The Debt Arrangement Scheme: A New DAS?

The Debt Arrangement Scheme: A New DAS?

The Scottish Debt Arrangement Scheme (DAS) is changing. 

From Monday 29th October 2018, new regulations will come into force making the remedy more attractive to people struggling with problem debts.


What is the Debt Arrangement Scheme?


The Debt Arrangement Scheme is unique in the UK, in that it is the only  formal repayment plan that allows people struggling with multiple debts to repay those debts over a period of time, without having to worry about interest, fees, charges or penalties.


It also protects those in debt payment programmes from having to worry about their wages being arrested or bank accounts being frozen and even prevents creditors from making them bankrupt.


Participants in programmes also benefit as they only need to make one payment per month, with a payment distributor then paying the individual creditors on their behalf.


So what is changing?


The changes that are being introduced are intended to make it easier for those applying , in the hope that more consumers will use it rather than debt remedies like bankruptcy.


The first of the changes will be it will no longer be necessary for applicants to offer all their disposable income  to pay their debts each month. So where someone’s income is £1,200 and they are spending £1,000 on their household bills, they will no longer have to offer the full £200 spare cash they have each month. 

It is hoped this will give the participants more financial breathing space over the duration of the plan and make missed payments less likely.


It will also no longer be necessary for people entering a Debt Payment Programme to include all their debts.  After the new changes they will be able to leave out rent and mortgage arrears and come to separate agreements with those creditors, possibly offering them more money than they would get if they were included into the Debt Arrangement Scheme.


Other changes will allow applicants to leave their name off the Debt Arrangement Scheme Register where they are at risk of violence. The Register is a publicly accessible register that all participants in the Debt Arrangement Scheme previously had to appear on.


Borrowing whilst in the Debt Arrangement Scheme


Debtors entering the Debt Arrangement Scheme will also after the 29th October 2018, still be able to borrow whilst in the scheme, up to £2,000 without having to tell those they are borrowing from that they are in the Scheme or seek permission of the Debt Arrangement Scheme Administrator.


Where they have already borrowed a £1,000 or more whilst in the Scheme, they will have to tell the creditors if they borrow any more.

For more information about the Debt Arrangement Scheme visit our Debt Arrangement Scheme Page.

Money Advice Update – August 2018

Money Advice Update – August 2018

John McGleish v Graham Cameron Tough and Maureen Leslie

This case, decided by the Sheriff Appeals Court considered an obscure area of bankruptcy law, which has not seen much discussion, nor had much judicial consideration since its introduction in the Bankruptcy (Scotland) Act 1913.

The provision, now contained in section 78 (9) and (10) of the Bankruptcy (Scotland) Act 2016, (previously section 31(5) of the Bankruptcy (Scotland) Act 1985), relates to the non-vested contingent interests of the debtor.

The facts of the case were Mr McGleish and his wife took out a life insurance policy with critical illness insurance in 2001. They were then sequestrated in 2008 and received an automatic discharge in 2009. In 2010, Mrs McGleish passed away and her trustee took the proceeds from her life insurance policy.

The reason for this was the deceased’s interest in her life insurance policy was believed to vest with the trustee and was, therefore, a realisable asset that the trustee could use for the benefits of her creditors.

However, the argument put forward for Mr McGleish and which the Sheriff Appeal Court upheld, was that the life insurance policy constituted a non-vested contingent interest and, therefore on the discharge of Mrs McGleish in 2009, because of changes introduced by the Bankruptcy and Diligence Etc. (Scotland) Act 2008 (2008 Act), reinvested in her post-insolvent estate.

The argument being that the interest in a life insurance policy, which is only payable on death, only vests in the debtor on the purification of the contingency, which is death. The interest, therefore, is a non-vest contingent interest.

It is known that what constituted a non-vested contingent interest was never clear and even when the 2008 Act was passing through the Scottish Parliament one Scottish Government solicitor described it as unfathomable.

However, the argument has previously been made to the Accountant in Bankruptcy (AIB) that life insurance policies were non-vested contingent interests.

In one case that this author was involved in, they even gave a direction ruling against such an interpretation. It is, therefore, known that policies have been taken by the AIB, where it now is clear they had no legal basis for doing so.

Non-vested contingent interests now re-invest in debtors, not on their discharge, but if sequestrated after the 1st April 2015, on the expiry of 4 years from the date of their sequestration.

The Debt Arrangement Scheme (Scotland) (Amendment) Regulations 2018

The Scottish Government have put before the Scottish Parliament the latest changes being proposed for the Debt Arrangement Scheme.

The Regulations, which will be considered by the Economy, Jobs and Fair Work Committee, are aimed at increasing access to the Scheme, which in recent years has seen a substantial drop in the number of consumers applying to it.

They are also designed to reduce the likelihood of Debt Payment Programmes (DPPs) under the Scheme being revoked, after it was revealed that 2016-17 was the first year, in the history of the Scheme, which commenced in 2004, where more DPPs were approved than revoked.

The primary changes that are being introduced, are first to remove the requirement that debtors need to include all their debts in proposals to creditors.

This requirement was first introduced in 2013 and meant that even mortgage and rent arrears had to be included, despite the fact that although DPPs are diligence stoppers, they do not step creditors or landlords raising actions for repossession or eviction.

Although, the proposed changes do not exclude the possibility such debts can still be included, they allow, where they are omitted, for money advisers working with debtors to work with the debtor’s secured creditors and landlords to avoid any action for repossession or eviction. It may be that such changes will allow such creditors to obtain a priority status again and allow these debts to be cleared off quicker.

The other fundamental change that will be introduced will allow debtors to not have to offer their full disposable income to creditors when proposing a Debt Payment Programme. This change, it is believed, will be more controversial and some creditors may be inclined to object where they are offered only part of the debtor’s disposable income.

However, with the average length of a DPP now being over 7 years, the concern is that debtors are being expected to live on quite austere budgets, which although sustainable over the 4 year payment period in sequestration and protected trust deeds, is not suitable for longer term repayment plans. The counter argument to creditors who object to such proposals being that they will recover more through the Debt Arrangement Scheme, not only over its lifetime, but even in the first four years.

If passed the Debt Arrangement Scheme (Scotland) Regulations 2018 will commence on the 29th October 2018.

Common Financial Tool (Scotland) Regulations 2018

At the same time the new Debt Arrangement Scheme Regulations were laid in front of parliament, the Common Financial Tool (Scotland) Regulations were also laid.

The Common Financial Tool (CFT), first introduced on the 1st April 2015, is the income and expenditure tool that is used to determine how much debtors can pay towards their bankruptcy or protected trust deed. The preferred CFT is currently the Common Financial Statement ( CFS) that is produced by the Money Advice Trust, but the new regulations proposed this should become the Standard Financial Statement (SFS), which is owned by the Money Advice Service.

The decision by the Accountant in Bankruptcy to recommend the adoption of the SFS as the new CFT has proven controversial, as it is believed in some circumstances it may result in debtors paying more than they were required to pay under the CFS, or being required to pay a contribution where they were not required to under the CFS.

This is important, as one of the requirements for a Minimum Asset Bankruptcy, where the application fee is £90, is that the debtor cannot afford to make a contribution towards their bankruptcy. Where they can make a contribution, they must not only pay that contribution for 4 years, but also must use the Full Administration Bankruptcy procedure which has an application fee of £200.

Both tools are also controversial because of the way they are designed and formulated. Both break down a debtor’s expenditure into categories, such as essential expenditure and household expenditure. These categories, except the essential expenditure category, then have trigger figure assigned to them, based on the household composition of the debtor, which act as a rebuttable presumption that any expenditure over that amount is unreasonable.

The trigger figures for both Schemes are arrived at by looking at the average expenditure of the lowest 20% group contained in the Living Costs and Food Survey produced by the Office of National Statistics.

The argument why this is an inappropriate methodology to use to calculate trigger figures is that such a group are already living in poverty, with many dependent on means tested benefits to survive. Also the survey only shows what people are able to spend, rather than what they require to spend to afford a reasonable standard of living. The flaws in the methodology were recently exposed when the update trigger figures for the Common Financial Statement actually had some of the trigger figures being reduced at a time when it was clear living costs are increasing.

The regulations, however, have been withdrawn, as due to a timing error, they would not have been passed until after the summer recess and would have commenced on the 29th October 2018, leaving insufficient time for money advice agencies to adapt case management software systems and for training to be provided.

The Scottish Government have indicated they will resubmit the regulations after the summer recess with a view to commence them in April 2019.

Standard Financial Statement: Is it fit for purpose in Scotland?

Standard Financial Statement: Is it fit for purpose in Scotland?

The Credit Services Association (CSA), a trade body that represents debt recovery and purchase organisations, has raised its concerns that new guidelines for the Standard Financial Statement (SFS) may exacerbate the position many consumers find themselves in when struggling with problem debts.

The Standard Financial Statement, which the Accountant in Bankruptcy (AIB) have recommended be adopted as the new financial statement for formal debt solutions in Scotland, is produced by the Money Advice Service and is intended to be a common financial tool for all creditors and debt advisers to use in determining how much consumers can afford to pay towards their debts.

The CSA, which is part of the governing body for the SFS, is concerned that new trigger figures, which are used to create a rebuttable presumption that someone’s expenditure may be excessive, are concerned that new guidelines for the figures may be excessive after being updated by as much as 30% in some category areas.

Their fears are that by indicating some consumers have less to spend on their debts, consumers may enter repayment plans that may last longer and, therefore, keep the debtor in debt longer, whilst others may feel a type of insolvency may be a better solution for them, when it isn’t.

However, in Scotland, fears amongst money advisers and the AIB are that the figures are already too austere for consumers, who are in repayment plans, and the SFS’s predecessor, the Common Financial Statement (CFS) which adopts a similar methodology to the SFS, has been instrumental in large numbers of Debt Payment Programmes under the Debt Arrangement Scheme failing.

Scottish Government Minister Paul Wheelhouse has recently announced plans to introduce new rules that even if the SFS is used for the DAS in future, it will not be necessary for consumers to propose paying all their disposable income to their debts each month.

Comparative Studies

The problem with the Standard Financial Statement, like the Common Financial Statement is both seek to determine what is a “reasonable” level of expenditure by looking at the average expenditure of the lowest 20% in the Office of National Statistics Living Costs and Food Survey. This survey looks at what people are actually spending, rather than what they require to be spending to maintain a reasonable standard of living.

The consequences of this can be seen in the guidance notes for the Common Financial Statement 2018, which actually saw “trigger figures” for categories of expenditure reduced, despite inflation running at 3%.

However, as both the CFS and the SFS both look at what people are spending, rather than what is needed for a reasonable standard of living, the methodology used can result in expenditure amounts being downgraded at a time of rising living costs. This is for the simple reason that with stagnating income levels, rising living costs and much expenditure in recent years being driven by consumer borrowing, which is now becoming harder for lower income groups to access, people are now being forced to spend less.

This has led to some uprating of figures in the SFS, by removing for example, some of the lower income groups in the Living Costs and Food Survey sample group. This has included those in receipt of Universal Credit and has contributed to the uprating of the average expenditure overall within the study group.

Scotland’s Dilemma

The problem for Scotland is whether now to adopt the SFS, which the Accountant in Bankruptcy have recommended or whether to seek an alternative to the Common Financial Statement 2018 when it expires in 2019?

The problem is the SFS has proven volatile in the first year of it’s existence, with initial concerns in Scotland that the trigger figures for the SFS 2017 were too low and would have led to more consumers being presumed, albeit the presumption is rebuttable, as having unreasonable expenditure amounts.

There was also a concern many consumers who were wishing to utilise the Minimum Asset Route into bankruptcy may be found to have disposable income and, therefore, be deemed ineligible to apply, forcing them to use full administration bankruptcy procedures instead. This in turn leads to complicated debates as to what types of income can consumers legally be expected to pay their debts from. There is no question, for example, that consumers cannot be forced to pay towards bankruptcy from benefit only income, although the AIB do hold that contributions can be taken from child maintenance money (for a fuller debate on this issue, see here). The consequence is that people whose only income is benefits and child maintenance, may be forced to use full administration bankruptcy simply because the AIB believes it is legitimate to take a contribution from income that is paid to a child via their parent and the CFS or SFS help determine that the consumer can afford a contribution.

In support of adoption of the SFS 2018 guidelines, however, the AiB have released a comparative study of financial statements which they believe shows the SFS 18 guidelines are more favourable than the CFS 18 guidelines (although a smaller study by Money Advice Scotland suggests this may not be the case). What the AIB have not released, however, is a comparative study between SFS 18 and CFS 17, which still applied in Scotland until a few weeks ago, or any response to the recent downgrading of expenditure items in CFS 18 that resulted from the methodology that can see average expenditure amounts fall at times of increasing living costs.

In addition to this, no explanation has been provided as to why the CFS 18, in the guidance notes, was not given the same corrective treatment that SFS 18 received by removing lower income groups from the sample group.

The problem is now likely to be exacerbated as the Scottish Government have announced that even if SFS 18 is adopted in Scotland, new changes will not require applicants to the Debt Arrangement Scheme to propose 100% of their disposable income to repayment programmes. The fact the Credit Services Association already believes the SFS 18 is overly generous, it’s likely their members would not accept DAS proposals that only offer say 75% of a Debtor’s disposable income as payment, although the AIB will be able to force acceptance using their fair and reasonable test under the Scheme.

The Way Forward

The problem for the Scottish Government is there is no clear way forward.

It was only in 2016/17, for example, that for the first time more debt payment programmes were successfully completed than were revoked. One of the main reasons believed to be behind this being that consumers have been finding that they are being told to pay more than they can afford.

The AIB, however, are reluctant to see contribution levels in any formal solution reduce, as they themselves realise much of their operating costs from fees charged against cases where contributions are made and are expecting, because of a reduced number of cases, a shortfall of approximately £4.2 million in their funding.

The problem is, however, section 89 of the Bankruptcy (Scotland) Act 2016 (2016 Act) requires Scottish Ministers to establish a Common Financial Tool (CFT) to determine contribution levels, that allows for reasonable levels of expenditure by debtors. Whether that has been achieved by CFS 18 that has seen trigger figures reduced for certain categories at a time of rising living costs is questionable.

Whether designating the SFS as the new CFT will achieve this is also debateable, considering it’s volatility and the fact key stakeholders are already questioning the recent uprating of figures and calling for a further review as soon as possible.

The question now must be asked, as the CSA, is part of the governing body for the SFS and accepted the 2018 figures, whether other governing body members also have concerns?

The question also has to be asked if a further review of the SFS or even the CFS were to see a further downgrading of the figures at a time of rising living costs, whether Scottish Ministers would be fulfilling they obligations in creating a tool that allowed for reasonable expenditure by consumers?

The danger being that in designating either the CFS or the SFS as the Common Financial Tool, Scottish Ministers are delegating this legal responsibility that they have under section 89 of the 2016 Act, to a third party that does not have such a legal responsibility, is not accountable to Ministers or Parliament and does not publicly release it’s trigger figures for public scrutiny or comment.

Mis-Use of Trigger Figures

One argument is that much of the problem arises from a misunderstanding of how trigger figures should be used.

Creditor and AiB concerns are they are used as an allowance by money advisers for their clients, whereas money advisers complain they are used as a cap by the AIB and creditors to drive down the reasonable living expenditure of consumers, which if you wish to exceed places an increased administrative burden on the money adviser and evidential burden on the consumer.

You then get anecdotal stories from money advisers of clients having to provide evidential proof of purchasing incontinence pads, or having to explain how the Disability Living Allowance of their children is spent or of having to fight to ensure contributions are not taken from the child maintenance money of children to pay towards their parent’s debts.

The problem is there is a lack of understanding by the Money Advice Service as to how trigger figures are in practice used. They are clearly a key battle ground for the AIB, money advisers and creditors alike, as recently evidenced by the concerns raised by the Credit Services Association and their calls for them to be downgraded.

A Scottish Solution?

There is now a clear and comprehensive case for Scotland to devise it’s own Common Financial Tool.

There is no overwhelming case for a UK wide solution, albeit it is clear it would be preferable from the perspective of UK wide financial service organisations and also debt advice bodies.

However, there is no UK wide system of laws for dealing with debts; debt law historically always being different under Scotland’s legal system and being devolved to the Scottish Parliament.
Also, unlike the rest of the UK, the Common Financial Tool was placed on a statutory footing in Scotland in 2015 and carried with it particular legal responsibilities for Scottish Ministers that the Money Advice Service, who own the SFS and the Money Advice Trust, who own the CFS, don’t have either in Scotland or elsewhere in the UK.

In addition to that, it is clear that Scotland, with the recent proposals by Scottish Ministers as to how contributions in the Debt Arrangement Scheme are determined, has already begun to diverge further from what is likely to be considered good practice across the UK and by the SFS governing body.

Clearly it would now be more advisable for the Scottish Government to look to establish it’s own Common Financial Tool, that is best suited to the peculiarities of the Scottish system of debt laws, with 48 month payment periods in Bankruptcy and a Debt Arrangement Scheme, where not all a debtor’s disposable income has to be offered as a contribution in a payment plan.

Scottish Debt Policy is Broken

Scottish Debt Policy is Broken

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

Debt Arrangement Scheme: Can it Be Fixed?

Debt Arrangement Scheme: Can it Be Fixed?

New proposals by the Scottish Government to introduce changes to the Debt Arrangement Scheme (DAS) are to be welcomed (See Debt Arrangement Scheme: The Way Forward). However, the question is, do they go far enough to save the Scheme, which saw a 49% reduction in take up following the introduction of changes in 2014-15 and remained 46% down in 2015-16, on the number of cases approved in 2014-15?

Debt Laws Too Debtor Friendly

The decline, which partly followed the adoption of a number of legislative changes which were introduced between 2014 and 2015, were underpinned by a belief that debt laws had become too debtor friendly and saw the number of approved programmes fall from 4,161 in 2014-15 to 2,043 in 2015-16, before slightly increasing in 2016/17 to 2,233. It is anticipated the slump in take up of Debt Payment Programmes (DPPs) under the DAS will, however, continue in 2017/18, based on reports from the first three quarters suggesting figures for the full financial year may be as low as 2,443, still representing a 41% reduction on the number of cases approved in 2014/15.

The 2014-15 changes included provisions under the Debt Arrangement Scheme (Scotland) Amendment Regulations 2014, which required consumers entering the Scheme to include all debts in DPPs and culminated in 2015 with the Commencement of the Bankruptcy and Debt Advice (Scotland) Act 2014 and the introduction of a new Common Financial Tool (CFT), which required debtors to contribute all their disposable income to DPPs.

It is now these changes that the Scottish Government is proposing should be reversed to improve access to the Scheme, which represents an acknowledgement that their previous position that DAS was too flexible was wrong.

Funding Cuts to Money Advice

However, since 2014-15, the amount of money being invested by local authorities in free money advice services has now also fallen from £21 million per year to £11.72 million in 2016/17, representing a cut of 44% (not accounting for inflation) and has seen the number of money advisers being employed or funded by local authorities fall from 370 full time positions (or the equivalent) to only 305 in 2016/17.

The decline in the take up of the Debt Arrangement Scheme, however, cannot totally be attributed to funding cuts, as a report produced in 2017 showed that the decline was not just for consumers accessing the Scheme via the free sector, but also via the private sector (DAS: Is It Broken?).

It is highly likely though with more advice agencies now closing down in the next financial year and further funding cuts to free money advice services anticipated, that the current proposed changes by the Scottish Government are too little too late and will do little to revive the fortunes of the Scheme.

The Future

The question now also must be asked, not just what is the future for free money advice services in Scotland and the Debt Arrangement Scheme, but what is the future for other changes that were introduced in 2014-15? This includes the requirement that consumers wishing to enter formal debt solutions, including bankruptcy, first have to seek advice. The simple fact is such policies, which were presented as providing increased consumer protection in 2014-15, now have the effect of being obstacles as free front-line money advice services continue to experience funding cuts and clients struggle to access free front-line money advice services.

Bankruptcies Down, Protected Trust Deeds Up

The Accountant in Bankruptcy in Scotland have released their third quarter Statistics for 2017-18.

The figures show that the number of sequestration in Scotland have fallen, whilst the number of debtors granting protected trust deeds has increased.

There has also been a slight increase on the number of debtors who have entered debt payment programmes under the Debt Arrangement Scheme.

Speaking on the release of the figures, the Minister for Business, Innovation and Energy Paul Wheelhouse said: “The longer term trend for bankruptcy is very much a downward one and it is heartening to see this reflected in these recent figures.

“There is absolutely no doubt in my mind the UK Government’s persistence with its failed policy of austerity is causing real hardship and strain for financially vulnerable families all across Scotland. They face even more challenges once the impact of the UK Government’s reckless determination to pursue an economically damaging Brexit becomes known.

“However, these Accountant in Bankruptcy figures indicate the numbers of people falling into bankruptcy and signing protected trust deeds are around half of what we saw eight or nine years ago. The Scottish Government is doing what it can to mitigate the worst of these Westminster policies.

“The Debt Arrangement Scheme is the only statutory debt management programme in the UK and we are rightly proud of its success in providing a viable option for those seeking to pay their debts without plunging into insolvency.”

The full report can be accessed here.

Can Benefit Overpayments be Recovered during a Formal Debt Solution?

Can Benefit Overpayments be Recovered during a Formal Debt Solution?

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 .

Learning to Breathe: The English Way

Learning to Breathe: The English Way

Scottish money advice services should pay particular attention to the plans of the UK Treasury for statutory debt management and breathing space schemes for England, Wales, and Northern Ireland.

The schemes, which will not be extended to Scotland, as they fall within areas devolved to the Scottish Parliament, are already provided for by the Debt Arrangement Scheme (DAS) and the Statutory Moratorium process contained within the Bankruptcy (Scotland) Act 2016.

However, early Indications are, that the UK schemes are promising to surpass Scotland’s 14-year-old DAS Scheme in their forward thinking and their protection for financially distressed consumers and may provide a roadmap for improving the Scottish scheme, which in recent years has been struggling to remain relevant.

Length of Breathing Space and Freezing of Interest

The first proposal for the UK scheme, which is worth mentioning, has been called for by Stepchange, and is for the 6-week protection period, that currently applies to Scottish Moratoriums, to be extended to 52 weeks for UK debtors.

Also during that period, UK consumer champion, Martin Lewis, has called for consumers to be protected not just from enforcement action, but also from interest, fees, and charges being applied to their debts (MSE Call on Government to Give People in Debt Real Breathing Space).

If implemented, this would be an improvement on the current position in Scottish moratoriums, which do not freeze the interest and charges on debts (I argued for such a proposal in 2013, in response to the rise in payday lending, but the Scottish Government rejected it at the time, arguing the balance in favour of debtors had gone too far – see Civic Scotland Owes Scotland).

Recognising Debtor Repayments

Another area relates to a recommendation of the Money Advice Service in their recent report: UK Debt Solutions – recommendations for change, which has called for further exploration of debt ‘rehabilitation’, including better recognition of debt repayment.

It is a simple fact in Scotland, regardless of how much the Scottish Government promotes the Debt Arrangement Scheme over other solutions, bankruptcy can have a less damaging effect on someone’s credit rating than repaying their debts can. In bankruptcy, the debtor’s liability for their debts are ended when the debtor receives their discharge, normally after one year; whereas the person who takes ten years to repay their debts, must accept their accounts will show as being in arrears for that length of time (and their account payment history may appear for another six years after that).

Lack of Capacity

Finally, however, it may be that Scotland still has something to teach in relation to statutory debt repayment schemes, other than the mistakes we made.

It is quite clear that the UK will face the same problems that Scotland has, in that supply for free services is being outstripped by demand and the creation of a statutory scheme is likely to add to that demand.

In Scotland, it was not until after 2011 that the Debt Arrangement Scheme took off, when rules allowed greater opportunity for the private sector to participate. However, the practices of some parts of the private sector, particularly in relation to fees, are as much a cause for concern as they are elsewhere in the UK in relation to debt management plans.

It is partly for this reason, the Scottish Government have indicated they will consult on the introduction of a form of the Fair Share Scheme which is operated voluntarily by the UK clearing banks with organisations like Stepchange and Payplan.

The simple truth is, that although organisations like the Money Advice Trust appear to want to restrict provision of the service in the UK to free providers (Making the Treasury’s breathing space scheme as effective as possible), the capacity of the private sector will be required, although this does not mean services cannot still be provided on a free to consumer basis.

In conclusion

Scotland may have led the way in the UK with statutory debt repayment schemes and breathing space processes; however, that doesn’t mean we have a monopoly on knowledge. There are still things we can learn, as it is certainly true the Scottish schemes are not meeting expectations.

Money Advice Service Release Recommendations for Changes to UK Debt Solutions

The UK Money Advice Service have released its recommendations for change for UK debt solutions (albeit only a couple of the recommendations will impact on Scottish debt solutions).

The recommendations are contained in a report that can be downloaded here and follows on from a comprehensive study that was carried out by the Money Advice Service into UK debt solutions.

In carrying out the research, the Money Advice Service and the University of Bristol engaged with the Money Advice Sector through expert workshops, interviews, group discussions and a consultation process, which approximately 60 individuals and organisations responded to.

A summary of the recommendations are:

  • A review into fees for debtor applications for bankruptcy in England, Wales and Northern Ireland;
  • The re-introductoon of fee remissions for low-income applicants;
  • Better online information about going bankrupt;
  • More prominent and easy to understand information and tools on the online bankruptcy application portal;
  • Further exploration of debt rehabilitation, including better recognition of debt repayment;
  • The introduction of a statutory debt management scheme for England, Wales and Northern Ireland;
  • Innovations in the equity release market for people who are asset rich, but cash poor;
  • The development of one online income and expenditure portal.
Too Late, Too Late for Debt Advice Services?

Too Late, Too Late for Debt Advice Services?

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

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

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

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

Supply and demand

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

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

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

National agency?

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

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

Equitable fees

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

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

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

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

Past experience

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

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