lets have a consultation on how personal insolvency should affect their debts. Surely this would be a worthwhile discussion. Better than the tiresome process of personal insolvency bashing and driving policy for minority creditors whose total debt makes up less than half of one percent of all debt in personal insolvency solutions.

I have in the past been described as a blue-sky thinker, which I believe in some circles is a derogatory term.

However, if ever Scotland required some blue sky thinking, it is now. We cannot go back to 2011, but if I could, I would hit the reset button tomorrow, so we could return to a time when it could be said Scotland had the most progressive system of debt laws in Europe.

My only consolation is I know the cracks and failings in the Scottish system cannot be bandaged up forever with AIB tinkering and soon it will become apparent to politicians that the arguments and soundbites are out-dated, plagiarised and from another time and no longer apply.

Then the narrative will have to change.

In the meantime, I suspect the Scottish Government will not be submitting any controversial regulations to the Economy, Energy and Fair Work Committee of the Scottish Parliament without two or three parts of the sector supporting them.

I don’t see that support being there for anything covered in the Trust Deed consultation. Certainly not anything that will stand up to robust scrutiny. It will certainly take more than a survey monkey style poll to conclude otherwise.

New Bankruptcy Fee Regulations Laid

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The Accountant in Bankruptcy have laid new Bankruptcy Fee Regulations.

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

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

The Regulations can be found here.

Scottish Debt Policy is Broken

Scottish Debt Policy is Broken

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

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

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

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

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

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

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

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

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

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

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

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

First published in The Herald, 4th April 2018

Bankruptcy fees: Scottish Parliament takes evidence

Bankruptcy fees: Scottish Parliament takes evidence

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

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

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

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

The Cuckoo in the Nest: Four Year Bankruptcies

The Cuckoo in the Nest: Four Year Bankruptcies

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

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

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

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

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

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

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

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

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

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

So what is driving the policy?

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

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

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

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

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

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

Scottish Gov To Introduce UKs Longest Bankruptcy

Scottish Gov To Introduce UKs Longest Bankruptcy

As the Scottish Government host on Monday, the 24th Annual General Meeting of the International Association of Insolvency Regulators, their surroundings will be far from those where most bankrupts spend their time.

The conference itself will be hosted in the Edinburgh’s plush George Hotel and be opened by Scottish Government Minister, Fergus Ewing.

Later there will be a drink’s reception in the Great Hall of Edinburgh Castle and a formal conference dinner on the Royal Yacht Britannia.

The event is expected to be attended by insolvency regulators from 24 countries, including the Republic of Ireland which, like Scotland, is currently modernising its own bankruptcy laws.

Unlike Scotland, however, whereas the Irish are liberalising their laws to reduce the time someone will be bankrupt from 12 years to 3 years, Scotland, under Minister Fergus Ewing is introducing new legislation, which will may see Scots remaining bankrupt for longer than anyone else in UK.

Currently under existing legislation, bankrupts throughout the UK are only bankrupt for 1 year, then they receive a discharge from their bankruptcy.

Where debtors can afford to pay something towards their bankruptcy, however, they have to pay for three years.

New proposals being made by the Scottish Government, however, will see this change.

First, they are proposing removing the automatic discharge of debtors from their bankruptcy after one year and leaving it to the discretion of their trustees to decide when they should be discharged.

Second, they are changing the law so bankrupts don’t just pay for three years, but for four years, one year longer than anywhere else in the United Kingdom.

Many insolvency practitioners have already indicated that if it is left to their discretion when a debtor is discharged, then they will likely only discharge debtors when all payments to the bankruptcy have been paid, meaning for most Scots, bankruptcy will last four years.

The poor are being trapped in a cycle of debt

Last year over 40% of all Scottish bankrupts were low income, low asset bankrupts (LILA), which mean they were either entirely dependent on means tested benefits or living on less than the 40 times the national minimum wage and didn't own their own home.

Previously these types of bankrupts in Scotland composed a larger number of those who went bankrupt, but applications by LILA debtors dropped by 60% last year after Fergus Ewing increased the cost of applying for bankruptcy from £100 to £200.

Since then many Citizen Advice Bureau and local authority money advisers have reported a sharp increase in the number of poor debtors unable to find solutions to their debts and who are now trapped in a cycle of debt.

Low Income, Low Asset Bankruptcies

The Scottish Government are now proposing a new procedure for Low Income, Low Asset debtors, but the procedure will be more restrictive than the current procedure and it is not expected as many debtors will be able to apply.

It will, however, allow those do meet the criteria to be discharged automatically after 6 months, but with the maximum amount of debt in such bankruptcy’s being restricted to £10,000 (average level of debt in LILA’s is £17,000), many low income debtors will be forced into the more formal, longer bankruptcy procedure.

The problem is the Scottish Government has not produced any evidence to suggest debtors in Scotland are able to pay for longer than anywhere else in the United Kingdom and no research has been undertaken to discover if this will increase hardship for bankrupt debtors and their families, although most money advice agencies are expecting it will. 

Even if the motivation is to raise more money for creditors, it is expected four year bankruptcies will also increase the costs of administering bankrupties and any increased returns will be minimal. 

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.

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.

 

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?