The Good, the Bad and the Ugly

The Scottish Government have released their response to the consultation they held earlier this year on bankruptcy law reform. Alan McIntosh takes a look at the implications.

After 10 years of progressive modernisation of Scotland’s debt laws and increased debtor protections being introduced by the Scottish Parliament, the current Government have now set out a number of proposals that can best be described as the good, the bad and the ugly. Considered as a whole, the proposed reforms can only be viewed as a backward step and instead of reforming our current system to ensure its fit for an era of austerity, will only likely exacerbate the effects of that austerity on many Scottish consumers and creditors.

The Good is the length of payment holidays in debt payment programmes under the Debt Arrangement Scheme will be increased as will the accessibility of the scheme for joint applications to be made; a new 6 week moratorium period will be introduced for all of Scottish formal debt remedies that will see interest , fees and charges on debts being frozen at an earlier stage and debtors will be provided with protection from enforcement action; there will be earlier discharges for those debtors who qualify for a new “no income” route into bankruptcy; and there will be a common financial tool introduced to harmonise how much debtors pay, regardless of the remedy they use.

The Bad is there are the proposals for a new route into bankruptcy, which will be known as a “no Income product” and be far less accessible than the current Low Income, Low Asset route; there will be an increase in the length of time that debtors will have to pay contributions in Protected Trust Deeds and Sequestrations, from three to four years; there will also be no automatic discharge after one year and debtors will have to apply for this, which will be linked to financial education and co-operation with trustees, increasing uncertainty; the power to make income payment orders will be taken off sheriffs and transferred to the Accountant in Bankruptcy’s office, creating Article 6 issues under the ECHR in relation to the right to a fair hearing as the Accountant in Bankruptcy will also be the trustee in most cases.

The ugly will be the exclusion of debts accrued within 120 days of the debtor entering a protected trust deed or bankruptcy, which will benefit the payday loan companies and others who prey on distressed debtors and only force debtors to delay in seeking protection; there will also be the introduction of a statutory minimum dividend for Protected Trust Deeds, which will limit accessibility to a wealthy few and force thousands more each year to become bankrupt.

To understand the thinking behind these policies, the temptation may be to think it’s the fear of creating a moral hazard that the Government is guarding against, which may lead to people believing it’s too easy to just not pay their debts; but this is unlikely considering it was this Government in 2010 which made it easier for debtors to go bankrupt; and where is the need to guard against such a hazard in a system where the numbers going bankrupt each year has been in decline for the last three years?

More plausibly, at the heart of the Scottish Government programme for reform is the need for the Accountant in Bankruptcy to be fully self funding. Already their level of public funding is at a 20 year low and saw 40% of cuts this year on top of the 37% of cuts the year previous to that.

In actual fact, it’s only when you place the events that surrounded the announcement of this consultation and its execution in this context, does any of it make sense.

In August last year, the Scottish Law Commission at the behest of the Accountant in Bankruptcy began a consultation on consolidation of bankruptcy law. All the indications were the Scottish Government were getting ready to let this much reformed area of law bed in. Then in December, unexpectedly it was announced there would be a root and branch reform of Scots law on bankruptcy to make it fit for the 21st century. No-one had anticipated such a move, especially as the implementation of the Bankruptcy and Diligence Etc (Scotland) Act 2007 and Part 2 of the Home Owner and Debtor Protection (Scotland) Act 2010 had only been implemented; but then it was probably around such times the decisions were made to further slash their public funding.

Then the consultation was hurried. It ran only between February and May this year. There was no underlying, unifying theme underpinning the consultation and when the eventual 124 page consultation document was released, it was made up of what some described as a ragbag of ideas that you wouldn’t expect to appear in the same strain of thought. There was no clear analysis of what was wrong or what the challenges were for the future.

Then there was the bizarre events during the consultation when the AIB announced they were developing a triage advice tool, with funding from the Money Advice Service, despite the fact this was an issue still being consulted on; then an advertisement was sent out to money advisers asking them to apply to be seconded to the AIB to provide an in house advice service, despite the fact they was no statutory role for them to perform such functions.

Then with little notice, it was announced the bankruptcy application fee was to be increased by 100% across the board for debtors, which resulted in a 36% increase in debtor applications as debtors hurried to beat the fee hike and was followed by a 50% decrease in the latest quarterly insolvency statistics.

We now have a non cohesive programme of reform. The good are to be welcomed, but none are that urgent to justify the bill that is being proposed or the hurried consultation process. The bad clearly appears driven to help the AIB meet the financial needs of their service, largely caused by the funding cuts, and the ugly are just that, policies with no evidence underpinning them and almost definitely will have consequences that will harm the vast majority of creditors and debtors.

There was a hope, albeit a tentative one at the beginning of this process, that the Scottish Government was going to rise to the challenge of the economic crisis and use imagination and innovation to develop a system that would help Scottish consumers and creditors tackle the problems facing both.

That hope, I believe, was dashed yesterday with the Government’s response to the consultation on bankruptcy law reform. It’s not all ugly, some of it is good, but on the whole its bad and arguably we’d be better off with what we have.

 

DAS: The debtor’s panacea to bankruptcy?

DAS: The debtor’s panacea to bankruptcy?

First published in Scottish Legal News

Historically, in Scotland, if you were facing a creditor’s petition for sequestration, there was little to be done. Options under the Bankruptcy (Scotland) Act 1985 were limited. You either had to show it was not competent to award sequestration, or you had to be in a position to repay the debt in full or offer sufficient security for it.

For such reasons, over the years the threat of sequestration has been an invaluable tool in the debt recovery toolbox, especially in relation to debtors with assets that could be put at risk. The threat of an expired charge or the delivery of a statutory demand for payment was often sufficient to motivate the debtor into action.

Since 2004, however, the effectiveness of these debt recovery tools has been eroded with the Debt Arrangement Scheme. Under current regulations, introduced in July 2011, not only is it possible to defeat a creditor’s petition by applying for a Debt Payment Programme, but it’s also possible to prevent one being raised. This could provide an explanation why even in the last year the number of sequestrations awarded on the basis of creditor petitions has fallen by almost 25 per cent, despite the total number of sequestrations in the same period (2011/12) only having dropped by just 3 per cent.

The Debt Arrangement Scheme, however, is much more than a bankruptcy stopper. Launched in 2004, it suffered from a slow start, but last year saw over 3,300 programmes being approved by the Accountant in Bankruptcy in her capacity as DAS Administrator.

It is unique in that it provides individual debtors with a multiple debt remedy that is not a form of personal insolvency and does not require assets to vest in a trustee. It also prevents creditors using diligence or sequestration once a debtor is in a programme and freezes all interest, fees, penalties and charges. Other features are it provides a payment distribution service and an intimation procedure which can be used to obtain six weeks interim protection to allow an application to be made. It also is increasingly being used for not only consumer debts, but also for business debts by sole traders, partners and company directors, where personal guarantees have been provided for corporate loans.

In one recent case we acted in, a client who owned commercial property of significant value was cited to appear in front of a sheriff to show why sequestration should not be awarded. We assisted him in securing a continuation to allow an application to be made to the Debt Arrangement Scheme, which eventually was successful. The petition for his sequestration was dismissed and he was able to enter into a repayment programme with his creditors, allowing his assets to be protected.

In another case, a sole trade who employed six staff and ran a haulage firm was able to protect not only himself, his home, his business assets, but also his business and staff’s employment by applying for a programme.

In all cases, whether its business or consumer, the key is pulling together credible offers for creditors and presenting them as such. As with protected trust deeds, creditors get a right to object, but where none do, they are deemed to consent. Where creditor objections are received, the DAS Administrator applies a fair and reasonable test to see whether she believes it should be protected or not.

Increasingly, we are finding the use of discretionary conditions in applications, such as proposing assets will be realised during the scheme, is widening the availability to more clients, particularly business clients who would not be able to repay their debts within a fair and reasonable time (ten years being the maximum period accepted). Such proposals, however, do tend to take more planning and professional expertise to put realistic valuations on property; where businesses are involved it’s also necessary to ensure proposals are realistic and credible and will assist the business in not only surviving but flourishing.

For creditors, however, although the scheme may make sequestration harder to secure, it does provide more attractive returns. Even in the longest running scheme, it is likely at least 30p in the pound will be received back within the first three years: few bankruptcies will pay so much. The added benefit in this is even after three years, if the scheme has not been completed, the debtor continues paying.

The scheme is also increasingly been seen as a possible tool in the Scottish Parliament’s toolbox that could allow them to use it more effectively and deal with the growing problem of payday loans. Consumer credit law and interest rates are out with their legislative authority, but debt isn’t and Govan Law Centre’s principal solicitor, Mike Dailly has drawn up a discussion paper proposing a new payday loan, fast track, DAS programme.

The future for DAS is bright: the Scottish Government have indicated they are fully behind the Scheme and consider it a growing success and one they wish to encourage as an alternative to bankruptcy and protected trust deeds. From what I can see, they have already achieved that and, for once, I share their optimism.

The Rangers Effect (or is it Sevco 5088…?)

The Rangers Effect (or is it Sevco 5088…?)

As the Scottish Government considers creating a new business Debt Arrangement Scheme, Alan McIntosh explains how the current scheme works and how it can be used to help flailing businesses and consumers.

If you are like me, you will have followed the demise of Rangers football club with some interest and probably participated in many discussions about Company Voluntary Arrangements (CVAs), Administration and Corporate liquidations that seemed to spring up everywhere, including online, over the water cooler and at dinner.

Remarkably much of it has been well informed and has led me to wonder whether there could be a Ranger’s effect: a silver lining in those dark clouds where more businesses, now their awareness has been heightened, begin seeking advice and assistance when they begin to experience financial difficulties.

I have seen a number of small businesses over the last year that fit this description, whether it’s been the result of rising fixed costs, adverse weather, falling sales or HMRC pursuing a more aggressive recovery strategy.

Although CVAs, Administrations and Corporate liquidations are inappropriate for these types of business models the Scottish Debt Arrangement Scheme can be used to assist them. A formal debt management tool that was introduced in 2004 by the Scottish Government, the Scheme was created to help debtors manage their personal liabilities and was provided for initially by the Debt Arrangement and Attachment (Scotland) Act 2002 and the Debt Arrangement Scheme (Scotland) Regulations 2004.

It was updated in 2007 to include provisions which allowed the freezing of interest and charges and again in 2011 to widen access to the scheme. The Scottish Government is now seeing over 4,000 applications being made each year to the Accountant in Bankruptcy, in her role as Debt Arrangement Scheme Administrator.

If debtors wish to apply to the Scheme they must do so through an approved money adviser or insolvency practitioner, who gives holistic advice to the debtor on their finances and options and then makes an application on their behalf. Creditors of the debtor get 21 days to agree or object to a plan and if they fail to do so are deemed to have consented. If no creditor objects or responds the plan is automatically approved. Where someone does object, it is sent to the Accountant in Bankruptcy who applies a fair and reasonable test to see if the plan should be approved.

Where plans are approved, it is not possible to sequestrate the client, execute a earning or bank arrestment or carry out any other form of diligence. Where an earnings arrestment has been executed, it is formally recalled.

Although an application to the Debt Arrangement Scheme will prevent a petition for bankruptcy being raised in the sheriff court by a creditor, where it has been raised prior to an application being made or intimated, the debtor can seek a continuation from the sheriff under s12 (3C) of the Bankruptcy (Scotland) Act 1985 to allow the DAS application to be decided.

The effect of approval is the debtor gets full protection and is allowed to repay their debts each month through an appointed payment distributor to the Scheme.

What makes the scheme suitable for sole traders and individual partners is not only does it protect individual debtors, but Regulation 25 (3) of the 2011 Regulations allows the DAS Administrator when considering whether a programme should be approved to consider anything she considers relevant. The fact certain business assets may have to be kept, therefore, to produce an income is relevant and means the owners of such businesses can often enter the scheme, obtain protection and continue trading to help pay off their debts.

Discretionary conditions are also possible in making an application to the Scheme and it can be proposed that the realisations of assets will be delayed until a later date or if at all or where it is known assets will become available, that at that point these will be used to reduce the outstanding balances.

The many businesses that are using this scheme at present may not be on the scale of Rangers Football Club, but it is providing many with vital breathing space to reorganise their affairs and seek advice for the first time. It is a credit to the scheme that this has been possible and is providing many small Scottish businesses with a life line during the current economic turmoil.

It also provides fantastic returns for creditors with the longest scheme running generally no more than 10 years, meaning in reality creditors receive a 10 pence dividend for each year a plan operates. These results compare favourably with other remedies such as protected trust deeds and sequestrations.

It may be some time before the Debt Arrangement Scheme attracts the same attention that corporate insolvency has, barring a high profile application being made by someone, but its popularity is only likely to continue to grow.

Money Advice Update – April 2009

Money Advice Update – April 2009

First published in the April 2009 edition of SCOLAG.

The first quarter of this year, unsurprisingly, has been one of rumours and speculation for the money advice community.  Advisers have been eager to discover what changes the Scottish Government would introduce to help normal, hard working families with the credit crunch. 

As the picture begins to crystallise, the wait is almost over.

DEBT ACTION FORUM

Fergus Ewing, the Minister for Community Safety, began by announcing on the 13th of January that he was launching a Debt Action Forum to ensure the Scottish Government was doing everything within its powers to assist debtor’s struggling with the current financial downturn. There would also be a special housing sub-group to look at the issue of what else the Government could do to prevent repossessions[1].

The Forum has now met four times and is due to submit its proposals by the end of May.

Already a number of proposals have been considered, such as voluntary protocols for collections agencies and contribution only trust deeds, which may exempt debtors’ homes, with the consent of creditors.

It has also been mooted the possibility of the AIB expanding its functions, to provide an online and telephone advice service[2]. This is the reoccurrence of an earlier debate that took place during the passing of Bankruptcy (Scotland) Act 1993.

Then it was dismissed as a possible conflict of interest and it is believed many of the arguments which were valid then, are still valid today. It has also been expressed that it will be a duplication of existing services, provided by the National Debtline. A service already funded by the Scottish Government.

DEBT ARRANGEMENT SCHEME

The Accountant in Bankruptcy has also announced she will be taking over the full administration of the Debt Arrangement Scheme, including the management of cases. It is hoped this will free up the time of local Money Advisers, in order that they can devote more time to providing face to face advice to clients.

Other proposed changes to the Debt Arrangement Scheme, will be:[3]

  • Debtors being able to apply directly to the Scheme, through an online application process or an Approved Adviser
  • There no longer being a requirement for debtors to have two or more debts, allowing debtors with single debts to apply
  • The abolition of deemed consent, which allowed a creditor’s consent to be implied, when they fail to respond to notifications
  • The extending of the DAS Administrator’s power to apply a fair and reasonable test, in deciding if a payment programme should be approved, unless creditors’ with more than 50% of the total debt, actively express their consent.
  • A requirement for debtors to be able to make a minimum payment of £100 per month, or 1% of their total debt, whatever is the highest, towards their programmes and complete it within 10 years at most

It is hoped these changes will provide one point of contact for all debtors and creditors and increase the legitimacy of the scheme, as a result of it being operated by a Scottish Government agency.

It is also intended, despite the expansion of the gateway into the Scheme, debtors will still be encouraged to seek the advice of money advisers first. Although this will remove the requirement for Approved Money Advisers, it is likely money advice services will continue to play a pivotal role in the Scheme, particularly if the low Income, Low Asset Bankruptcies are an indication of the needs of debtors, where up to 90% of all applications are being made via advisers.

The other change, that debtors with single debts will be able to apply, will address some of the concerns that too much court time is taken up with Time to Pay Directions and Orders under the Debtors (Scotland) Act 1987. However, it is unlikely this provision will not be as successful as it could be, if debtors with single debts are still required to make a minimum payment of £100 per month. In the case of multiple debts, the minimum payment criteria is unlikely to be too great an obstacle, as the average payment in a Debt Payment Programme is already well in excess of this.

The removal of deemed consent will address the AIB’s concerns with lengthy repayment programmes being approved as a result of creditor’s failing to respond (over 90% of DPPs are currently approved as a result of deemed consent)[4].

It is, however, unlikely to do anything to address the lack of participation by creditors, and is likely only to encourage their continued lack of involvement.

BANKRUPTCY AND DILIGENCE ETC (SCOTLAND) ACT 2007

The new statutory Action of Arrestment and Furthcoming appear set to come in to force from April 22nd 2009, as are the further changes to inhibitions (see SCOLAG 375).

Earning Arrestments

From the 6th of April, new Earning Arrestment Schedules will be implemented.

The minimum amounts protected from arrestment, will change  to:

  • Daily: exceeding £13.50
  • Weekly: exceeding £94
  • Monthly: exceeding  £410

There will now be a clear flat rate of arrestment of 20% from any amount above those figures, up to:

  • Daily:  £88
  • Weekly: £617
  • Monthly: £2,680

After which 50% of the earnings will be deducted.

Land Attachments and Adjudication for Debt

Alex Salmond’s announcement in August 2007, at the Citizen Advice Scotland conference, that he will not allow the new diligence of Land Attachment to be used against the principal home, continues to delay its implementation.

Gillian Thompson, the AIB, has also expressed concerns that there may need to be further changes to the BAD Act 2007, as the legislation may no longer hang together.  There is now likely to be a three month consultation on the future implementation of the changes in diligence, beginning in March 2009[5].

What is of more concern, however, is the continued delay in abolishing Adjudication of Debt, which should have been abolished with the implementation of Land Attachments.

The delay allows creditors to increasingly use this diligence, interest in which has been revived, with the number of adjudications being registered in 2007/2008 being in their hundreds, whereas a few years ago, the number registered could have been counted on one hand. 

This situation is clearly contrary to the policy of the current Government, that is unsecured creditors should not be able to attach the principal home of debtors.

Money and Residual Attachments

It is now intended the new diligence of Money Attachments, will be implemented in July 2009. This will allow Sheriff Officers to attach the money of debtors, when it is in their possession, but not when it is kept in a dwellinghouse.

Residual Attachments, which, it is expected, will be used to arrest intellectual property, will be implemented from autumn 2009 onwards.

BANK CHARGES

The bank charges test case continues to work its way through the English legal system.

After the banks involved in the case decided to appeal the decision of the High Court, the Court of Appeal has now decided the charges can be subject to the fairness test contained in the Unfair Terms in Consumer Contract Regulations.

Although the Court refused the right to appeal, it is likely the banks will appeal directly to the House of Lords.

All cases, challenging the legality of the charges are likely to remain on hold, until the case is decided definitively.

MORTGAGE TO RENT AND SHARED EQUITY                    

Mortgage to Rent

The Scottish Government has now released details of their new Mortgage to Rent Scheme, which was launched in March 2009.

The Scheme aims to allow social landlords to take over the ownership of the homes of homeowners who are at risk of losing their property, either as a result of arrears with secured lenders or through insolvency and allow them to remain in possession as tenants.

The eligibility criteria for the Scheme will largely remain the same as before, although a list of average prices for homes throughout Scotland will be published and, other than in exceptional circumstances, it will not be possible to apply should the homeowners’ property be above the average value. The value of the property will be the value of the home, with all necessary repairs carried out to make it habitable.

A £6,000 grant will be available to the Social Landlord to carry out all necessary repairs.

If repairs, costing more than £6,000 are required, the application will only go through if the excess can be found from other sources.

Where there is equity, the debtor will be able to retain £8,000 of it, when under 60 years of age and £12,000m, when over 60 years of age. This source can be used to pay for repairs in excess of £6,000.

It will also not be possible to apply should the homeowner have more than 25% equity, unless the debtor is in a Trust Deed or has an interest only mortgage.

One important change will be that it will no longer be necessary for the home to be in imminent danger of being repossessed or for the lender to have initiated legal proceedings. Now, providing the owner has not made 3 months full payments and there are one month arrears, it will be possible to apply, providing all other UK home rescue schemes have first been exhausted.

Mortgage to Shared Equity

The Government Mortgage to Shared Equity Scheme will be similar to the Mortgage to Rent Scheme, in its’ intentions: that is to keep families in their homes. However, unlike the Mortgage to Rent Scheme, this entirely new remedy aims to allow debtors to retain some ownership of their property.

It will not be open to anyone with less than 25% equity and again debtors will need to exhaust all other UK home rescue remedies first. It will also not be available to any debtor who is insolvent, either as a result of signing a Trust Deed or applying for Sequestration.

Debtors applying for this Scheme will also need to have a capital and interest repayment mortgage.

It is intended a Government adviser will assess what level of share of the debtor’s home the Government will need to purchase, in order to reduce their monthly mortgage payments to an affordable level.

The debtor will not be required to pay rent to the Government for their share of the home. 

In order to apply for both Schemes, debtors will first need to seek advice from an agency that is a Citizen Advice Scotland or Money Advice Scotland member.

[1] http://www.aib.gov.uk/News/releases/2009/01/13215620

[2] http://www.aib.gov.uk/News/releases/2009/03/13163726

[3] http://www.aib.gov.uk/News/releases/2009/03/13114653

[4] http://www.aib.gov.uk/Resource/Doc/4/0000669.pdf

[5] Reaching for Reform, Credit in Scotland Supplement, Credit Today, issue March 2009

Money Advice Update – January 2009

Money Advice Update – January 2009

First published in the January 2009 edition of SCOLAG

Bankruptcy and Diligence Etc (Scotland) Act 2007

Although at the time of writing no draft regulations or precise dates are available, the next stage of implementation for the Bankruptcy and Diligence Etc (Scotland) Act 2007,  appears to have been delayed and will be at the end of April 2009, rather than early 2009, as initially intended.

Actions of Arrestment and Furthcoming

Previously a common law diligence, Actions of Arrestment and Furthcoming are commonly used to arrest bank accounts, but can be used to arrest any moveable property held by a third party. Soon to be almost entirely a creature of statute, the Debtors (Scotland) Act 1987 is to be amended to include the rules governing them under a new Part 3A[1].

Importantly, there will now be protection for a minimum amount held in bank accounts[2]. The amount to be protected from arrestment will be the monthly amount, under which no deduction can be made using an earnings arrestment: currently £370[3].

There will be no automatic protection for social security benefits or tax credits held in bank accounts, but a recent decision by Sheriff Principal Kearney[4], held where social security benefits and tax credits, paid into an account can be identified, it will not be possible to subject those funds to arrestment[5]. This leaves open the possibility that where benefits paid into an account exceed £370, then providing they can be identified, it may be possible to protect funds over the minimum amount.

Under the new provisions, despite the heading under Part 10 of the 2007 Act, there will no longer be an Action of Furthcoming, with funds arrested being automatically released to creditors after 14 weeks[6], unless the debtor agrees to the early release of the funds.

There will be no automatic release of property, however, where the debtor, the arrestee of a third party submits a notice of objection[7]. Notices of objection must be intimated within 4 weeks of the arrestment being executed or final decree being obtained (in the case of arrestment on the dependence). Grounds of objection are the warrant authorising the arrestment is invalid, the arrestment was executed incompetently or irregularly or the property is owned solely by the third party or in common with the debtor[8] (this could include joint accounts or funds held in trust for the maintenance of others, such as children).

Automatic release will also be prevented where a debtor or other person, who the court believes has an interest, applies for release of all or some of the funds on the grounds the arrestment is unduly harsh[9]. In considering whether the arrestment is unduly harsh, the Sheriff shall have regard to the source of the funds (possibly also that they are benefits) and whether other arrestments are already in place (including possibly earning arrestments and the fact diligence has being executed twice on the same funds).

Where a Sheriff finds an objection founded or that an arrestment is unduly harsh, he may restrict or recall the arrestment.

New provisions will also be implemented to oblige arrestees to disclose to creditors, within 3 weeks, the nature and value of the property arrested[10].

Inhibitions

New provisions will also be implemented in relation to inhibitions, which will abolish the bills and letters procedure and will include the authority to apply for an inhibition in extract decrees and documents of debt[11].

A Sheriff will also now be able to grant a warrant for diligence by inhibition, on the dependence of an action[12].

Inhibitions will also no longer confer preference in bankruptcy or insolvency proceedings[13] and will take effect from the date of recording[14].

Accountant in Bankruptcy Reviews

The awaited reviews of the Debt Arrangement Scheme and Low Income Low Asset Bankruptcies have now been published and are available from the AIB website[15].

Unfortunately, the AIB has used different geographic regions to show the number of applications being made with regards both Schemes, making any meaningful geographical comparison of use of the schemes, not possible. More importantly with regards the Debt Arrangement Scheme, it appears the AIB do not currently have figures showing the numbers of homeowners in Debt Payment Programmes. This is unfortunate, as it could reveal to what extent the DAS is being used as a remedy to protect homeowners from sequestration.

Where it would appear LILAs have been a huge success, with over 2,929 debtors applying for bankruptcy using the route between April and July 2008, the Debt Arrangement Scheme has not been as successful, although take up has significantly increased since June 2007 (a five fold increase on that of the previous year).

Significant emphasis continues to be placed by DAS Administrator on the problem of lengthy payment programmes (23% of the cases in the review period are expected to last more than 10 years), but this may only reflect the fact that for an increasing number of debtors, other than surrendering their homes and possibly making themselves and their family’s homeless, such programmes are the only option available.  Again the lack of figures regarding homeownership by debtors in DPPs appears to be a missed opportunity to understand use of the scheme.

The main concern with DAS remains its accessibility for debtors, with, in the review period, no DPPS being applied for or approved in 7 local authority regions.

The AIB has proposed a number of options for the DAS. The options outlined in the review are: do nothing and allow it to continue; abolish it; introduce composition (which could address the issue of DPPs which will last beyond 10 years); the AIB taking over the administration of cases and finally the AIB taking over the administration of cases and removing the need for debtors to apply through Approved Money Advisers.

With regards the last two options, the concept of debtors applying themselves seems unrealistic, when it is considered one of the issues most commonly raised by approved money advisers is that the application process is complex and time consuming.

With regards the DAS Administrator taking over the administration of cases, this may have merit if it was to reduce the workload on approved money advisers. The problems remains, however, the majority of work on cases is at the set-up stage and in carrying out variations. It is likely this work would still have to be carried out by money advisers and, therefore, the benefits of the work being taking in house seem negligible.

The reality is, the problem with DAS is not that it is an unattractive option to some debtors, although introducing composition could make it more so, but there is difficulty in accessing it. Considering the fifth option of removing approved money advisers as a gateway to the scheme is not realistic and in reality money advisers would still need to make most of the applications for debtors, as they currently do for LILA, the issue of increasing the number of approved money advisers remains the only plausible option.

Furthermore, as increasing measures are being taken by both the UK and Scottish Government to protect homeowners from repossession, DAS remains the only credible options open to those with multiple debts facing sequestration and protects them from losing their homes. Indeed, it would seem ridiculous to increase protection for debtors from secured lenders, only for them to lose their home through the actions of unsecured lenders.

Abolition of the Scheme, in these times, cannot, therefore, be a serious option..

In light of this, one suggestion is to leave the rules governing it intact and focusing on increasing access through increasing numbers of approved money advisers.

If any changes to the Scheme should be considered, possibly one is that the current procedure, which allows a debtor to intimate an intention to apply for a DPP and obtain six weeks protection from sequestration, should be increased to six months. This would allow those who can demonstrate a significant drop in income to safeguard their homes, for a period, whilst seeking new employment or methods to increase their income.

It is expected any changes that are introduced, however, will be introduced by June or July 2009 and left unchanged for 5 years to allow them to bed in.

Time to Pay Directions/Orders

Council Tax and Summary Warrants

There appears to be some confusion with regards time to pay measures under the Debtors (Scotland) Act 1987 and their use with regards Council Tax. Prior to April 2008, neither remedy was competent in relation to a debt constituted by Summary Warrant, but now is in relation to Council Tax.

Despite the legislation and explanatory notes to the 2007 Act, suggesting Time to Pay Directions are competent with regards council tax debt, the summary warrant procedure does not allow an application to be made.

Debtors have to wait until a Charge for Payment is served and then they are able to apply for a Time to Pay Order. The detriment to the debtor is this results in them incurring the cost of the charge being served, whereas if they were able to apply earlier, as intended, the further expense could be avoided.

Transferring Powers to Award Proposed

Indications are that the Accountant in Bankruptcy will now be proposing to the Scottish Government that she takes over the role of granting Time to Pay Directions/Orders under the Debtors (Scotland) Act 1987.

It is probably to be welcomed the possibility of removing these remedies from the adversarial environment of the courts and it would make the process of applying, less stressful for debtors.

It raises the issue, however, whether the AIB are now taking on a judicial role.  They now award sequestration, when debtors’ apply, where previously this was the role of the courts. If they are to take over the role of awarding Time to Pays, will this also mean  decrees, which when currently granted by the courts results in an instalment decree. It also begs the question what will happen when debtors wish to dispute the level of their liability and apply for a Time to Pay. Will the AIB adjudicate on these issues or will the courts retain authority on these matters? A further issue is whether debtors or their representatives, will retain the right to make oral representations, as they can currently in front of a Sheriff, or whether that right will be lost? Importantly it will need to be clarified whether the process will remain free to debtors.

With the proposed changes to the DAS, this could see a huge increase in the role of the AIB.

There clearly needs to be proper discussions as to whether this possible increased role is in the wider pubic interest and whether it is appropriate that a government agency takes on such judicial functions. If they take over the role of deciding time to pays under the Debtors (Scotland) Act 1987, why not Time Orders under the Consumer Credit Act 1974 or S2 orders under the Mortgage Rights (Scotland) Act 2001?

Historically, the AIB’s expertise has been in Insolvency and case administration, not in the provision of advice and performing what were previously, judicial functions. If the AIB is to take on wider roles, such as this, there must be more transparency in their decision making process: not just providing guidelines for advisers, but also publishing the detailed guidance they make available to their decision makers.


[1] Section 206, Part 10 of the Bankruptcy and Diligence Etc (Scotland) Act 2007

[2] S73F Debtors (Scotland) Act 1987 (as amended) – when S206 of the 2007 act is commenced

[3] Table B, The Diligence Against Earnings (Variation) (Scotland) Regulations 2006

[4] North Lanarkshire Council v Shirley Crossan & Airdrie Savings Bank, unreported, Airdrie Sheriff Court 2nd May 2008

[5] Although the case Sheriff Principal Kearney decided dealt with arrestments under the common law, the case concerned the inalienability of benefits under S187 of the Social Security Administration Act 1992 and S45 of the Tax Credits Act 2002. It is likely, therefore, the decision may still be relevant for the new arrestments.

[6] S73J Debtors (Scotland) Act 1987 (as amended) – when S206 of the 2007 act is commenced

[7] S73L Debtors (Scotland) Act 1987 (as amended) – when S206 of the 2007 act is commenced

[8]  S73M Debtors (Scotland) Act 1987 (as amended) – when S206 of the 2007 act is commenced

[9] S73Q Debtors (Scotland) Act 1987 (as amended) – when S206 of the 2007 act is commenced

[10] S73G Debtors (Scotland) Act 1987 (as amended) – when S206 of the 2007 act is commenced

[11] S146, Bankruptcy and Diligence etc (Scotland) Act 2007

[12] S15A Debtors (Scotland) Act 1987 (as amended) – when S169of the 2007 act is commenced

[13] S154, 2007 Act

[14] S149 2007 Act

[15] www.aib.gov.uk

The Debt Arrangement Scheme – Is it working the way it was intended?

The Debt Arrangement Scheme – Is it working the way it was intended?

The Debt Arrangement Scheme (DAS) is now approaching its fourth anniversary, but before it reaches that it will go through its second review, which is expected to run between July and December this year. The first review, which was implemented at the end of June 2007, allowed, inter alia, for the automatic waiving of interest and charges on debts included in debt payment programmes, providing they were successfully completed. It also extended the role of the DAS Administrator[1] in the scheme, reducing the role of the Sheriff, and allowing the Administrator, whenever a creditor refused consent, to apply a fair and reasonable test, before approving or refusing a Programme under the Scheme.

Although, there will be a process of consultation in the review, allowing for all stakeholders to participate, it is clear that what is being asked is whether the Scheme is working the way it was intended. The DAS Administrator has indicated she will be looking at a number of factors in relation to the Scheme, primarily the quality of applications being made by Approved Money Advisers[2] and the use of the Scheme by debtors.

The Application Process for Debt Payment Programmes

The Administrator has clearly indicated, through her staff, she is concerned with the proposed duration of some of the programmes being applied for. When the Scheme was originally implemented, there were two principles in the legislation which underpinned when a programme should be approved. The fist of these was contractual freedom, that is the client and the creditors can reach whatever agreement suits them.”[3] The second was where a creditor did actively refuse consent that a fair and reasonable test should be applied.

The DAS Administrator’s concern that the Scheme is being used in a way that was not intended appears to be directed to the first of these routes for a payment programme being approved: that is through the agreement of the debtor and the creditors. This is partly because, at present, where a creditor fails to reply to a notification that a Debt Payment Programme is being applied for, they are deemed to have implied consent. A programme can, therefore, be automatically approved despite the fact no creditor has actively agreed to it, even if it will take twenty years or more to complete. These cases are being automatically approved as a result of the creditor’s active and implied consent. It is true many creditors are prepared to wait lengthy periods for their debts to be repaid, knowing they will in all likelihood recover far less if the debtor chooses another route, such as personal insolvency. It is also true, however, that another significant reason for these programmes being approved is poor creditor participation, resulting in them being deemed to have consented when they fail to reply within the statutory time limits.

Does this constitute misuse of the Scheme? In the situation where all creditors actively consent it would be hard to argue there is any abuse and, therefore, little justification for limiting the principle of contractual freedom, as surely the parties involved must be presumed to know what is in their best interests. When the programme is approved as a result of deemed consent, the question is more complex. There is a strong public interest in the DAS: it provides a remedy for those in debt and restricts the right of creditors, by implying they have consented, when they have not. Where those creditor rights are lost as a result of a legal fiction, there is a duty for the DAS Administrator to ensure any infringement is limited and proportionate.

However, removing the concept of deemed consent is unlikely to be the solution. For a start, the concept is hardly an alien one, already existing in Scots Law in relation to Protected Trust Deeds and was recently reaffirmed with The Protected Trust Deeds (Scotland) Regulations 2008. In the case of trust deeds, the creditor who fails to respond loses far more rights, than the creditor who fails to respond to a notification of an application for a Debt Payment Programme (DPPs pay 90p in the pound in comparison to Protected Trust Deeds, which on average pay only 10-20p in the pound). Also if the concept of deemed consent was removed from the DAS, it would not necessarily increase creditor participation and, arguably, would remove one of the incentives that currently exist for creditors to participate in the scheme: that is, they ignore it at their peril. In terms of restricting the rights of creditors, the approval of a programme still allows creditors to apply for a variation or appeal, on a point of law, and although the DAS does currently include an element of debt relief for debtors from interest, fee and charges, this is only realised if the DPP is successfully completed. The creditor, therefore, retains the right to pursue the debtor for these sums should the plan fail. The creditor whose debts are included in a Debt Payment Programme, therefore, is in a significantly stronger position in regard to his rights, than the creditor with debts included in a Protected Trust Deed or Sequestration. Arguably, therefore, the rights of the creditor who fails to respond to notification are outweighed by the public interest of ensuring creditors act responsibly and meet their obligations to assist debtors facing financial difficulties. It cannot be argued, for example, that the creditor is obstructed from participating in the procedure or is having his rights infringed upon without due process.

In light of this, it is difficult to argue that those programmes currently being applied for, which may have proposed durations of twenty or more years are in actual fact abuses of the scheme. Firstly, the DAS Administrator has said, in the guidance provided, that where it is felt a case is fair and reasonable, an application should be submitted.[4] What is fair and reasonable will always depend on the particular facts of a case and also the views of those involved. It is not possible for an Approved Money Adviser to know in advance whether a creditor will respond or what his view will be.

The possible reason why it is felt such applications may be a misuse of the scheme appears to derive from the second way a DPP can be approved. That is, when a creditor actively refuses consent. As mentioned above, in such situations the DAS Administrator has to apply a ‘fair and reasonable’ test. There is nothing in the legislation that stipulates such a test should apply to a programme when creditors don‘t refuse consent. It would appear, however, the fair and reasonable test is being used as a benchmark against which cases where creditors either do consent, or are deemed to have consented, are being measured. If this is the case, the question needs to be: should the fair and reasonable test be used as a benchmark in all cases?

Possibly the first question that needs to be asked, is how is the fair and reasonable test being applied? At present there is nothing in the primary or secondary legislation stipulating how long a DPP should last, although, The DAS Guidance for Approved Money Advisers does state “…the DAS Administrator is likely to approve anything under 5 years in duration and refuse to approve anything over 10 years. Between these periods will be a matter of individual assessment”.[5]

Although, such guidelines can be helpful, they are arbitrary. They appear to be more for convenience than because they have any basis in fact or in law in determining when a case is fair and reasonable. The regulations do, however, provide a list of other factors that the administrator should consider, such as the total amount of debt, the level of equity a debtor has in his home, the extent to which creditors have consented and any other factors considered appropriate.[6]

At present there is little information what weight is being given, on a case to case basis, to these factors and what other factors are considered relevant. For example, there is no indication whether relevant factors would include the length of time the original debt was for, or whether a client risks losing their home.

The current practice is that when an application is rejected, the Administrator states the application failed the fair and reasonable test. This lack of specificity creates two problems: first it is near on impossible to decide if there are any grounds for appeal by the debtor (albeit it would need to be on a point of law). And, secondly, without any understanding as to the reasoning behind decisions, money advisers are not able to improve the quality of the applications they make.

If the DAS Administrator is determined to restrict the duration of payment programmes under the scheme, possible solutions could be sought from examining English Administration Orders. Although these orders have no statutory limit on their duration, it is generally accepted debts included in such schemes should be repaid within a reasonable time. Where repayment plans are likely to exceed such a reasonable time, a Composition Order can be imposed, only requiring the debtor to repay a percentage of the debt. The DAS could be reformed along the lines of such a model. This would help resolve some of the issues concerning the duration of programmes, although it would involve a greater infringement on the rights of creditors.

Another option used in Administration Orders would be to impose limits on the level of debt that can be included in DPPs, although caution needs to be exercised here as the scheme could become too restrictive. It should also be noted such limits are believed to be the reason behind the declining use of this remedy in England and Wales.

It would still need to be decided, however, how programmes get approved. That is whether the fair and reasonable test should be applied in all cases or whether the principle of contractual freedom should still apply, with or without deemed consent. Also, arguably the grounds of appeal should be widened to include appeals not only on points of law but also on the merits of the case. This would not only improve decision making and accountability, but considering the gravity of the decisions on both creditors and debtors alike and the fact composition of debts could be included, would be in the interests of justice. This would also be in line with the Administration Order model.

Freezing of Interest

The other issue the DAS Administrator has raised through her staff, concerns the reforms that arose after the first review of the scheme. Currently, when a debtor’s programme becomes approved, all interest, fees and charges on their debts are frozen and ultimately waived, should the programme be successfully completed.

Concerns have been raised that some debtors are opting for the Scheme as a less expensive alternative to consolidation loans and as a way of evading their contractual obligations to pay interest. This is without doubt a possibility. However, two points are being ignored: firstly, under the present climate many debtors are not able to access consolidation loans; secondly, even when debtors are able to obtain consolidation loans, they usually face adverse interest rates. This often exacerbates the debtor’s financial situation and can eventually be the precursor to the debtor becoming insolvent.

The same concerns could also be raised with regards sequestration and protected trust deeds, but there is no suggestion that access to these remedies should be restricted because debtors have not yet borrowed enough. The purpose of debtors using these remedies is that they are acting responsibly to manage their financial difficulties and not acting irresponsibly, posing a hazard to other lenders.

Recognising there is the potential for abuse, the qualifying criteria should be that the debtor should be able to demonstrate with their financial statement that they cannot meet their contractual obligations and are, to that extent, practically insolvent. The alternative to this, that the debtor either must first have defaulted on their debts or that a creditor has obtained a court order, would mean that a debtor would need to wait much later before they can act. It was never intended the DAS would work like this, as the idea was to reduce litigation and encourage debtors to act sooner rather than later.

The Future of the Debt Arrangement Scheme

On average, at present, the number of Approved Money Advisers fluctuates between 90 -100 and in some local authority regions in Scotland there are still no Approved Money Advisers being employed by the public and voluntary sector. Part of the problem has been stretched public and voluntary sector services.

As Approved Money Advisers are the gateway which debtors must pass through to enter a Programme, this creates a significant problem. The Debt Arrangement Scheme is a legal remedy and like other remedies, in the interest of justice people must be able to access it. The equivalent would be to say to people you are able to go bankrupt, but only if you live in certain parts of the country and not others.

In the coming review, therefore, attention should be focused on increasing access to the Scheme, either by providing further resources or countenancing greater private sector involvement.

If the private sector is to be encouraged to increase their involvement, the current standards must be maintained, for the sake of both the creditors and the debtors. One of the driving principles behind the DAS, however, was that it should be a free service. This, however, will have to be squared with the fact any private sector involvement will need to be commercially viable.

This isn’t an impossible task. One option would be to expand the statutory fees that creditors are liable for when their debts are included in a Programme. Currently, they pay 10% to the Payment Distributor. If they also had to pay 10% to the Money Advice Service Provider, this could act as an incentive for increased private sector involvement in providing access to the Scheme. Increased take up of the Scheme may also encourage greater creditor involvement.

Creditors, even with an additional charge, would still receive greater dividends than they do when debtors becoming insolvent and would benefit from no longer having to pursue customers for payment.

Whatever reforms come out of the review, what is important, is not only that some of the above problems are resolved, but that the Scheme continues to provide relief to debtors and an organized method for them to manage their complex multiple debt problems.


[1] The DAS Administrator is the Accountant in Bankruptcy.

[2] All applications for a Debt Payment Programme under the Debt Arrangement Scheme, currently have to be made through an Approved Money Adviser.

[3] Pg 2, Foreword, DAS Guidance for Approved Money Advisers (version 4)

[4] A3.3 DAS Guidance for Approved Money Advisers (version 4)

[5] A3.3 DAS Guidance for Approved Money Advisers (version 4

[6] Regulation 26 (2)