It also doesn’t help that the Scottish Government has still not implement S74D of the Debtors (Scotland) Act 1987, which requires lenders within 48 hours of executing a non earnings arrestment to serve on the debtor a Debt Advice and Information Package advising them where and how to seek advice on how to deal with their debts.
In some way name calling is inherently unequal. By reducing someone to a name we turn a person into a one dimensional character and deny ourselves the wisdom that comes with seeing them as human beings. You only need to think of the ways people have referred to others over the years: the wife, the servant, the child, and that is even without degrading myself and quoting the more offensive racist and sexist names that exist.
This is something I have been thinking about recently and particularly how I have fallen into this trap with regards consumers (which is another name) or as I commonly refer to those who are experiencing financial difficulties, debtors. As someone who trained as a money adviser, my everyday terminology when speaking about clients is that they are debtors. This is something I have gradually become uncomfortable with in my role as a social policy officer and trainer for Money Advice Scotland.
When in the company of other money advisers, such terminology rolls off the tongue with ease, but when I am in the company of others, as I more often find myself now, it has gradually dawned on me I am the only person using such derogatory terminology. I say derogatory as its interesting how in Scottish society when you pay your debts you are viewed as a consumer, which denotes you having certain rights and a certain status and more importantly the right to choose between services; but when you become a debtor you lose the privileged of this status and everything that flows from it. This is the terminology that prevails in all those well-intentioned money advice service across Scotland, whether it’s Citizen Advice Bureaux or local authority money advice services (at best you may be referred, officially at least, as a client).
This in itself would be bad enough if it didn’t have serious implications. As, can be seen in more extreme examples such as Nazi Germany or apartheid South Africa, name calling and the characterisation of people in a negative vein, is part of that initial process which ultimately allows those people and their families to be dehumanised and have their rights infringed.
Cheats, Chancers and Debtors
It is, therefore, not unusual in Scotland to hear politicians, when speaking about debtors and the legislation that relates to them as cheats charters or chancers charter (most famously Donald Dewar called Tommy Sheridan’s Abolition of Poinding and Warrant Sales Bill as a “cheats charter” – which has with the passage of time shown to be completely unjustified). In another context I remember speaking at a Credit Today conference held in Edinburgh and listening to Gillian Thompson, the former Accountant in Bankruptcy, stating how low income debtors applying for bankruptcy were money adviser’s dead who were being brought out. She also controversially labelled the Scottish Parliament as being “debtor friendly”, which in the context of that conference could only be interpreted as a criticism: quite arrogant for a civil servant.
Interestingly she did not say the Parliament was consumer friendly (she retired shortly after).
This is important, as it has effects. One of these I touched on in my last blog (Why the poor pay for the poor in modern Scotland) is that debtors will be denied a choice of whose service they use to help manage their debts – despite the fact they will be expected to pay for such services. This would never be acceptable if debtors were considered consumers, which they are.
We Risk De-humanising Ourselves
However, if we stigmatise these consumers and dehumanise them with names, call them cheats and chancers, then we can deny them the choices that the rest of us take for granted. Instead they will be landed with second class state providers of services who can do a good job or a bad one and who can increase their prices year on year, safe in the knowledge their customers cannot walk away.
This is the fate that can befall all of us, for these debtors are us, they are unfortunate consumers. Many of whom have just had the misfortune of suffering illness or bereavement in their families or have been downsized or streamlined in response to the current economic crisis.
Unlike in the past, however, you will no longer find yourself in a debtor’s prison, but you will be stripped of much of the dignity and status of being a consumer and reduced to a debtor, someone who should be treated with suspicion and should be denied the rights and choices the rest of us take for granted. You and your family might even lose your home, a outcome more acceptable if your viewed as a debtor or a cheat, as you can’t be allowed to get away with repaying your debts: even if you don’t feel like your getting away with anything.
Scotland Requires A Respect Agenda
As we work to building a modern Scotland, we need to move away from this culture. In a modern consumer society, if we expect people to go out there and spend and take the risks that we need consumers to take to grow the economy, we must ensure that there are safety nets to protect those who fail. Consumer rights and protections shouldn’t just apply when things are good, but also when they are not.
Consumers deserve to be protected from stigmatisation, especially from those that try to help them and choice shouldn’t disappear when things go wrong.
We need a respect agenda for consumers.
By Alan McIntosh
Be scared, very scared, as Scotland’s Accountant in Bankruptcy seems hell bent, yet again, on trying to spread its tentacles and grow its empire as the de facto godfather of Scotland’s personal debt solutions. Fears are that after receiving a bruising defeat by the personal insolvency industry in relation to its attempts to expand its empire further into bankruptcies and protected trust deeds, it is now focusing its attention on Scotland’s Debt Arrangement Scheme as a means of swelling its coffers and reducing its reliance on public funding.
The Accountant in Bankruptcy is Scotland’s effective official receiver for bankruptcies. It also has a supervisory function in relation to protected trust deeds, a less formal type of bankruptcy. In a different capacity, it is also the Debt Arrangement Scheme Administrator.
One of the success stories of Government Agencies, The AIBs office has year on year been reducing it dependency on public funding and is working towards full cost recovery, so its services come at no expense to the public purse.
However, as admirable an aim as this may be on the face of it, the morality of a government agency pursuing such an objective is morally questionable. Why should one debtor who is financially struggling have to pay more to allow another debtor to access a service? Surely the test should be whether that debtor can pay for their own remedy and where they can they should be allowed to access it. Where another debtor can’t, then society has to decide whether it has a social responsibility to pay for that solution or whether they want to leave that person caught in a debt trap which will not benefit society (see my article on why Scotland needs 200,000 bankrupts). But to disproportionately place the costs of Scotland’s debt remedies on those least able to pay is a morally bankrupt policy.
One of the services the AIB currently provide is to administer Low Income Low Asset bankruptcies. These are bankruptcies where debtors who have more than £1,500 in debt, own no heritable property, have no one asset above £1,000 (or in total £10,000) and are either in receipt of a means tested benefit or effectively earn less than 40 x the hourly national minimum wage rate. All these debtors have to pay a £100 application fee to access the scheme, but the majority of these bankrupts will not pay anything towards their debts, because of their low income and will be discharged from their liability within one year.
There is now talk the AIB office, in its Debt Arrangement Scheme role will aim to take over much of the administration of Debt Payment Programmes under the Debt Arrangement Scheme. These are repayment programmes, which are not types of bankruptcies, which allow debtors to repay their debts in full, whilst protecting them from their creditors. At recent conferences the AIB office has indicated they now want to monopolise this type of work and it is likely if they do they will start charging for the service. Asking debtors to pay is in itself not completely objectionable, as one of the reasons the AIB office has indicated it wishes to take over this role is because public and voluntary money advice services have stated they lack the capacity to do so. Also if debtors who have little or no disposable income, such as those that apply for low income low asset bankruptcies have to pay, then why should those that apply for a Debt Payment Programmes and who by definition have some disposable income not pay? In addition to this for those who enter into DPPs, as the interest and charges on their debts are frozen, many benefit up to the tune of hundreds of pounds each months.
However, the concern is that as the AIB move to full cost recovery, the poor will be used to pay for the poor, with some services being used to cross subsidise other services. It has to be noted that when the AIB talk of full cost recovery, there is no suggestion that the fees they charge debtors are only to pay the cost of providing those services to those debtors. It is likely some are paying more to pay for the services of those that can’t afford to pay. There are also indications that as the AIB continue their journey towards full cost recovery, the temptation will be, with an effective monopoly, to year on year increase the cost and charges to debtors. There is a basis for stating this: in 2008 the AIB began charging trustees in protected trust deeds a one office supervisory fee of £200 per case. Last year this will have raised the AIB’s office close to £2 million. This year that fee was increased to £234 per case, despite the fact the number of protected trust deeds are now likely to begin falling. Also it is extremely unlikely that the supervisory function the AIB performs for protected trust deeds, costs anywhere near the approx £2 million they raised: so effectively this is a profit making service this Government agency is now running. It is clear to many, however, that this is an effective tax on the insolvency industry, with the costs in reality being passed onto those least likely to afford it: the debtor.
This is concerning as there is an alternative and that is to allow the private sector to take over the administration of DAS cases and allow the public and voluntary sector to refer those cases onto them. Although they will also charge and some of those that currently provide it do (with one charging up to £1,800), with more involvement by firms, there will be pressure on them to compete and this should be a force for good driving down the cost of the DAS to debtors. There are already some large UK private firms that already provide fee charging services, with the best of them charging only nominal amounts. It is not inconceivable that in the future, if the private sector were allowed to compete for this work that the service may eventually be free to debtors in Scotland, with the most successful of firms only relying on the 10% that the legislation allows them to charge creditors for providing the service.
It will also be providing the Scottish Government with a means of beginning to regulate the private debt management industry in Scotland, which is currently a role reserved to Westminster, as if they wish to provide access to the scheme, they will need to comply with Scottish Parliament regulations. This will help drive out the rogues and cowboys in the industry.
However, there is currently little indication the AIB, which is responsible for developing government policy in this area are prepared to have open discussions on the future of the scheme. Clearly there is a conflict of interest with them more than likely wanting to choose a path or consider options that will benefit them as an agency and add to their coffers. This is even if the alternative could produce a more accessible, cheaper and more professionally run service for debtors and the voluntary and public sector money advice services to refer on to.
The truth is, however, the only reason the AIB’s office wish to monopolise the DAS (which in itself is probably a breach of European competition law), is to allow it as means to raise more revenue to cross-subsidise other services.
That is to ensure Scotland’s poor pay for the poor , so the rest of us don’t have to.
In Scots Law it is usually a requirement for someone to get into debt they must have the mental capacity to do so.
However, this is not always the case. Often it will depend on the type of debt that the person is being pursued for.
So, for example, for someone to obtain a debt for a bank loan, or a credit card, they must have had the mental capacity to have entered into a legally binding agreement, otherwise the argument is if they didn’t, they can not be held responsible for the debt.
However, there are other types of debt, that someone can be liable for, even if they lack the mental capacity, such as for rent, or Council Tax (although there may be grounds for the person to be exempt for Council Tax – see below).
Equally, someone who lacks the mental capacity to knowingly enter into a legally binding agreement, may still be liable for other types of debt, such as for gas or electricity debts. The reason being is because these debts are for necessities of life, so although the person may not have the capacity to enter into an agreement, they can still be held liable for them, as these are services the person require, regardless of whether they have mental capacity or not.
What is Mental Capacity?
The issue of mental capacity is a question of whether someone has the ability to act on their own behalf and understand fully the implications of the acts they may take.
Where people lack the mental capacity to do so, the effects legally may be their acts are void and any agreements they enter into may either be void or voidable, meaning they cannot be enforced against them.
Mental incapacity can arise for a number of reasons, either physical or mental. Sometimes it can be permanent, but other times it may be temporary. Also sometimes it may be complete, in that a person has no mental capacity to do certain types of acts, like take out a credit card agreement; whilst other times it may be partial. It may, therefore, be possible for someone to carry out that type of act, like take out a loan, providing certain steps are taken to safeguard the person’s interests and maximize their capacity to take those acts.
Scots Law and Mental Capacity
The first thing that should be noted is that the laws that deal with debt and mental capacity in Scotland are different from those elsewhere in the UK.
This page, therefore, examines the law in Scotland and what issues should be considered when dealing with the issue of debt and mental capacity.
These range from the ability of people with mental and legal capacity issues to act on their own behalf, give instructions and understand advice; to the ability of people who manage their affairs to receive advice and enter agreements on behalf of the person they act on behalf of.
It also examines the protections available that can mitigate and avoid any unduly harsh effects resulting from the legal enforcement of debts when there may be capacity issues.
Capacity to act
In Scotland there is a common law presumption of capacity.
This allows people working with clients and customers to presume that the person has full contractual capacity: that is the ability to enter into legally binding contracts.
Such presumptions can, however, be rebutted: the onus being on those who wish to rely on the rebuttal. So if you want to argue that a friend or family member didn’t have full mental capacity, the onus is on you to do so, presuming of course the person themselves will lack the capacity to do so.
So if you want to demonstrate that someone did not have the capacity to do something, like take out a loan, it is for you to demonstrate this, as the person who gave out the loan could argue they had the right to presume the person they dealt with had full legal capacity.
However, this does not mean that if there were signs that a person was confused or did not understand what they were doing, that the other person can just ignore these red flags.
It is expected when people rely on a presumption, such as the presumption that another party had full legal capacity, they must do so in good faith.
What is the Test for Capacity?
“There is no all-purpose test for incapacity. The test depends on the decision to be taken…or task to be done. The principle of least restrictive alternatives and maximising the person’s capacity underline the importance of not making blanket assessments of incapacity and recognising any residual capacity an adult has”
Hilary Patrick, et al, Mental Health, Incapacity and the Law in Scotland, Tottel Publishing 2006
What this means is when someone lacks capacity it is rarely an absolute or definitive thing.
Instead it’s likely to be a matter of degree.
The definition of incapacity in Scotland, in relation to when a person cannot make decisions on their own behalf is contained in the Adults with Incapacity (Scotland) Act 2000.
It defines incapacity as being when a person is incapable of
- acting; or
- making decisions; or
- communicating decisions; or
- understanding decisions; or
- retaining memory of their decisions
by reason of mental disorder.
The Scottish Government has produced Guidance for social work and health care staff, in how to assess capacity under the Act and enable decision making.
It defines capacity as:
“…the ability to understand information relevant to a decision and to appreciate the reasonably foreseeable consequences of taking or not taking that action or decision”.
The Guidance provides Chapters on supporting decision making, assessing a client’s capacity to deal with property and money matters and how to work with six major groups of people who may have impaired capacity and cannot make some or all decisions for themselves.
Appendix 1 also provides sample questions that can be used to assess a client’s capacity to deal with money and property matters.
Who May Lack Capacity?
Six major groups who may have impaired capacity to act or make some or all decisions for themselves could be:
- People with neurological conditions;
- People with dementia;
- People with leaning disability:
- People with a severe or chronic mental illness;
- People with alcohol related brain injury;
- People affected by a sever stroke
In assessing capacity the first thing someone has to consider is whether it is possible to communicate with the client.
The Act does state that no-one should be deemed to be incapacitated simply as they lack or have a deficiency in their ability to communicate, especially if that lack or deficiency can be made good by human or mechanical aid.
Where the inability to communicate is chronic, however, this can be grounds for incapacity even if a person can make a decision, as they may not be able to communicate it.
The first step in assessing capacity, therefore, must be in assessing the person’s ability to communicate and in exploring other possible methods of communication with the person.
This may mean involving others such as family members or support workers who know the person and can possibly communicate with them or by using other means of communication, such as pictures, sign language or writing.
There is an underlying principle in the Act that where possible all reasonable steps should be taken to maximize a person’s capacity and assist them to act on their own behalf.
People who have capacity issues, should, therefore be supported to enable them, if possible, to communicate, possibly through:
- The use of advocacy services or family members;
- The conducting of interviews over several short sessions, with regular intervals;
- Ensuring interviews occur in an environment which makes the person more comfortable (their home or the home of family members); and
- Avoiding the use of technical and legal jargon.
It is not enough that person should be able to communicate, it is also vital that they can understand the choices they are being presented with and can make informed decisions.
The Guidance identifies two strands in a person’s ability to understand:
- The first being the person’s ability to understand the facts;
- The second being the ability to weigh up options and foresee the different outcomes and possible consequences of one choice over another.
Understanding the facts in relation to debt, means a person being able to understand and have an awareness of their own personal and financial circumstances, such as what income and outgoings they have and what are their assets.
The second strand, is the ability to weigh up options, and means being able to understand the advantages and disadvantages of options and what risks are involved.
This does not mean someone may be deemed incapacitated simply because they make bad or unwise decisions.
We will all have our own preferences and understanding of what constitutes acceptable risks.
It could be poor decisions may be remedied by people being better informed or having more regard to the risks.
It is necessary that the poor decisions stem from the person’s mental incapacity and their inability to understand the facts or the consequences of their decisions, or both.
Even where someone can be deemed to understand, it also worth remembering that a reduced mental incapacity or even mental illness can prevent them from acting on the information they are being given.
Authority To Act For Others
Where people do lack capacity and this cannot be sufficiently maximised, it may be possible for them to be represented by others.
In Scots law, people and organisations can have authority to act on behalf of incapacitated adults.
The majority of these powers are contained within the Adults with Incapacity (Scotland) Act 2000.
Some are consensual and can be provided for by the person themselves, whilst others are non consensual and can be provided by the courts and the Office of the Public Guardian (Scotland).
As one of the principles of the Act are that any intrusion into the affairs of an adult should be the least restrictive possible, people should be aware that even when someone holds such powers, this does not mean they can do whatever they want.
Courts will usually only grant the minimum powers necessary to minimise any intrusion into the incapacitated adult’s affairs.
When dealing with someone who is acting on behalf of another, it is, therefore, important to not only see the documentation granting their powers, but to note the extent of those powers.
The provisions in the 2000 Act allowing others to act are:
Power of Attorney
There are two types of Power of Attorney provided for in the 2000 Act. The first of these is Continual Power of Attorney and the second is Welfare Power of Attorney. These are both consensual powers granted to a third party by the person themselves, when they still have the capacity to do so.
The first of the two, Continual Power of Attorney, grants the third party the power to deal with the financial affairs and property of the person and importantly enter legal contracts and raise or defend legal actions on behalf of the person.
The second, the Welfare Power of Attorney, as the name suggests relates to welfare matters such as deciding on care arrangements and making lifestyle and medical decisions on behalf of the person.
Access to Funds Power
The Access to Funds power is not dependent on the consent of the person and can be granted by the Office of Public Guardian on receipt of an application by an individual or organisation. It allows the person or body which holds the power to deal with the person’s accounts and pay bills.
An Intervention Order is an order which is granted by the court, usually for a one off specific purpose, such as to allow someone else to sign a tenancy agreement.
A Guardianship Order is made to allow an individual or organisation to act as the guardian for an incapacitated adult. The extent of any order is set by the court.
Manager of Authorised Establishments
These orders are granted to the manager of an authorised establishment such as a care home, to manage the financial affairs of a person in the establishment.
Social Security Benefit Appointees
Social Security and Tax Credit appointees can also deal with the financial affairs of a person in relation to benefits and tax credits. These powers are not contained in the Adults with Incapacity (Scotland) Act 2000.
Capacity to Contract
It has long been established in Scots Law that a person cannot enter into a contract, such as a consumer credit agreement, such as a credit card, loan or hire purchase agreement, if their lack of mental capacity prevents them from understanding the nature of the obligation.
Whether someone can understand the nature of any financial agreement will depend on the nature of the agreement and the extent which their mental capacity has been diminished.
There is no one test of incapacity and much will depend on the decision at hand and the person’s ability to understand not only the facts surrounding that decision, but the implications and consequences of any decision.
The definition of incapacity contained in the Adults with Incapacity (Scotland) Act 2000 relates primarily to when a person can make a decision for themselves and will, therefore, be relevant when a court decides if a person had capacity to contract.
If, however, information can be provided to show that a person did not understand the facts of their situation and the transactions they were involved in, then this can be vital in showing a lack of capacity to contract.
Equally important will be the dates when any impairment of the person’s mental capacity occurred, if it is not ongoing, to evidence that it existed at the relevant times when the transactions were entered.
Such evidence will not in itself determine that a person lacked capacity, as ultimately contractual capacity is a question for a court to decide, rather than that of any medical professional, but their evidence will be important.
It will, however, be necessary to gather such evidence to support any negotiations with creditors and for people to defend any legal action raised against them.
Proving incapacity in a court, where a creditor disputes it, will require evidence, including medical evidence.
If sufficient evidence can be presented, however, and on balance shows the person lacked capacity then the effect is that the contract is void.
This means no legally binding agreement existed.
This differs radically from the position in England and Wales.
It is not necessary to show that the creditor should have known that their presumption of capacity was unsafe, because by law they are entitled to make that presumption, providing there is no obvious reason they should not have relied upon it.
The logic behind this is, as the person lacked capacity to understand, there cannot have been any agreement and, therefore, any contract, as contracts require the agreement of both parties.
This raises the question of whether a person who has been incapacitated can later ratify or consent to an agreement if they regain their senses and the ability to make decisions.
An example may be the case of someone who has a credit card and suffers from a bi-polar disorder. They may lose capacity and during that period spend money on their credit card.
They then continue spending once they regain their capacity.
If the agreement had been entered into when the person was not incapacitated, then it is clear the agreement is not made void by the later incapacity, but does not mean any transactions occurring after the incapacity cannot be challenged.
Where the person lacked capacity at the time they entered the agreement, then the agreement is void and the effect is there is no agreement to ratify.
Courts may, however, take the view the debtor adopted the transactions with their later conduct.
As this issue has never been decided,the safe course of action is for the person to always renounce transactions to the creditor, by bringing it to their attention, once they regain their capacity and make no further transactions.
Even where an agreement is void, however, a person can still be held liable for the price of such goods, where those goods are necessaries, such as food or clothing.
A person’s mental capacity to enter transactions can also be lost by intoxication, whether such intoxication is the result of alcohol or drugs.
The level of intoxication, however, has to be substantial and must deprive the client from the exercise of reason.
They must not be able to understand what they are doing. Intoxication may be relevant for mental health clients where the intoxication arises from prescribed medication or substance abuse and the accumulated effects of the reduced capacity, which results from their mental illness and intoxication, means they are not able to exercise reason.
In the case of intoxication, contracts are not automatically void, but can be annulled by the court providing once they regain their senses, the client takes steps to avoid what they have done and notify the creditor. It is not necessary for the creditor to have been aware of the client’s intoxication.
Facility and Circumvention
Another possible defence that may be available to a debtor suffering mental illness is facility and circumvention, although it may be harder to prove this than arguing the debtor lacked mental capacity.
Facility and circumvention is a defence that may be available to someone who suffers a degree of diminished capacity, but not to the extent that they are incapacitated. They, therefore, may understand the agreement they have entered.
It will, however, be necessary to demonstrate the person suffered a weakness of mind at the point they entered the transaction. Such a weakness can arise from mental illness, old age and physical infirmity.
Such weaknesses can also be temporary and arise from some trauma or distressing event such as bereavement.
It may be that where the client is intoxicated, but not to the extent they lack reason, they could still be considered to have a mental weakness. It is also necessary to show the other party to the agreement took dishonest advantage of this weakness, to obtain the client’s agreement, and that the person suffered some loss or harm as a result of the circumvention.
An example of this may be bank staff persuading a person to pay off a deceased partner’s loan, as it’s what they would have wanted.
Where the weakness of mind is great, the amount of evidence required to prove the person’s will was circumvented will not be as great as would otherwise be required and vice versa.
Such contracts are not automatically void, but can be annulled by the court.
Whether it would be advisable to use such a defense now is debatable and a debtor may be better advised to consider requesting an order under S140B (unfair relationship test) of the Consumer Credit Act 1974.
This would allow the court to look, not only at the circumstances, in which the agreement was made, but also the events afterwards and how the creditors enforced the agreement.
Alternatively, a complaint could be made to the Financial Ombudsman Service. The Ombudsman can be more flexible in what remedy they could provide, even if they felt the circumstances did not merit the agreement being annulled.
Once it is clear there are issues relating to a person’s liability for their debts, it is necessary to consider how best to dispute such liability.
Much will depend on the person’s view and preferences and also the conduct of the creditors. Clearly, negotiation and requesting a write off will be less stressful than taking legal action, but another option may be the creditor’s own complaint procedure and the Financial Ombudsman Service.
Where creditors raise court action, clients may be forced to defend the case, although if the issue of capacity is disputed the onus will be on the person (or someone on their behalf) to defend the action to demonstrate they lacked the capacity and the issue may become a matter for evidence to be led.
A cautious approach to legal action should be taken, considering there could be cost implications and such action may have a detrimental effect on the person’s well-being.
Specialised legal advice should be sought.
Enforcement of Debts and Mental Capacity
Scots law, however, also provides a number of other protections in relation to the enforcement of debt, where evidence of the debtor’s mental capacity may be relevant.
It is often commented in Scots Law that Diligence, or legal enforcement action, is coercive and, therefore, unavoidably harsh. This does not mean, however, that diligence should be ‘unduly harsh’.
Provision exist in relation to “unduly harsh” in the diligences of attachment and exceptional attachment, money arrestment and actions of arrestment and furthcoming otherwise known as bank arrestments.
There is no statutory definition of what constitutes ‘unduly harsh’ and it is a matter of fact to be dealt with by the Sheriff.
It is probably safe to state that where there are factors that make the execution of diligence harsher than normal, it may be considered unduly harsh.
Clearly it is for the sheriff to decide, but where a person is suffering from a lack of mental capacity, the harsh effect of diligence could be exacerbated as a result.
Evidence that a person is suffering from a lack of mental capacity is, therefore, relevant. Equally evidence that there are members of a person’s family suffering a lack of mental capacity is also relevant, particularly where the person’s family will be affected by the diligence.
The successful use of such arguments in any application may result in the release of attached items or the release or restriction of any arrested funds.
In actions relating to the eviction of tenants for rent arrears, evidence of a person’s mental incapacity can be considered by the courts. Section 16 of the Housing (Scotland) Act 2001, in relation to Scottish Secure Tenancies, requires the court only to make an order for recovery of possession if it believes it is reasonable.
In determining whether any eviction is reasonable the court has wide discretion to consider a number of factors including the effect any eviction will have on the tenant and their family. In such cases, where it can be shown tenants are in a position to begin making payments towards arrears, evidence of mental incapacity in the home may be relevant information which prevents the court granting an order for eviction.
In relation to homeowners facing repossession it can be important to place evidence of mental incapacity before the court during an application to suspend an action for repossession under the Conveyancing and Feudal Reform (Scotland) Act 1970.
When considering such an application courts should have regard to any circumstances which may have resulted in the person defaulting on their loan.
A court, therefore, could consider the home owners mental incapacity, where the person’s ability to manage their affairs has arisen from such a lack of capacity.
The courts also have to consider the person and their family’s ability to secure reasonable alternative accommodation. Where this will be a problem and the consequences of not being able to do so could further exacerbate any mental incapacity, it should be brought to the courts attention.
In bankruptcy, the mental capacity of a debtor or any of their family members may be relevant where the court has to decide whether to grant an order allowing a trustee to sell a family home. The Court is required to consider all the circumstances of the case including the needs of the family members and the person who is bankrupt.
Where such an application is made the sheriff may refuse to grant the order or postpone it for as long as they consider reasonable, up to a maximum period of 3 years.
In conclusion, a person’s mental capacity is an important factor when helping people with their debt.
To not do so could deny the person access to possible defenses.
Where there are communication problems it is important to support the person and help them maximize their communication abilities where possible.
It is also necessary to ensure persons understand their own personal financial circumstances and can weigh up the advantages and disadvantages of the options that are being presented to them and assess any risks.
Even where this is possible, it is important to be aware a person’s mental incapacity may prevent them from acting.
If others purport to act on behalf of a person, it is necessary to ensure they have the necessary authority to do so.
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.
Importantly, there will now be protection for a minimum amount held in bank accounts. 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.
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, 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. 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, 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. 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 (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. 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.
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.
A Sheriff will also now be able to grant a warrant for diligence by inhibition, on the dependence of an action.
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.
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.
 Section 206, Part 10 of the Bankruptcy and Diligence Etc (Scotland) Act 2007
 S73F Debtors (Scotland) Act 1987 (as amended) – when S206 of the 2007 act is commenced
 Table B, The Diligence Against Earnings (Variation) (Scotland) Regulations 2006
 North Lanarkshire Council v Shirley Crossan & Airdrie Savings Bank, unreported, Airdrie Sheriff Court 2nd May 2008 see: http://www.govanlc.com/nlc-crossan-judgment.pdf
 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.
 S73J Debtors (Scotland) Act 1987 (as amended) – when S206 of the 2007 act is commenced
 S73L Debtors (Scotland) Act 1987 (as amended) – when S206 of the 2007 act is commenced
 S73M Debtors (Scotland) Act 1987 (as amended) – when S206 of the 2007 act is commenced
 S73Q Debtors (Scotland) Act 1987 (as amended) – when S206 of the 2007 act is commenced
 S73G Debtors (Scotland) Act 1987 (as amended) – when S206 of the 2007 act is commenced
 S146, Bankruptcy and Diligence etc (Scotland) Act 2007
 S15A Debtors (Scotland) Act 1987 (as amended) – when S169of the 2007 act is commenced
 S154, 2007 Act
 S149 2007 Act
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 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 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.” 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. 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”.
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.
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.
 The DAS Administrator is the Accountant in Bankruptcy.
 All applications for a Debt Payment Programme under the Debt Arrangement Scheme, currently have to be made through an Approved Money Adviser.
 Pg 2, Foreword, DAS Guidance for Approved Money Advisers (version 4)
 A3.3 DAS Guidance for Approved Money Advisers (version 4)
 A3.3 DAS Guidance for Approved Money Advisers (version 4
 Regulation 26 (2)