Benefit Overpayments

Can the Scottish Parliament stop UK Wage Arrestments?

Can the Scottish Parliament stop UK Wage Arrestments?

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As we enter a cost-of-living crisis and more and more families begin to struggle with paying for day-to-day essentials, there is one thing the Scottish Parliament could and should do and that is stop the use of Direct Earning Arrestments (DEA) from being used to recover DWP debts in Scotland. DEAs are a brutal form of debt recovery that was introduced in 2012 by the UK Government as part of its programme of welfare reform.

They are also unique as since the creation of the Scottish Parliament, debt recovery has been a devolved area of law.

Direct Earning Arrestments (DEA), however, are UK wide debt recovery tool (but don’t apply in Northern Ireland and the Channel Isles) and are specifically used by the DWP to recover debts owed to them from wages (local authorities can also use them to recover housing benefit overpayments). At their worst they can take up to 40% of someone’s net wages each month.

How do they work in Scotland?

In a Scotland, they can be even more harsh, as although they can arrest up to 40% of someone’s wages, such levels of arrestment are only likely in the most extreme cases, where fraud is involved. However, in Scotland they can also be executed in addition to a Scottish Earning Arrestment that can be used to recover other debts, such as council tax. This means even when a lower level of arrestment is used for a DEA (not 40%), when a Scottish Earning Arrestment is in place, people get hit with a double whammy.

Why this is unusual, is because under Scot Law, when more than one creditor wants to arrest someone’s wages, Scots Law provides a solution known as a Conjoined Earning Arrestment. This means two or more creditors can share the amount arrested, but the person in debt does not pay more, as Earning Arrestments are designed to ensure they are not unduly harsh in how they operate.

Direct Earning Arrestments, however, by being allowed to operate in addition to an Earning Arrestments, can cause real hardship and are a UK cuckoo in the nest of Scotland’s home-grown debt recovery tools available to creditors.

What is the logic of Direct Earning Arrestments?

The logic behind Direct Earning Arrestments in a Scottish context is the Department of Works and Pension don’t need to use Scotland’s traditional law of Diligence to recover debts and can get a larger amount than they may receive if they use Scotland’s more progressive Earning Arrestment.  They can also get a higher priority over other creditors who may be owed more but must use an Earning Arrestment.  

The justification for this is not readily apparent either. Its true benefit overpayments are public funds, so you could argue, those types of debts should be given priority over other debts; but there are lots of public debts, such as tax debts owed to HMRC, or arrears owed for council tax. However, those debts still must be recovered using Scots Law. Some may say it’s because benefit overpayments arise from benefit fraud, but this is not true. Most arise from people not understanding the UK’s complex benefit system or having to apply for advances on their Universal Credit, or because the DWP make official errors and miscalculations. Most benefit overpayments do not arise from fraud and most people who have them, are those on the lowest incomes, so its ironic they are the ones subject to the most brutal forms of debt recovery.

How were the UK Government able to make these Law?

How the UK Government were able to legislate in 2012 to introduce Direct Earning Arrestments into Scotland is questionable. As already noted, since the inception of the Scottish Parliament, debt recovery law has been devolved to the Scottish Parliament.

The way devolution operates is under the Scotland Act 1998 (which has now been amended by the Scotland Act 2016) the general principle is an area of law is not devolved to the Scottish Parliament if it is specified as being reserved to the UK Parliament under Schedule 5 of the 1998 Act. If it is reserved, the Scottish Parliament cannot legislate in that area.

Under Head F of Schedule 5 of the Scotland Act 1998, however, Social Security Law is reserved (although because of the Scotland Act 2016, many areas of Social Security Law are now also devolved to the Scottish Parliament).

So, are Direct Earning Arrestments made under an area of law that is reserved exclusively to the UK Parliament? Well back in 2012, Social Security was fully reserved to the UK Parliament and what Section F1 of Schedule 5 stated was reserved was:

Schemes supported from central or local funds which provide assistance for social security purposes to or in respect of individuals by way of benefits.

Requiring persons to—

(a) establish and administer schemes providing assistance for social security purposes to or in respect of individuals, or

(b) make payments to or in respect of such schemes,

and to keep records and supply information in connection with such schemes.

The circumstances in which a person is liable to maintain himself or another for the purposes of the enactments relating to social security and the Child Support Acts 1991 and 1995.

The subject-matter of the Vaccine Damage Payment Scheme.

Importantly none of which relates to the recovery of debts, even DWP debts. However, under Head F there are further provision which illustrate the type of powers that are reserved in relation to Social Security Law, which includes:

“…recovery of benefits for accident, injury or disease from persons paying damages; deductions from benefits for the purpose of meeting an individual’s debts…”

Interestingly, however, the illustrations only refer to the recovery of debts from benefits, not earnings.  Now it could be argued this list is only illustrative and not exhaustive, so it could be argued it does include the power to recover benefits from earnings. However, it could also be argued, it’s a deliberate omission.  At this point, when the Scotland Act was made in 1998, it was well established that recovery of debts in Scotland were done using Scots Law of Diligence and had been done that way for centuries. In fact, even after devolution, DWP debts were recovered from earnings exclusively using the Law of Diligence up until Direct Earning Arrestments were introduced in 2012.

That would be a more plausible reason why the illustration only refers to deductions from benefits rather than earnings, as it was always anticipated that debt recovery from earnings in Scotland would be carried out using the law of Diligence. So, one view could be the introduction of DEAs by the UK Government was a bit of a power grab.

In terms of DWP debts being recovered from benefits being a reserved matter, this makes sense, as strictly speaking benefit deductions are not really debt recovery in a traditional sense. They are more the right by the DWP to offset debts owed to them against money it is due to pay someone. As DWP benefits are a reserved matter and the DWP are a UK agency, it makes sense the power to make deductions from benefits should also be reserved. Deductions from earnings, however, are less likely to be an obvious area to be reserved to the UK, as Scotland already had a system of laws that govern recovery of debts from earnings and other assets that a debtor may have.

Describing Direct Earning Arrestments as cuckoos in the nest of Scotland’s debt recovery laws is apt, as they effectively crash a wrecking ball into that framework and allow the DWP to carry out its own arrestments, regardless of any other claims by other creditors, even public sector ones.

Can the Scottish Parliament legislate in relation to Direct Earning Arrestments?

The Scottish Parliament can legislate to amend or repeal a law that is passed by the UK Parliament.

The Scottish Parliament can amend or repeal UK laws, providing it is not an area of law that is reserved; nor can it make changes that would affect the law of any other legal system or country. So, it could not amend or repeal Direct Earning Arrestments in a way that would affect their application in England or Wales (they don’t apply in Northern Ireland or the Channel Islands).

So, are Direct Earnings Arrestment an area of law that is reserved? They were introduced by legislation of the UK Government. If it is not an area of law that was reserved, then the UK Government should not have extended them to Scotland, but the UK Parliament is a sovereign parliament, so effectively it can legislate in any area it wants, regardless of what the Scotland Act says.

However, The Welfare Reform Act 2012 did not amend or restrict the powers of the Scottish Parliament, so even if the UK Parliament did legislate in a devolved area, this does not mean the Scottish Parliament cannot legislate to amend the law in relation to the application of DEAs in Scotland.

Another argument that supports the view that how DWP benefits are recovered in Scotland is not a reserved area (except in relation to when it’s done by making deductions from benefits) is the Scottish Parliament can currently legislate in relation to how DWP benefit overpayments are recovered just now. Under the law of bankruptcy, for example the Scottish Parliament can decide what types of debts are included in bankruptcy and what are not; it can decide what types of debts are written off in bankruptcy. It can also create different classes of debts, which include benefit overpayments and decide how they rank against each other and how they get paid.

The simple fact is under Scots Law, the rules that govern how debts are recovered were always governed by the Law of Diligence (with one notable exception), so it seems unlikely when the Scotland Act was drafted in 1998 it was ever intended that the UK Government would reserve the right to create a new system of debt recovery laws that previously had never existed. I would, therefore, take the view the Scottish Parliament can competently legislate in relation to Direct Earning Arrestments and how they operate in Scotland.

I would also take the view that it would be perfectly competent for the Scottish Parliament to amend S149 (3) of the Welfare Reform Act 2012 which states: “Sections 128 and 129 extend to England and Wales only”. If the Scottish Parliament were to include S106 into that Clause (which relates to Direct Earning Arrestments), it would effectively repeal their use in Scotland, without having any impact or effect on any of the other UK legal Systems.

Prescription (Scotland) Bill

Prescription (Scotland) Bill

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The Prescription (Scotland) Bill 2018 should be welcomed, but the Scottish Parliament needs to ensure all obligations to pay debts arising from personal contracts and statute should be covered by short term negative prescription, with few exceptions.

Scotland’s law of prescription governs when an obligation to pay a debt is extinguished and no longer owed. This includes debts owed for credit cards and personal loans, but also debts such as council tax arrears, benefit overpayments and outstanding tax debts owed to the crown.

At present the framework for this area of law is provided for by the Prescription and Limitations (Scotland) Act 1973 (1973 Act), which the Scottish government aims to amend and clarify with the Prescription (Scotland) Bill 2018 (2018 Bill), currently at stage one in the Scottish parliamentary process.

Prescription Framework

The current framework under the 1973 Act provides that if a debt is specified in paragraph one of Schedule One of the Act, it is covered by short term negative prescription, which means the obligation to pay the debt expires after five years, unless the person owed the debt takes certain steps to protect their claim (or the debtor makes a relevant acknowledgement of it). Paragraph Two of the Schedule, then specifies which obligations are not covered by the five-year rule, whilst Schedule Three lists obligations which are never extinguished.

Where an obligation is neither covered by short-term negative prescription, or exempt from being extinguished, it is covered by long-term prescription, which means the obligation can be recovered for up to 20 years, with, as the law currently stands, that period being restarted if a creditors makes a relevant claim for the debt within that twenty year period or the debtor makes a relevant acknowledgement of it.

It was the operation of this long-term prescription rule that meant that even in 2014 some Scots still owed poll tax debts, which dated back as far as 1989, and led to the passing of the Community Charge Debt (Scotland) Act 2015 to write off the remaining debts owed.

However, as was entirely predictable, attempts by the 2018 Bill to simplify the law in this area have already been derailed, with certain statutory creditors arguing their debts are different and in need of special treatment. So, in section three of the 2018 Act, a new provision that aims to include all statutory obligations to pay a debt into the five-year rules, unless provided for elsewhere, has now led to several provisions which provide otherwise elsewhere.

This includes debts owed for council tax, non-domestic rates, benefit overpayments (under UK legislation) and tax debts owed to the crown.

Few Exceptions

The Scottish Parliament should resist these attempts to protect the “special interests” of certain statutory creditors, with a view to preserving the overall principle that all debts, with few exceptions, that arise from personal contracts or statute should be covered by the five year rule and creditors, who wish to protect their claim, should be required to take certain steps to do so.

This could easily be achieved in relation to debts for council tax, non-domestic rates, and crown tax debts by extending sub-paragraph (a) of paragraph two of Schedule One of the 1973 Act to include debts legally constituted by decrees or documents of debt. This provision currently states the five-year rule does not cover obligations if they relate to an obligation to comply with a decree of court, an arbitration award or an order of a tribunal or authority exercising jurisdiction under any enactment. By extending it to include decrees and documents of debts, this would mean debts that are constituted by summary warrants, which all local authorities and HMRC have the power to issue for the above debts, and regularly do so, would be covered by long-term negative prescription. It would also mean in future, where new statutory obligations are created, and there is a wish to allow the statutory creditors to protect their claim easily, it would not be necessary to further amend the 1973 Act, but instead to allow for a means of recovery that allows the summary warrant procedure to be utilised.

In relation to benefit overpayments, however, that are owed to HMRC and the Department of Works and Pensions, the Scottish government should bring forward rules to provide that UK benefit overpayments, owed under the Social Security Administration Act 1992 and the Tax Credits Act 2002, are expressly included into the five-year rule. This would ensure all UK benefit debts are treated the same as Scottish benefit overpayments, which because of section 38 of the Social Security (Scotland) Bill 2017, will be covered by short-term negative prescription. It makes no sense that debts which are essentially the same in nature, should be covered by different prescription rules, simply because the source of the debt is UK legislation, rather than Scottish legislation.

Equally, however, if the purpose of section 38 the Social Security (Scotland) Bill 2017 is to provide a short recovery period for benefit overpayments, it may be necessary to further restrict sub-paragraph (a), of paragraph two of Schedule one of the 1973 Act. The reason being is that it makes clear that debts that are constituted by a tribunal or authority exercising jurisdiction under any enactment are not covered by the five-year rule: this could include both benefit UK and Scottish benefit overpayments. Also, it may wish to consider whether the running of short-term negative prescription for these types of debt can be interrupted by claimants making relevant acknowledgements of the debt, such as in making payments towards them. The reason being most benefit overpayments are recovered by direct deductions from existing awards of benefits, meaning every payment constitutes a relevant acknowledgement of the debt and the five-year prescription period begins running again. Most people will, therefore, clearly still be paying back benefit overpayments, long after the expiry of five years.

Bill to be Welcomed

However, the new Prescription (Scotland) Billis to be welcomed. For many years, because of the omissions in the 1973 Act, it was not even clear if HMRC tax debts could be extinguished.

Also, section 6 in the 2018 Bill makes it clear it will no longer be possible for long-term prescription to be interrupted by a creditor making a relevant claim or the debtor making a relevant acknowledgment, meaning a repeat of the problems that arose with poll tax should no longer arise, with debts still be being owed long after the expiry of twenty years.

Also, section 14 of the 2018 Bill also introduces into the 1973 Act a new burden of proof on creditors who are pursuing a debt through the courts, to show, where a question arises, whether that debt is prescribed or not. With the increasing use of litigation by debt purchasers to protect claims for distressed debts, this will hopefully help stamp out the practice of them obtaining decrees for extinguished obligations.

Long term Prescription – Is it too Long?

However, the question does need to be asked, with the similar law in other parts of the UK being governed by the Limitations Act 1980and the prescriptive periods being six and 12 years, is the long-term negative prescription period in Scotland too long? There appears little reason it should be possible for debtors in Scotland to be pursued for the same types of debts, owed to the same organisations, for almost double the duration of debtors elsewhere in the UK. Arguably, a shorter period of long-term negative prescription of 10 or 15 years should now be adopted.

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 .