The Accountant in Bankruptcy (AIB) has issued guidance to Insolvency Practitioners, cautioning them over the growing practice of Protected Trust Deeds with large amounts of equity.
There is a suggestions such Trust Deeds may be challengeable and may see debtor’s being forced to sell their home or having to remortgage to repay their debt back in full.
See here.
Glasgow MSP Bob Doris has urged the Scottish Parliament to consider taking more action to clamp down on rogue marketing companies who are mis-selling personal debt solutions to vulnerable Scots.
Echoing concerns I raised in an earlier article for the FIRM (Trust Deed Bubble to Burst), the MSP made the calls whilst speaking in the Scottish Parliament.
Discussing the Scottish Government’s new legislative programme, Bob Doris urged MSPs to look closely at the new Bankruptcy and Debt Advice (Scotland) Bill and emphasised the bill could be vital in improving debt solutions for the most vulnerable people.
The Glasgow MSP raised concerns, however, that some lead generation firms were offering Protected Trust Deeds irresponsibly, incentivised by lucrative fees and called for the Scottish Parliament to take further action to regulate them.
At present any firm involved in providing debt advice must have a category E and D Consumer Credit Licence, issued by the Office of Fair Trading (OFT); but there are concerns by many in the debt advice industry that the OFT is an ineffective regulator and many of those involved in providing advice are unqualified or unsuitable to do so.
The Glasgow MSP, therefore, called for the Scottish Government to consider creating an Approved Intermediary Scheme that would require anyone involved in advising on Scottish statutory debt remedies for financial gain to be approved by the Scottish Government.
This Scheme could be deliberately targeted at lead generation firms and would not authorise them in itself to provide access to those remedies, but would allow the Scottish Government to issue guidance to them, or sanction them where they believed it necessary.
By requiring only those who provide leads for financial gain to be registered, this would ensure those that provide advice as part of their profession would not be prevented from doing so, such as elected representatives, solicitors or other professionals.
There is a powerful case for requiring further regulation where firms provide leads for financial gain. The debt advice industry is already recognised as a high risk industry due to the vulnerability of the people involved and the fact debtors have a tendency to panic buy and be distressed sold solutions. If you incentivise those generating leads with lucrative fees, it’s not hard to understand why then the risk of mis-selling or bad advice increases immeasurably.
The Scottish Government do currently operate a similar scheme in that to actually provide access to the Debt Arrangement Scheme, it is necessary to be approved as a money adviser and hold a Consumer Credit Licence, or alternatively be a licenced insolvency practitioner.
The argument, therefore, is to extend this approval scheme to not only those providing access to formal remedies, but also to those providing advice on statutory remedies for financial gain.
The fact such a scheme already exists, however, could also be an argument against any additional regulation. Lead generators acting as intermediaries cannot themselves provide access to remedies, so arguably debtors are already protected in that regardless of who gives them initial advice they must go through an approved money adviser or licenced insolvency practitioner.
However, this ignores the fact the current system is failing. There is fierce competition for referrals and some firms are prepared to pay in excess of £2,000. Also as most advisers and MSPs can testify, too many debtors are ending up in inappropriate solutions.
The simple and brutal fact is lead generators have become too powerful within the Scottish formal debt remedy industry.
They are not as well regulated as those who provide access to debt solutions, they do not have the same administrative and regulatory costs and, therefore, can channel their funds into dominating the internet, TV and radio waves and dominate the flow of clients seeking debt relief and debt management remedies. This is forcing firms to pay more for referrals and in some cases as a result they can exert too much influence over what cases are signed.
Additional regulation would not destroy the market, nor would it prevent legitimate and responsible lead generators from continuing to operate.
However, it would increase the quality of advice and allow the Scottish Government to exercise more control over how their formal remedies are marketed.
More importantly it would ensure vulnerable debtors are protected.
I believe this is what Bob Doris wants and I totally support him in that aim.
I recently explained in a blog how the Scottish Government were taking action to stop the human trade of debtors in the Scottish Protected Trust Deed market.
They have now released regulations that will take effect from the 28th of November.
It’s hoped these regulations will prevent such lead generation firms targeting financially vulnerable debtors and selling on their details to other firms, sometimes for as much as £2,000.
The problem is so bad, Glasgow MSP, Bob Doris, recently highlighted the issue in a speech in the Scottish Parliament and called on the Scottish Government to go further and create an approved scheme for such firms, so they are better regulated.
The problem is when such middle men are receiving such lucrative fees, how can anyone be certain they are receiving “best advice”.
Other possible debt remedies don’t earn them the same kind of money, so there is an incentive for the less scrupulous to wrongly advise.
So if you are thinking of signing a Protected Trust Deed, ask yourself some questions first.
If you have not yet had advice from a money adviser, how do you know a Protected Trust Deed is right for you?
Keep an open mind.
Protected Trust Deeds are only one option. There are others and some less severe.
If you have not spoken to someone, make sure you do speak to someone who is reputable. If they are not a licenced insolvency practitioners, a Citizen Advice Bureau or your local authority, ask them for their consumer credit licence number.
Only licenced insolvency practitioners can actually sign you up for a protected trust deed, so deal with one directly – miss out the middle man.
Alternatively, contact your local free advice agency.
If you have been contacted by someone offering you a Protected Trust Deed, ask if they are actually insolvency practitioners. If not, say no thanks.
If you have been advised to sign a Protected Trust Deed and you are a home owner, ask what will happen to it.
Trust Deeds are a form of insolvency, so your Trustee acquires a right in your home when you sign. This does not necessarily mean your home will be sold or that you will have to leave it, but you have to be sure before your sign. A reputable Trustee will tell you before you sign how your home will be dealt with.
They will also tell you what is expected of you.
If you cannot afford for the next three or four years to pay what is being asked of you, you may be making your situation worse.
If you sign a Protected Trust Deed and then stop paying, the Trustee can hand you back all your debts, plus interest . You could end up owing more than you started with and lose the money you have paid in.
If it is not affordable there may be other solutions.
Ask about Bankruptcy and the Debt Arrangement Scheme. These may be viable alternatives.
If you are being asked to pay a set up fee, refuse.
Never agree to pay money to setup a Protected Trust Deed, they can be set up quickly and you should not have to pay anything until it is protected.
No one should be in any doubt, the Scottish Government’s new proposals for Protected Trust Deed reform is about taking the heat out of the Protected Trust Deed market and ending the trafficking of debtors between lead generation and personal insolvency firms.
It’s no secret that with some firms now reportedly paying in excess of £2,000 for referrals, Scotland’s Trust Deed market has become an overinflated bubble with debtors being “mis-sold” products as new lead generation firms sprout up daily and chase down every possible lead for the lucrative fees that some firms are now dangerously paying.
The exorbitant fees have resulted in saturation level TV and radio campaigns that push and sell statutory remedies as products and don’t promote best advice. For some firms, the use of the products themselves in their company names, like Trust Deed, give away the game.
However, what many debtors are unaware of is in actual fact many of these firms are just lead generators whose entire business model is about trafficking debtors to insolvency firms for ridiculous referral fees. In addition to this, many debtors don’t realise that such levels of fees have created a high risk culture of mis-selling, with many being pushed into solutions that are not appropriate and are destined to fail when payments are not maintained and debts are handed back; but only after the lead generator has been paid and the debtor has made months of contributions towards a remedy that was never going to work.
The practice of paying fees has been allowed in Scotland since 2008, but only for work done. The logic being where someone else has gathered information about a debtor and passed it to an Insolvency Practitioner, then it is acceptable for that practitioner to pay that intermediary for the work they have done. This removes the need for the practitioner to do the work and prevents duplication, although they are still obliged to validate the information provided.
However, whereas such fees began at £2-300, they have exploded in recent years with some English firms now paying in excess of £2,000 per referral, allowing them to buy up significant portions of the Scottish Market.
However, the new Protected Trust Deed regulations which will be laid before the Scottish Parliament in early September and are expected to come into force by November are the clearest sign yet that the Scottish Government intends to curb the practice and clamp down on the mis-selling culture.
The new provisions that will be introduced will no longer allow trustees to recover referral fees as part of their outlays for a case and instead will require them to include them as debts into the case, where they will only receive a dividend on the fees and be treated like other creditors.
The way trustees charge their fees against cases will also change, meaning they will no longer be able to charge on a time and line basis and will have to propose a setup fee at the outset to creditors, with proposals thereafter only to take a percentage of the ingathered funds from the case. Effectively this will mean trustees will have to share the risk of the case failing with the creditors throughout the lifetime of the case and, logically ensure only those cases likely to succeed are taken on at the outset.
In addition to this new provisions will be brought forward extending the minimum time a trust deed lasts from 3 to 4 years, whereas the duration a debtor pays into a bankruptcy will, for the time being anyway, remain at 3 years. This means many debtors faced with the prospect of having to pay a trust deed for 4 years are more likely to opt for a bankruptcy where they will only pay for 3 years; or alternatively where they want to avoid that remedy and can repay their debts within a reasonable timeframe, a debt payment programme under the Debt Arrangement Scheme.
The only obvious conclusion that can be drawn from a consideration of these proposals, is that the Scottish Government are determined to take the air out the over inflated bubble that is the Scottish Trust Deed market.
And who can blame them?
The current state of the market is now at a dangerous level. The risks of mis-selling are high and many vulnerable debtors are now being targeted by firms, who to put it simply should not be advising anyone on anything and it would not be unfair to call them rogues.
The end result will probably be more sequestrations and a greater uptake of the Debt Arrangement Scheme by debtors. It will also probably mean that the high profile TV and radio campaigns will also come to an end as the commercials behind such campaigns will no longer be sustainable. We are also likely to see more insolvency firms, who are far better regulated by regulatory professional bodies, having to market themselves directly to consumers.
If this leads to better advice and less mis-selling, then that’s no bad thing.
I am looking forward to it and being able to breathe again.
It goes without saying that policy that underpins the decision to make legislative reforms, or not as the case may be and is based on premises that are not supported by evidence, produces bad laws or allows bad laws to remain in place.
We have already seen this in relation to the Bedroom Tax and calls to amend S16 of the Housing (Scotland) Act 2001. The Scottish Government’s position is that such reforms are not necessary because if local authorities adopt no eviction policies, then there will be no evictions. However, as tenants throughout the country begin receiving threatening eviction letters from Housing Associations (and councils), such reassurances deliver no comfort.
Equally as dubious is the Scottish Government’s stated intentions that in the coming year they will rebalance Scotland’s personal debt laws by introducing a series of legislative reforms that will make it fairer and more effective.
This may appear reasonable, but when the premises that such legislation is being built on is unfounded, such as the Scottish Government’s view that financially distressed debtors are not paying enough, it should come as no surprise to realise we may end up with debt laws that are unfit for purpose and cause untold hardship.
Evidence of this is transparent in the first of the Scottish Government’s measures to reform the law in this area. The Debt Arrangement Scheme (Amendment) (Scotland) Regulations 2013 should send a warning blast from the whistle of Scotland’s personal debt flagship. It’s not that it doesn’t introduce some welcome reforms, such as the ability for debtors to get adverse decisions reviewed and widens access for joint couple applications; but it also introduces provisions that will reduce the length of time many will be allowed as payment breaks and most worryingly, it doesn’t use the Parliament’s full powers to protect debtors from the rising problem of pay day loans by freezing interest at the earliest opportunity.
This is particularly concerning as arguably a more pressing issues is the number of Debt Payment Plans (DPP) that are being revoked. There is some evidence to suggest that if the Debt Arrangement Scheme was any other financial product, promoting it to debtors could be mis-selling. Recent statistics show that although the numbers applying last year increased by 39.6%, other figures show the number of cases being revoked are now averaging 12% annually, which with the average lifespan of a DPP being 7.2 years, suggests significant numbers will never be successfully completed (in actual fact the figures for the last quarter of 2012-13 showed 21% revocations).
There is no evidence based insights into why such levels of revocations are occurring; however, a strong likelihood must be that in these times of austerity, debtors are struggling to sustain long term repayment plans. Considering it is the Scottish Government’s intention to try and make the Debt Arrangement Scheme the default remedy for all debtors, unless they can satisfy some contrived test that personal insolvency is the better option, this must be a cause for concern. Debtor’s paying for years and getting no resolution to their problems is not a remedy.
It also comes as no comfort, in light of this, that the Scottish Government has also recently announced it intends to draw up new spending guidelines which all debtors will be required to use when calculating how much they can pay towards their debts. These figures they have previously announced will be more stringent than those currently used by advice agencies in the UK and which are accepted by the British Bankers Association and Financial Leasing Association.
It’s not as if there are no recent examples of bad policy making that the Scottish Government could learn from. Last year they made another presumption that wasn’t evidence based and which they didn’t consult on: that low income, low asset bankrupts could afford a 100% increase in the application fee from £100 to £200. Despite evidence to the contrary from Money Advice Scotland and Citizen Advice Scotland the changes were rushed through and the result was a 58% reduction in the number of poor debtors who were able to access the remedy.
It must be accepted the Scottish Government have made some concessions on their initial debt law proposals, but most of these have been to the money advice, creditor and insolvency industry. Those that have not been consulted yet have been the consumers who are financially distressed and who will be most affected by the reforms that are in the pipeline.
It can be in no-one’s best interest for tens and over the long term, hundreds of thousands of consumers to be left cash strapped and impoverished because of debt; particularly as the vast majority of those creditors they owe are in actual fact high street banks and lenders who have been bailed out by the public purse (and very often have sold on the debts for pennies to debt purchasers who speculate on profiting from diminished returns).
The truth is the proposition that is being advanced by the Scottish Government that debtors are not paying enough and can afford more, has no evidential basis. The arguments are based on the same Jeremy Kyle School of thought that underpins much of the UK Government’s benefit reforms. On the contrary, there is substantial evidence of poverty being a problem for many debtors and the only evidence of systemic failure that exists, is not in Scotland’s current debt laws or insolvency industry, but in the credit industry that left so many debtors with unaffordable levels of personal debt.
Over the next couple of months I hope to review in more detail the Scottish Government’s plans for legislative reform, highlighting the good, the bad and the ugly of what is being proposed. I also hope to show what is being developed is a personal debt strategy that in many ways risks being based on unfounded premises, antiquated prejudices and in some cases an outdated, Dickensian attitude towards debt in a modern, credit based economy.
The 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.
First published in Scottish Legal News
Alan McIntosh explains how the Scottish Government’s response to its Bankruptcy Law Reform Consultation will lead to thousands more debtors unnecessarily becoming bankrupt.
When the Scottish Government announced late in 2011 that it intended to consult on bankruptcy law reform, it came as a surprise to most who worked in the industry. The Bankruptcy and Diligence Etc (Scotland) Act 2007 had only been passed a few years earlier and part two of the Home Owner and Debtor Protection (Scotland) Act 2010 had only commenced in November 2010.
There had also been an announcement in August 2011 that the Scottish Law Commission had been asked by the Scottish Government to consult on consolidating Scottish Bankruptcy law, suggesting the intention at that time was to allow this much reformed area of law to bed in for the foreseeable future.
Then there was the announcement by the Scottish Government that it intended to consult on further reform to create a system suitable for the 21st century.
In its response to that consultation yesterday, however, it became clear although there a number of admirable reforms being proposed, at the heart of the reform agenda are changes that will not benefit debtors or creditors, but instead result in thousands of debtors each year being forced into sequestration in an attempt to address the funding crisis that the Accountant in Bankruptcy’s office is facing due to the Scottish Government’s policy of full cost recovery.
Public funding of the Accountant in Bankruptcy’s office is now at a 20-year low, with 40 per cent of cuts this year following on from 37 per cent of cuts last year. To address its current funding crisis, other than making cuts themselves, the AIB, has to find other sources of revenue. This is only possible in two ways: one is by increasing the fees it charges; and the other is by increasing its market share of the personal insolvency work it undertakes.
In relation to increasing its fees the AIB has already done this in relation to debtor application fees, where it raised the fee in June 2012 by 100 per cent from £100 to £200. This resulted in a 50 per cent decrease in the last quarter in the number of debtor’s applications being made. Fee increases, therefore, carry problems: the more they increase the more that is added to the cost of the remedy and the less people will use that remedy, resulting in falling fees and increasing costs per unit of work you undertake. It’s a vicious circle.
Increasing market share, however, provides more potential, although to do that you must compete with the private sector, except in relation to Low Income, Low Assets bankruptcies, where only the Accountant in Bankruptcy’s office is allowed to be appointed. In relation to other types of sequestrations, the AIBs office is the default trustee, meaning where a debtor chooses or cannot appoint a Licensed Insolvency Practitioner, the AIB acts. Previously the AIB had attempted to increase its market share of bankruptcies when part 2 of the Home Owner and Debtor Protection (Scotland) Bill was announced by proposing only they could act as trustee when the new route of certificate of sequestration was used. However, that proposal was controversial and a breach of competition rules and had to be dropped.
Since then, there has been increasing debtor and money adviser dissatisfaction with how the AIB treats debtors when they are the trustee and this has resulted increasingly in debtors appointing their own licensed insolvency practitioner. The main source of this dissatisfaction has surrounded the level of contribution the AIB agents are seeking from debtors once they are in place, whereas private insolvency practitioners can normally advise on this before being appointed.
In response to this, the Scottish Government have now proposed they will create a common financial tool which will harmonise the amount debtors will pay regardless of the remedy they use. This will allow debtors to know beforehand how much they will pay prior to signing up to any remedy and to that extent is a commendable proposal, although as the AIB will be deciding on the details of any financial tool, much of what is contained in the detail will be crucial.
Of more concern, however, is the proposal that a new statutory minimum dividend of between 35-50p in the pound be introduced for protected trust deeds. Protected Trust Deeds are voluntary, less formal type of personal insolvency in Scotland and over 9,000 people entered into them last year. They generally provide better returns for creditors than sequestrations and, although the majority only last 3 years, significant numbers do run for four to five years to allow debtors to buy out equity in their properties and pay additional amounts to satisfy creditor criteria for the deeds to be protected.
Legally, all Protected Trust Deeds in Scotland, therefore, are agreed to by creditors as they do get an opportunity to object. The effect of protection being legally all creditors are deemed to have acquiesced in the agreement.
Currently, the average dividend payable in a protected trust deed is approximately 16 pence in the pound. If the level of dividend is statutorily fixed at 35-50 pence in the pound, as opposed to it being agreed freely between the parties involved, the simple reality will be thousands of debtors each year will not be able to afford to such remedies and instead will have to enter more severe and damaging sequestrations. The alternative to this will be to enter into a Debt Payment Programme under the Debt Arrangement Scheme, which could see many debtors being trapped in repayments plans lasting up to 12 years.
This is only one feature of the current proposals being made by the Scottish Government and not all should be condemned, but it must be asked, as the AIB cannot act as trustee in Protected Trust Deeds, whether it is being proposed such criteria should apply to Protected Trust Deeds in the knowledge that it will kill off that remedy or restrict its use. The resultant effect being more will have to use sequestration and with the common financial tool, it must be in the AIB’s calculations that this will increase their market share of sequestrations and, therefore, their income from such work.
If this is the case and part of the strategy of the AIB becoming fully self-funding, the proposals must be condemned. A bankruptcy system that we all know will increase damage to the interests of debtors and creditors cannot be a system that is fit for the 21st century, nor can it be in the interest of the country as a whole to force more people into such a drastic remedy. If it’s not, then the question must be asked, why introduce statutory criteria into what is already currently a very popular remedy?
First published in the March 2009 edition of SCOLAG.
Alan McIntosh argues Fergus Ewing’s new Debt Action Forum needs to consider making personal insolvency in Scotland more consumer friendly and increase protection for homeowners.
The traditional view in Scotland of personal debt, has been the debtor who becomes notour bankrupt, becomes embarrassed by their debts and should realise all their worldly assets for the benefit of their creditors and, hopefully, obtain their forgiveness.
Whether this should be the view in 2009 is debateable. Much has changed with regards insolvency and the stigma attached to it. It is no longer seen, necessarily, as something people should be embarrassed about, but rather as one of the unfortunate financial risks we all face in today’s society, the causes of which are as much out of our control as within it. Also, it needs to be questioned the desirability of such a legal remedy having such dire effects and carrying an embarrassing social stigma in today’s society. It was one thing this being the case, when even as recently as 1985, the number of personal insolvencies in Scotland could have been counted in their hundreds[1], but by the end of this financial year, that number could be closer to 20,000[2]. Also, is it fair the individual should bear the full burden of their downfall, when both the Government and the finance industry are, at least, partly if not equally culpable? From the 1980s onwards, where the origins of this current credit crisis lies, Government done everything possible to deregulate financial services and encourage the growth of the consumer market (underpinned with vast amounts of easily accessible, unsecured credit).
The question now needs to be asked, as we enter the severest recession in 60 years, is whether the thousands of debtors who now find themselves in the position they do, partly as a result of the government and the finance industry’s actions and incentives, should face Dickensian style ruin?
One of the biggest dangers facing many normal working families in the years ahead is their large quantities of unsecured personal debt. It is not uncommon for these debts to equate to 1-2 times the debtor’s net annual income. That is, levels of debt that it should have been obvious to creditors, if not the debtors themselves (many of whom lacked proper financial skills), was ever repayable.
One argument, which has been advocated already by others in Scotland’s wider legal community[3] is personal insolvency is now primarily a remedy for consumers and needs to be modernised, like the sale of goods and contracts for and of services were, to make it more consumer friendly. This would arguably include new protections for debtors and their families. Such protections could include the protection of the family home and the income of debtors’[4], ensuring they and their families are not forced into poverty.
Unlike many legal systems, however, Scotland’s bankruptcy laws have never treated the home of homeowners as an essential item, but as a realisable asset, to be used to swell insolvent estates for the benefit of creditors.
This may have been acceptable in the past, where the number of bankruptcies were small and social housing was more prevalent, but there is something nonsensical about a legal remedy, which treats the toys of a child as an essential item, but not the home the child lives in; or considers a personal computer or television to be something a debtor cannot do without, but does not afford the same consideration to where the debtor lives.
Although, numerous measures have already been implemented by both the UK and Scottish Government to prevent repossessions by secured lenders, little has yet to be done to protect debtors from losing their homes as a result of unsecured debts.
One possibility is for the Debt Action Forum to urgently consider a Dwellinghouse Exemption Act or provisions, exempting the principal residence of debtors, to some degree, if not completely, in sequestrations and protected trust deeds.
Such a measure may seem radical, but is commonplace in many other legal systems. In the USA, for example, Homestead Exemption provisions exist preventing the homes of debtors from being sold by unsecured creditors. In Texas there is no value to the property protected and in urban areas covers up to 10 acres[5]; In New York the home is protected up to the value of $50,000[6]; whilst in Alaska there is a $54,000 exemption[7]. Similar provisions exist in Canada and vary from province to province.
It would seem pointless for legislators, in response to the credit crunch, to take steps to protect homeowners from repossession, only for them to lose their home as a result of failing to pay a credit card or personal loan.
The vast majority of debtors who have accrued large amounts of unsecured debts were never cautioned, like they would have been with secured lending, that their home were being placed at risk, but for thousands of Scottish debtors, this is the reality they face as they now default on credit cards and personal loans.
The difficulty in measuring the true extent of this problem is although it may be possible to determine how many homeowners were sequestrated or signed trust deeds, it not always possible to determine how many of these resulted in the debtor losing their home. Trustees do not regularly force the sale of debtors’ property, although they have the power to. Most bankrupts “agree” to the sale.
As the credit crunch continues to unfold and the true extent of irresponsible lending becomes clear, there is now emerging a danger, for not only over indebted homeowners, but for the public purse, that it will have to mop up this overspill from toxic, unsecured, financial products.
Yet this is already occurring through the publicly funded Mortgage to Rent Scheme, which was initially set up to protect debtors from losing their homes as a result of repossessions. Under the current rules, the social landlord who buys the debtor’s home, with the assistance of a public subsidy, only pays the secured lenders up to the market value of the property or that which is secured over it, whichever is the lesser. Where there is equity, the debtor is only entitled to £8,000 (if under 60) or £12,000 (if over 60). This means often the full price is not paid, but the debtor gets to remain in the home as a tenant. Where, however, the debtor has been sequestrated or has signed a protected trust deed, the trustee is treated as a secured creditor and is paid the full equity. Effectively, therefore, where this Scheme is used for bankrupts to keep them in their homes, public funds are being used to pay the trustees fees and the debtor’s unsecured creditors.
In addition the availability of affordable, appropriate housing in the public sector is already scarce and Shelter has said the Scottish Government needs to make available up to 30,000 homes for rent over the next three years. These numbers may have to increase if the demand on social housing is increased as a result of bankruptcy.
There, however, is an opportunity, with a Dwellinghouse Exemption Act or provisions, to reduce the social affects of the deepening recession and the pressure on increasingly strained public resources.
If the principal home was exempt in bankruptcy, unsecured lenders would have to evaluate the risks attached to their lending more cautiously, especially if they realised they would only be able to recover unsecured debts from moveable assets. This is likely to promote responsible lending.
Another consequence may be debtors will also find it more difficult, even after the economy recovers, to access similarly large amounts of unsecured credit, with more lenders seeking securities for their loans. This will have a cautionary affect on debtors and will avoid the situation where one partner in a family runs up unsecured debts, unbeknownst to the other and is later sequestrated, placing the whole family at risk of losing their home.
It may even create a situation where our homes become just that and not speculative assets, which give people a false sense of wealth and encourage over indebtedness.
[3] Donna McKenzie Skene, & Adrian Walters, Consumer Bankruptcy Law Reform in Scotland, England & Wales
[4] Scots Law does recognise that debtor’s should be allowed to retain amounts needed for their ailiment, but this now needs to be developed with the recommendation in AIB guidance that Trustees use trigger figures when calculating debtor’s essential expenditure. This is current practice in the Debt Arrangement Scheme.
[5] Chapter 41.001, Title 5, Texas Property Code
