Bankruptcy (Scotland) Act 2016

Parliamentary Committee Recommends against Standard Financial Statement

Parliamentary Committee Recommends against Standard Financial Statement

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The Scottish Parliament’s Economy, Energy and Fair Work’s Committee have now released their Report into the Scottish Government’s draft Common Financial Tool Regulations.

The recommendations of the Committee are that the Scottish Government should not re-lay the Regulations until there has been:

  • A full review of the use of the Common Financial Tool, including
  • Engagement with the advice sector and debtors; and
  • Research into what is a reasonable standard of living.

The full report can be found here.

Background to Common Financial Tool

The Common Financial Tool is the mechanism with which it is decided how much Scottish consumers should pay towards their debts in Bankruptcies, Protected Trust Deeds and the Debt Arrangement Scheme.

They have been controversial and concerns have been raised they may not allow Scots to sustain a reasonable standard of living, which the Scottish Government has disputed. For more information on the background to the dispute read Standard Financial Statement: Is it fit for purpose?

Regulations withdrawn

The Scottish Government initially laid the regulations to adopt the Standard Financial Statement in June 2018, but these were withdrawn after the Parliamentary summer recess because of timing issues.

The regulations were then re-laid, but after evidence was given by various organisations, including money advisers, the regulations were withdrawn again, although the Minister did indicate in a letter to stakeholders he hoped to relay the regulations so they could commence by April 2019.

Evidence provided by Money Advice Scotland, R3, The Money Advice Service and the Institute of Chartered Accountants of Scotland.

Evidence provided by Aberdeen Council, East Renfrewshire Council, Inverclyde Council and WRI Associates.

Evidence provided by the Accountant in Bankruptcy and the Minister, Jamie Hepburn.

However, after the Parliamentary Committee discussed the matter in private on the 8th January, they are now recommending the adoption of the Standard Financial Statement be delayed for at least a year.

To read the Committee’s letter to the Minister dated the 10th January 2019, see here.

To see all the evidence and submissions relating to the Common Financial Tool, see the Economy, Energy and Fair Work Committee page on it here.

AIB must change Life Insurance Policy Practice

AIB must change Life Insurance Policy Practice

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IT is ironic that as the Scottish Government make plans to introduce a new benefit to alleviate funeral poverty, one of its agencies, the Accountant in Bankruptcy (AIB), has been cashing in on life insurance policies of people that have passed away.

This has led to bereaved families being left with no funds to pay for the funeral costs of their loved ones, sometimes forcing them into funeral poverty.

The reason the AIB has been taking the money is because under Scottish bankruptcy law, the rules state that once someone is made bankrupt all their assets, including interests in life insurance policies, become the property of the trustee in bankruptcy.

So, if someone dies during their bankruptcy, their trustee can take the money from their life insurance policy.

However, because of changes to the law in 2008, it has now been held by the Scottish Sheriff Appeal Court, that between 2008 and 2015, when someone was released from their bankruptcy, the policy became theirs again. After 2015 it returns to them four years from the date of their bankruptcy.

Up until this decision of the court, however, the view of the AIB was the policies belonged to it, even after the deceased person was released from their bankruptcy.

In one case I dealt with, I challenged the Accountant in Bankruptcy’s interpretation of an obscure 105-year old law, arguing that a life insurance policy is what is known as a non-vested contingent interest.

My argument was that a life insurance policy wasn’t payable until someone died, and therefore, the sum assured could not belong to anyone until the death occurred.

The AIB, however, ruled in its own interests.

The only option available to my client was to challenge the AIB through the courts, which meant taking the risk that if she was unsuccessful, she would have to pay for her brother’s funeral and the AIB’s legal costs.

Understandably, the lady chose not to take the risk.

However, the Scottish Sheriff Appeals Court has now held that this obscure area of law does in fact mean that interests in life insurance policies are non-vested contingent interests and are the property of the debtor once they are released from their bankruptcy, if made bankrupt after April 1, 2008; or if made bankrupt after April 1, 2015, after four years.

The question now needs to be asked, how many policies have been cashed in by the AIB after the debtor was released from their bankruptcy?

How many families have been left penniless on the death of a loved one, suffering funeral poverty and possibly debt by a government agency that is supposed to help people in debt?

It is incumbent on both the AIB and the Scottish Government Minister, Jamie Hepburn, to carry out a review of all policies that have been cashed in over the last five years and seek out the families that were denied funds they were legally entitled to.

It cannot be correct that a governmental body be allowed to benefit from its own mistakes, especially when those mistakes left families destitute on the passing of their loved ones.

For a Government that has stated it is intent on tackling the issue of funeral poverty, the first thing it can do is give people back the money that they were entitled to.

First published in The Herald on the 1st September 2018.

Can Benefit Overpayments be Recovered during a Formal Debt Solution?

Can Benefit Overpayments be Recovered during a Formal Debt Solution?

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

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

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

How do you know?

Personal Insolvency

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

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

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

Date of Sequestration

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

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

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

Can the DWP recover debts that are included?

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

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

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

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

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

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

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

Protected Trust Deeds

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

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

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

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

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

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

The Debt Arrangement Scheme

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

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

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

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

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

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

Personal Insolvency Seminar

Personal Insolvency Seminar

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

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

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

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

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

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

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

For more information see here.

Bankruptcy Fees Regulations revoked by Minister

Bankruptcy Fees Regulations revoked by Minister

Paul Wheelhouse, the Scottish Government Minister for Business, Innovation and Energy, has written to the Economy, Jobs and Fair Work Committee to state he will revoke the Bankruptcy Fees (Scotland) Regulations 2017.

Govan Law Centre and the Institute of Chartered Accountants of Scotland (ICAS) had opposed the fee increases, which increased the AIB fees for selling a debtor’s home by 188% in some cases.

In his letter to the Chairman of the Committee, Gordon Lindhurst, Minister Wheelhouse wrote:

In light of the issues raised, and my desire to ensure that we are able to best address the points raised by the Committee, I can confirm that the proposed regulations will be revoked and an appropriate revocation instrument will be laid in the Parliament today.

I particularly want to ensure that the Committee has comfort that any revised measures benefit from engagement with our key stakeholders. Therefore I propose that AiB will consult on our behalf on revised proposals, taking into account constructive points raised by the Committee in the evidence session, and your letter, before we bring forward a new set of regulations to the Committee, in due course, with a view to seeking the Committee’s support.

The Minister’s letter can be read here.

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.

Bankrupt Home Owners to lose out because of Fees

Bankrupt Home Owners to lose out because of Fees

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

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

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

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

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

AIB Costs and Full Cost Recovery

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

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

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

Funding of Personal Insolvency

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

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

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

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

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

The Bankruptcy Fees (Scotland) Regulations 2017

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

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.