Scottish Adviser Blog

Bank Arrestments are Forcing Thousands into Hardship

29th February 2020 0 comments

The rise in the use of Bank Account Arrestments in Scotland (also known as Actions of Arrestment and Furthcoming) , to recover debts, is a growing cause for concern and forcing thousands of Scots to experience serious financial harm each month.

In many cases, the debt recovery tool that can only be used by Sheriff Officers, is forcing thousands of Scots into having to choose between buying food, paying rent or heating their home.

In the worst-case scenarios, the legal debt recovery tool is forcing many to seek help from food banks.

Even where the Bank Arrestments are not successful, because someone has insufficient funds in their account, they still have the costs of the process added to their debt and banks add on a £25 administration fee (which when you only have Universal Credit can leave you suffering severe financial harm until your next payment).

Bank Arrestment Numbers Continue To Rise

Last year in Scotland over 173,000 non-earning arrestments were executed by Sheriff Officers, with the vast majority being bank account arrestments (a 33% increase on the number since 2011-12).

These arrestments, once served, then force the bank to arrest all sums in the account over £529.90 (the Protected Minimum Balance) up to the amount of debt that is owed.

Unlike Wage Arrestments, however, Bank Arrestments do not restrict how much Sheriff Officers can take over the Protected Minimum Balance (PMB) of £529.90.

With a wage arrestment, only 19% of the amount above the PMB can be taken (until the monthly sum earned is over £1,915.32, when the percentage increases to 23%).

This means if you get your wages arrested and earn only £1,200 per month, you will only have £127.19 taken. However, with a Bank Arrestment,£670.10 will be taken (assuming your debt is that or more).

It is no wonder, therefore, that last year in Scotland, when over 170,000 Bank Arrestments were executed, approximately only 70,000 Earning Arrestments were carried out.

Why arrest someone’s wages when, if you wait for them to be paid into their bank account, you can get £670.10 instead of £127.19?

Unduly Harsh

Scots Law has always recognised the potentially harsh effects of Bank Account Arrestments, which is why in 2008 the Protected Minimum Balance was introduced.

However, the level of protection the PMB provides is grossly inadequate. It has always been linked to the Protected Earnings Limit that exists in Wage Arrestments, but has never included the additional protection of restricting the amount that can be taken above the PMB.

Also, although it has always been possible to challenge a Bank Account Arrestment, on the grounds it is Unduly Harsh, this a Court Based procedure and can take over 8 weeks before you get a hearing in front of a Sheriff. By then it is too late and the undue hardship has already been suffered.

Statutory Debt Solution Review

I would call on the Scottish Government to use its recently announced Review of Statutory Debt Solutions as an opportunity to review what remedies consumers have when their bank acccount is arrested.

There is no question, that Bank Arrestments, one of the harshest forms of debt recovery available, are now excessively being used and risk bringing the whole procedure into disrepute.

Equally, how can leaving families, often with children,having to choose between heating their homes and feeding themselves not be described as unduly harsh?

As an immediate solution, subject to eventually increasing the level of protection for funds held in bank accounts, I would urge the Scottish Government to replace the Court based procedure for challenging a Bank Account Arrestment, with an administrative procedure.

This would mean allowing people, with the assistance of a Money Adviser or Insovency Practitioner, to apply for a Bank Arrestment to be recalled or restricted to the Accountant in Bankruptcy’s Office.

Such a process would be free, quick and would also require the person to seek advice, whilst avoiding them having to choose between feeding themselves and their children, heating their home or paying their mortgage or rent.

Advice Scotland Partners with Carrington Dean

18th January 2020 0 comments

Advice Scotland will shortly be partnering up with The Carrington Dean Group Ltd to offer telephone advice to any visitors who want personalised advice on their situation.

Carrington Group are one of the Scotland’s largest providers of formal debt solutions and are also the largest payment distributor for the Debt Arrangement Scheme.

They are regulated by the Financial Conduct Authority and do not charge for the advice they provide.

The reason I have decided to enter into this arrangement, is because visitors to Advice Scotland have increased and I have seen a dramatic increase in the number of people contacting me for advice.

Traditionally I have alway resisted the temptation to provide personalised advice, based on individual’s circumstances, and instead have focused on providing generic information on debt.

I have also always referred people onto free sources of advice, such as those provided by Citizen Advice Bureaux and also Local Authority Money Advice Agencies, and will continue to do so.

Provision of Telephone Advice

However, it is clear to me there are people who would like a telephone call and an opportunity to discuss their situation with someone, which is not something I am able to do.

Advice Scotland, has always been a personal blog and was never intended to become a provider of advice services.

However, the new Debt Arrangement Scheme (Scotland) Amendment Regulations 2019 have created a new opportunity.

Firms like Carrington Dean can now provide access to the Debt Arrangement Scheme without charging a fee, which means if anyone requests a call from them, the advice they will receive will be from a firm:

Regulated by the Financial Conduct Authority;
That doesn’t charge for the advice they provide; and
Can also provide free access to the Debt Arrangement Scheme.

No Service Provides Access to all Solutions

It is true Carrington Dean does not provide access to all solutions, such as Minimum Asset Bankruptcies, however, there are few organisations that provide access to all solutions. Stepchange in Scotland passes cases to insolvency practitioners, for a fee; as do all Citizen Advice Bureaux and Local Authority Money Advisers (albeit not for a fee). Carrington Dean don’t, as they are also insolvency Practitioners.

Carrington Dean, also, do not do Debt Management Plans, which in a Scottish context, have become heavily discredited, because of the existence of the Debt Arrangement Scheme; and will also act as the Payment Distributor in cases, meaning they will be a one stop free-provider for that solution.

Once launched, if anyone wishes a call back, they will be able to request it and their information will be sent directly to the Carrington Dean Case Management System. One of their team will then call the client back. People will have to agree to share their information with Carrington Dean

Carrington Dean will provide all the advice.

This new relationship won’t influence the content of Advice Scotland , which will remain, as was always intended, to be my personal blog site.

MSP Case Study on Trust Deed Raises Questions

14th January 2020 0 comments

Colin Beattiie (MSP) provides case study on Trust Deed

A Scottish Parliament MSP who presented a case study that concerned a constituent who had been in a Protected Trust Deed, as evidence of what‘s wrong with the personal insolvency remedy, has raised a number of questions.

The MSP, Colin Beattie, used the case study as an example of abuses that go on in Protected Trust Deeds, whilst examining the Accountant in Bankruptcy, Dr Richard Dennis, on how the remedy operates.

He gave the example of a woman, whose family were constituents and who passed away whilst in her 4^th year of her Protected Trust Deed.

She had already paid £6,000 into the Trust Deed, which she had entered as she had £20,000 in debt.

As she was a Homeowner, the family received a breakdown as to what the cost would be to wind up the Trust Deed.

That sum was £28,000, which initially appears ridiculous for a £20,000 debt, especially as £6,000 had already been paid into the Trust Deed, meaning the total cost could have been in excess of £34,000.

In actual fact during the evidence session by the Economy, Energy and Fair Work Committee, he described the eventual cost as not moral and said it was “banditry”.

Colin Beattie provided a breakdown of the figure:

£7,000 was for statutory interest
Trustee Fee £2,500
Trustee Realisation Contribution Fee 1,270
Trustee Realisation Lump Sum Fee 3,000
Legal Fees £3,000

He also added there were additional fees such a AIB Supervision fees, which are £100 per year, so for 4 year Trust Deed would be £400.

Not Clear Cut

However, an understanding of how the costs had been arrived at, shows the figures may not be as obscene as believed and in actual fact, if the lady had used any other solution to deal with her over-indebtedness, they may have been similar or possibly even worse.

What would have been the Options?

As it is believed £6,000 had been paid into the Trust Deed over 4 years, it probably safe to assume the Lady was able to pay £125 per month to her debts, or thereabouts.

If this is all she could afford, repaying her debts in full would not have been a realistic solution, as even with interest and charges frozen, a £20k debt would take over 13 year to repay. For most people, the idea of not having any disposable income for 13 years is not an attractive one and many lenders would consider such a lengthy repayment period unreasonable.

It is likely, therefore, if all the options had been discussed with the lady at the time she sought advice, a Debt Management Plan or the Debt Arrangement Scheme would not have been considered a viable option.

The lady may then have looked at insolvency options, such as Bankruptcy or a Protected Trust Deed.

These would have involved her paying the £125 per month for 48 months, or maybe even 60 months, as she was a homeowner, with the last 12 months going towards addressing any equity she had in her home.

We don’t know why the lady eventually chose a Trust Deed over a Bankruptcy, but generally Trust Deeds are considered to be less risky when you own a home, as Creditors will often agree to disregard more equity so you don’t have to sell your home. It may, therefore, mean this was a consideration.

However, when someone passes away, and there are sufficient assets to pay all the debts owed, the law, not just of insolvency, but Succession requires all debts must be repaid from the winding up of the estate.

The £20,000 of original debt would, therefore, have to be repaid in full.

Also, where there are sufficient assets in insolvency, the creditors also must be paid interest on this debt of 8% per annum.

This is known as Statutory Interest, and is owed to the Creditors, not the Insolvency Practitioners. This would explain the £7,000 in Statutory Interest that Mr Beattie spoke of.

Second, the Trustee’s standard fees for managing the Trust Deed over the 4 years are £2,500 and £1,270 (this latter fee is the cost of collecting the 48 payments).

It would appear the legal fees are the costs charged by the solicitors who eventually sold the property and are paid to them.

The £3,000 fee is the percentage the Trustee is allowed to charge on the sale of the property, for the work they have undertaken in selling the property.

All these fees are governed by legislation, except the legal fees and the Scottish Government have the power to change them.

In actual fact, it was Mr Beattie’s Committee, the Economy, Energy and Fair Work Committee that recently approved the Bankruptcy Fees (Scotland) Regulations 2018, which governs many of the fees. So if the fees are immoral, although legal and an example of banditry, it was Scottish Government Regulations that proposed some of them and the Economy Committee that recommended them to Parliament.

It is clear, therefore, the majority of the costs incurred in winding up the estate were not made up of the Insolvency Practitioner’s fees, but were either the costs of paying off the Lady’s debt and winding up her estate, which if it had not been carried out by the Trustee, would have had to some extent been incurred by her Executor on her passing.

What if another Option has been chosen?

However, what if another option had been chosen?

We have already looked at how long it would have taken to repay the debt in full, over 13 years, so it is understandable why a repayment solution wasn’t chosen.

However, if the Debt Arrangement Scheme had been chosen, it could be argued that £6,000 of the debt would have been repaid to creditors leaving only £14,000.

This is possible, but not certain.

One of the things that occurs in a Debt Arrangement Scheme is when someone dies during it, the Programme is revoked and as a consequence creditors can apply all the interest and charges that they could have applied had the person not been in the Scheme.

Even a contractual rate of 5% on a consumer debt of £20,000 is £1,000 per annum and we know many forms of credit have higher levels of interest applied to them.

It legally is possible, therefore, just paying £1,500 per annum to a debt of this level over 4 years, with interest being re-applied would not reduce the debt by much and in actual fact, the debt could increase.

Now the argument is few creditors would reapply interest and charges, but the truth is we cannot be certain. It is legally possible.

Also, its true to state not all creditors stop interest and charges on debt in the Debt Arrangement Scheme, even though the law requires it, but write it off once the programme is completed.

Also it is true that many creditors in the Debt Arrangement Scheme only reduce the balance owing on a debt in the Scheme by the amount they receive, which is not the same as what the consumer pays, as the payment distributor and DAS Administrator fee is deducted first (albeit this is a cost incurred by the creditor). These fees are now 22%.

In practice, therefore, where cases are revoked it is likely these fees are incurred by the Consumer, not the Creditor, unless challenged

The problem is many clients who stop paying their Debt Arrangement Scheme, don’t continue with the advice agency that was helping them, so most probably don’t challenge the fact they have incurred these fees.

On top of that, as the lady passed away the Lady’s family would have had to appoint a solicitor to wind up the estate, as estates with heritable property are not considered small estates.

It, therefore, is possible that had the lady chosen a debt management option like the Debt Arrangement Scheme, the eventual cost of winding up the estate could have been similar, if not close to, the eventual costs in the Trust Deed as a solicitor would have to have been involved in winding up her estate and her debts paid in full.

It is also, likely, had the lady chosen Bankruptcy as the solution to her debt problems, the cost of winding up the estate may have been greater than that quoted by the Trustee in the Trust Deed.

It is hard not to sympathise with families who find themselves, in this situation, as they are struggling with the shock of a bereavement only then to possibly learn for the first time the extent of the deceased family members debts and also that they were in an insolvency solution.

On top this, they then get a bill for £28,000, which although they are not liable for, has to be paid from the estate.

It is clear from information provided by Mr Beattie, the Insolvency Practitioners fees made up only a very small part of the £28,000, and most of the costs were related to the settling of the debt, winding up her estate and paying statutory fees.

Much of which would have been incurred by her Executor if she had not been in a Trust Deed.

Lessons to be Learned

However, some important policy points arise from Mr Beattie’s case study.

First, if the Scottish Government want to present the Debt Arrangement Scheme as a less risky solution than Trust Deeds, because at least if it fails someone’s debts will be lower, then they must change the law to ensure creditors cannot reapply interest and charges if a case is revoked.

It is all very well stating most creditors won’t, but there is every possibility, legally, they could and a consumers debt may end up being higher considering the levels of contractual interest and fees consumer creditors can charge.

Second, they should explore legal devices to ensure if a case is revoked the 22% payment distribution fees and DAS Administration fees are removed from the balance of debts owed.

Third they should also change the law to ensure that the effect of someone dying in the Debt Arrangement Scheme is not their Programme is revoked.

Instead they should apply a 12 month moratorium to the case to allow an Executor to be appointed and settle the debts if there are sufficient assets available to so.

Finally, the Scottish Government should reduce the level of Statutory Interest that is applicable, from 8% to 1-1.5% above the Bank of England Base Rate.

This is long overdue and even in 2016 Scottish Government Minister, Paul Wheelhouse, described it as punitive. They still have not acted.

Can School Meal Debt be Recovered?

6th January 2020 2 comments

Ross Grier, the Scottish Green Member of the Scottish Parliament has called on the Scottish Government to cancel what is believed to be over £1 million in unpaid school meal debt.

The revelation that the amount of unpaid school meal bills now owing to Scottish Local Authorities is in excess of £1,168,755 will surprise many.

However, the amount owning is expected to be even more as debts owing to:

Glasgow City Council;
Edinburgh City Council;
Midlothian Council;
Falkirk Council;
West Dunbartonshire Coucil;
Renfrewshire Council; and
Clackmannanshire Council

are not in included in that figure.

However, of those that responded to the Freedom of information requests, Aberdeen City Council is owed £434,545, whilst North Ayrshire Council is owed £168,854.

Other Local Authorities that are owed money are Aberdeenshire Council that is owed £98,985; Fife Council that is owed £55,455; and Dundee City Council that is owed £20,650

Speaking on publication of the figures, Ross Greer said:

“Children are going hungry in Scotland and we know that means-tested free school meals miss out far too many families who need them”.

“This frankly astonishing mountain of school meal debt should be written off immediately”.

However, Aberdeen City Council co-leader Douglas Lumsden has hit back at Mr Greer, stating:

“It is complete hypocrisy by the Scottish Greens to be calling on local authorities to write off money and take it from other front-line services”

“The Greens constantly prop up the SNP Government to allow them to pass a budget that continues to make Aberdeen one of the lowest funded councils in Scotland”

“We will continue to try and recover outstanding amounts owed while protecting the most vulnerable in society”.

Who is Liable for School Meal Debt?

Questions must be asked, however, against whom can the debt be recovered?

The Education (Scotland) Act 1980 does allow Scottish local authorities to provide children with school meals, but such provisions are only legally required where children are in Primary 1-3 or in receipt of certain income-based benefits.

The Act does say they “may” provide School meals to other children under S53 (3) (b), but interestingly it also states where the local authority chooses to do so, they can only charge the pupil.

(3) The authority may provide or secure the provision of—

(a) other food or drink to pupils falling within subsection (7),

(b) food or drink to other pupils.

(4) Where the authority provides or secures the provision of food or drink under subsection (3)(a) or (b) to pupils, it may—

(a) do so free of charge, or

(b) charge the pupils.

Being realistic, therefore, as parents cannot legally be charged for the school meals and, no Scottish Local Authority operates restrictions of school meals, where there is a debt, the question must be asked how recoverable is the debt, if it can only be recovered from pupils, who have no income?

Free school meals are available to children in Primary 1, 2 and 3 in Scotland, regardless of parental income.

Children are also entitled to free school meals where their parent or guardian is in receipt of

Universal Credit (where their monthly earned income is not more than £610)
Income Support
income-based Job Seeker’s Allowance
income-based Employment and Support Allowance
support under Part VI of the Immigration and Asylum Act 1999

Children are also entitled to free school lunches if their parent or guardian receive:

Child Tax Credit, but not Working Tax Credit, and their income is less than £16,105
both Child Tax Credit and Working Tax Credit and have an income of up to £6,900

For more information on Free School Meals visit the Scottish Government Webpage on eligibility.

Could Scotland abolish Sheriff Officers?

28th December 2019 0 comments

Does Scotland need Sheriff Officers?

I don’t think so.

I think with several legislative changes, the requirement for Sheriff Officers could be removed and the process as to how debts are recovered could be radically reformed.

This I believe would significantly reduce the costs involved for those seeking to recover debts, and for those who owe debt.

Scottish Diligence Statistics

The reason for me believing this has been brought on by the recent release of Scotland’s Diligence Statistics for 2018-19, which cover the types of legal debt recovery procedures that are used by Sheriff Officers.

These statistics bring into sharp focus the issue of how Council Tax debts in Scotland are being collected.

What the statistics show is that almost 88% of all work carried out by Scotland’s equivalent of Bailiffs, Sheriff Officers, is to recover Council Tax debts, and probably adds close to £30 million onto those debts in the form of Sheriff Officer fees (Unanswered questions over local authority debt statistics – The Herald; 18^th December 2019)

The type of work carried out by Sheriff Officers on behalf of Scottish councils includes:

201,026 Charge for Payments being served;
71,835 Earning Arrestments being executed; and
167,365 Bank Arrestments being executed.

Now this is concerning, as what the statistics also show is that the use of Sheriff Officers to recover debt by non-local authority creditors has fallen by 24.3% since 2011-12, but over the same period Scottish local authorities increased their use by 27.8%.

Also, in 2018-19, this continued with the use of Sheriff Officers by non-local authority creditors falling by 42%, whilst local authority use increased by 15%.

Which begs the question are Sheriff Officers advising Local Authorities to take a more aggressive approach to debt recovery to compensate for the loss of work by other creditors?

It also raises the question whether a radical overhaul of how Diligence (legal debt recovery) is executed in Scotland could significantly reduce the amount of fees that are being applied to the debts of those in default?

Scottish Councils should have their powers to recover debts increased

Now, a simple answer to this problem may simply be to increase the power of Local Authorities to recover debts.

Take, for example, Direct Earning Arrestments. These are types of wage arrestments that are used by Local Authorities and the Department of Works and Pensions for benefit overpayments. They are effectively wage arrestments.

However, unlike Earning Arrestments (which are governed by the Debtors (Scotland) Act 1987), there is no requirement for Local Authorities to use Sheriff Officers to execute a Direct Earning Arrestment. They simply send the Arrestment Schedule to the Bank themselves.

This begs the question why for Earning Arrestments, we could not allow local authorities to do the same ? If they can do it for one type of wage arrestment, why not for another, removing the requirement to use a private sector Sheriff Officer.

Which then begs the question, why then not also allow them to do the same for Bank Arrestments?

And if we are going to allow them to do that, then why not also allow them to send Charge for Payments by post?

This would arguably save tens of millions of pounds being added onto Council Tax Bills in the form of Sheriff Officer fees.

Council’s would not be alone in having such enforcement powers. As mentioned above, the Department of Works and Pensions also have the power to execute Direct Earning Arrestments without using Sheriff Officers.

The Child Support Agency and Child Maintenance Agency also have similar powers when it comes to Direct Earning Orders for child maintenance payments.

But not all debts are for Council Tax

However, this raises the question what about other debts, as not all debts are for Council Tax and not all debt recovery procedures are those mentioned above.

Well there is a simple answer to that question, in that these remaining types of debts and procedures could be recovered and executed by Court Enforcement Officers employed by the Courts.

In Northern Ireland such a model already exists where it is Court Officers rather than private Bailiffs that recover debts.

Court Enforcement Officers could therefore be employed on a full cost recovery basis by the Scottish Courts and Tribunal Service to recover these other types of debts and to carry out other types of enforcement procedures, for both Local Authority and non-Local Authority debts. They could also take on the role of Fine Enforcement Officers, who already exist in every court and can also execute bank and earning arrestments without having to use Sheriff Officers.

As all this would be done on a cost-only recovery basis, I believe it would help reduce the cost of recovering debts in Scotland for both those in debt and those that are owed debts.

It would also bring forward some radical reform to how debts are recovered in Scotland, which inevitably will have to occur anyway.

The simple fact is, if our entire system of enforcing Court Orders is being susidised by a form of Local Government taxation that none of the major political parties support, then reform will eventually be inevitable, as will how debts are recovered in Scotland.

It would seem logical to me, to begin that process of reform, sooner rather than later as currently Sheriff Officers have become overly dependent on Local Authorities for work and this is only adding to the misery of those struggling with Council Tax debts, as they are disproportionately bearing the burden of funding this no longer sustainable industry.

Proposed Reforms to Trust Deeds

14th December 2019 0 comments

Below is a paper I have drafted for consideration by the Economy, Energy and Fair Work Committee of the Scottish Parliament, as part of their inquiry into Protected Trust Deeds.

The papers makes a number of proposal to amend the Bankruptcy (Scotland) Act 2016 using Scottish Statutory Instruments.

These proposals are:

For a process that allows a creditor to apply to not be bound by the discharge of a debtor or a trustee from a Protected Trust Deed;
To require a Trustee to apply to the Accountant in Bankruptcy where they wish to refuse a Debtor a discharge from their Protected Trust Deed; and
Finally, to introduce a new procedure to allow a Debtor, through a Money Adviser to apply for the early termination of a Trust Deed, without a discharge, to allow remedial action where people have been mis-advised and to end the practice of people being Trust Deed Prisoners, where the solution is no longer appropriate.

A PDF version of the paper can be downloaded here. A previous submission I made to the Committee can be found here.

Background

The background to this paper, is to contribute to the inquiry by the Economy, Energy and Fair Work Committee of the Scottish Parliament into Protected Trust Deeds.

That inquiry has been launched because several Stakeholders have raised their concerns with Protected Trust Deeds, a form of personal insolvency in Scotland.

The concerns primarily relate to:

The way that Protected Trust Deeds are marketed and a view by some that they are being mis-sold;
A view that some consumers would have been better using another formal debt solution;
The failure rates in Protected Trust Deeds and the consequences that this has for the consumer; and
Finally, a view by some smaller creditors that Protected Trust Deeds have a disproportionate effect on them, and Insolvency Practitioner Fees lead to poor returns for them.

In response to this, although accepting there is no consensus within the sector, the Accountant in Bankruptcy has mooted several proposals.

These can be summarised as:

Increasing the minimum level of debt, a consumer has before they can enter a Protected Trust Deed;
Extending the duration of the Protected Trust Deed;
Amending the rules how Protected Trust Deeds are approved to increase Creditor engagement and to allow AiB more power to refuse a Trust Deed Protection; and
Finally, requiring a Trustee to set a fixed fee at the point of proposing the Trust Deed;

Concerns with Proposals

I have a few concerns in relation to these proposals.

First, they are unlikely, in themselves to significantly reduce the number of Trust Deeds becoming protected and even if they were, this is not necessarily a desirable outcome.

Trust Deeds levels are not actually at a level that they should be causing undue concern. Even if they were to rise to 2009 levels, of just under 10,000 per year, that would still only represent one-tenth of one percent of the entire Scottish population.

For an advanced consumer credit-based society, I would argue that such levels of personal insolvency are not a matter of concern. There is always going to be consumers who are not able to repay their debts, or even repay them with a reasonable period of time, so personal insolvency will be an appropriate solution for many and this is healthy if it addresses historic problem debts that people have. The key question is are those solutions appropriate for the consumer and is the level of consumer insolvencies across Scotland rising to a level that could pose a risk to the health of the wider economy?

Second, by just making it harder for people to enter Protected Trust Deeds, we may inadvertently drive people into less appropriate solutions such as bankruptcy, or even the Debt Arrangement Scheme, where the failure rate is believed to be currently twice what it is for Protected Trust Deeds in their first five years.

Thirdly, changing the voting arrangements for Protected Trust Deeds in not likely to reduce the number of Trust Deeds becoming protected, as due to the engagement of many commercial creditors through Creditor Agents the outcome is not likely to change in most cases and the smaller creditors are still not going to be able to object to Trust Deeds becoming Protected.

Finally, in relation to the AiB having increased powers or scope to refuse protection to a Trust Deed, this is likely to be problematic. First it will require guidance to be published to indicate when Trust Deed protection is likely to be refused. If this doesn’t happen, it will be harder to advise consumers on when Trust Deeds may be a suitable option for them.

The decision of the AiB will also have to be subject to review and appeal and even where a Trust Deed is Protected, but later fails, resulting in the consumer possibly losing out, it could be argued the AiB could be subject to complaints that they made the wrong decision and didn’t consider affordability etc. and as result the consumer has suffered harm and loss.

Understanding the Problem

The primary problem with Protected Trust Deeds is that many feel that from the perspective of being a creditor, or a consumer, who they don’t work for, is they are not fair.

However, personal insolvency is by its nature unfair to most Parties that are affected by it. The essential purpose of a Trust Deed is to wind up the financial obligations of a consumer whose can no longer meet their financial obligations.

By implication this means their creditors will be losers. It also means the consumer themselves will often be losers, as they will be denied access to further credit for several years, will have to pay over almost 100% of their disposable income for 4 years and may even have to realise and surrender assets.

However, occasionally, it is possible when looking at Trust Deeds, to see in certain cases that the solution was not appropriate for the consumer at the outset, or their circumstances have changed, so it is no longer appropriate.

When this happens the AiB, who have supervisory and regulatory powers, have not been known for being pro-active in making interventions in cases, even though they have had the power to do so for several years.

This often leads to consumers either being refused a discharge and having their debts returned to them or becoming a Trust Deed prisoner with no easily accessible process for reversing what may have been the consequences of bad advice in the first place, or their own misfortune.

Thirdly, even when creditors feel that the proposals being made are so fundamentally unjust, they feel powerless to influence the process or represent their interests and are often outvoted by larger creditors who can weather the insolvency process better.

All this has led to Trust Deeds becoming discredited as a solution.

Proposed Solution

As a solution to these problems, I would like to suggest some amendments to the Bankruptcy (Scotland) Act 2016, which won’t require primary legislation and could be achieved by regulations made by the Scottish Ministers.

The primary legislation that governs Protected Trust Deeds is the Bankruptcy (Scotland) Act 2016.

The specific part of the Act that deals with Protected Trust Deeds is Part 14 and Section 194 of the Act allows the Scottish Minister to make Regulations that modify or add to Part 14, providing the change that could be made could have been made by the Minister under paragraph 5(1) of Schedule 5 of the Bankruptcy (Act ) 1985.

This is below :

The primary legislation that governs Trust Deeds, therefore, can be amended by way of a Scottish Statutory Instrument, using I believe the negative procedure

The proposals avoid changing the essential characteristics of Trust Deeds, that if done out with a full review of all formal debt solutions in Scotland could have unintended consequences, such as denying people options, but also increasing the number of people forced into applying for their own bankruptcy.

The proposal instead would introduce three new provisions into the 2016 Act, which arguably AiB have already powers under section 179(1) they could use to achieve the same effect (the power to issue directions to Trustees), but would also introduce new procedural processes for applying and making these directions and would make a political statement that AiB must increase its regulatory role in how they supervise and regulate Trust Deeds.

The proposed provisions are:

Creditor application to not be bound by the Discharge of the Debtor or the Trustee

This provision would allow a creditor that has objected to a Trust Deed becoming protected to make an application to AiB that they should not be bound by the effects of the Debtor or the Trustee receiving a discharge from the Trustee.

The creditor would have to show that the Trustee’s proposed intromissions with the Trust Deed estate would be unduly prejudicial to their interest.

This would not be a judicial process and so, therefore, would be quicker and less expensive than the Creditors having to use any existing powers the 2016 Act gives them.

However, Creditors would only be able to apply where they had notified the Trustee of their objection to the Trust Deed before it became protected and providing the application was made within 28 days of the Trust Deed becoming protected.

It would also, if successful not be fatal for the Trust Deed, so the Debtor and Trustee could decide whether or not to continue with the Trust Deed or whether the Trustee or the Debtor should be able to apply for the Trust Deed to be terminated and another option used.

There would be a right to review of any decision on any application for all parties, with an ultimate right to appeal to the Sheriff on a point of law.

Trustee to seek Approval from AiB to Refuse a Debtor a Discharge

Currently, a Trustee must seek the approval of AiB to provide a Debtor with a Discharge, but not to refuse a Discharge.

This provision would introduce a new provision into the 2016 Act that would require the Trustee to seek the approval of the AiB if they wish to refuse a Debtor a Discharge.

AiB as part of this process would have to allow the debtor and the creditors to make representations as part of this proposal and have the power to refuse the Trustee’s application. They would also be able to issue directions to the Trustee as part of their decision.

It is not specified in the provision what these directions may be, but it could include reducing the contribution the Debtor is to pay or even directing the Trustee to apply for the Discharge of the Debtor.

It is hoped this would tighten up protections for consumers in Protected Trust Deeds, and have a cautionary effect on Trustee’s refusing Debtors a Discharge, and would also require AiB to ensure that the interests of all concerned are considered before a Debtor is refused a Discharge.

Debtor Application to seek Early Termination of a Trust Deed without a Discharge

This provision would allow a Debtor to seek an early termination of their Protected Trust Deed without a Discharge, but only through a Money Adviser.

Again, this would be an administrative process where the application is made to the AiB, so should be faster and less expensive than any existing court procedures that are available.

It is hoped this provision would allow a consumer, where they believe they have mis-sold or mis-advised a solution to seek remedial action that restores them, to the extent that is possible, back to the position they were in prior to granting the Trust Deed.

It would also allow AiB to issue directions, as it is appreciated terminating a Trust Deed early could leave many matters unresolved, such as what to do with funds already ingathered or what happens when assets have been sold or are in the process of being sold and what happens to contributions that have already been made or possibly have been taken from benefits, when they should not have been.

Equally, it is appreciated that some consumers may try and use this process when they anticipate they are about to come into possession of assets that could be used to pay their debts. In such cases, AiB could refuse the application or could agree to grant it only on compliance with a direction.

The power to issue a direction would, therefore, allow AiB to address any unresolved issues to help restore the consumer back to the position they were in prior to granting the Trust Deed and end the problem of Trust Deed prisoners where a Trust Deed is no longer the appropriate solution for a consumer.

It would also require the Debtor, on the Advice of a Money Adviser, to state how they intend to address their over-indebtedness, whether that is through sequestration or a Debt Arrangement Scheme.

The provision would be subject to a right of review or appeal to the Sheriff on a point of law only.

Conclusion

I believe these proposals would avoid any fundamental changes to Protected Trust Deeds, which for the reasons mentioned above, I believe are likely to have unintended and undesirable consequences and should only be considered as part of a full review of all formal debt solutions.

However, in recognition, there are genuine concerns by many stakeholders, I believe the above proposals could begin to address some of the concerns that have been raised and allow remedial action to be taken on a case to case basis.

I also believe, the accumulated effect of these provisions on Trust Deeds and the Trust Deed market will be to improve current practices, as providers will be reluctant to take cases that pose a risk of being reviewed under the above provisions or applying for a Debtor to be refused a discharge, without exhausting all options first.

I also believe as such they will help restore confidence in Protected trust Deeds, that is overdue and necessary, without restricting their availability where they are an appropriate solution for consumers.

Finally, whereas I don’t believe there is any consensus for the AiB’s proposed amendments, I believe there could be consensus across the sector for these proposed amendments.

Proposed Amendments

Below are draft versions of the proposed amendments to the 2016 Act that I believe should and can be made.

These draft versions are for illustrative purposes only (not being a legal draftsperson), however, I believe they are helpful in considering the proposals, in that they focus attention on what procedures should be used and hopefully, will help others contribute to the discussion.

After s178 insert S178A

178A Creditor’s application to not be bound by the Debtor or Trustee’s discharge

(1) A creditor who has notified the trustee of their objection to the trust deed within the relevant period may apply to AiB under this section within 28 days of the Trust Deed’s Protection being registered on the Register of Insolvencies

(a) On receipt of an application by a Creditor, AiB must notify the other creditors, the Debtor and the Trustee and provide them with a copy of the Application that has been made and invite them to make representations to AiB within 28 days of receipt of the notification.

(b) After the time allowed under (a) for representations to be made, AIB, if satisfied, on grounds other than those on which a petition under section 177(1)(b) has been or could have been presented by the creditor, that the Trustee’s proposed intromissions with the estate of the debtor will be so unduly prejudicial to the creditor’s claim that the creditor should not be bound by the debtor or trustee’s discharge, AIB may order that the creditor is not to be so bound.

(c) On deciding the application under (b), AiB must send a copy of their decision, with reasons to the trustee, the Creditors and the Debtor.

(d) Any party to the Trust Deed can request a review of AiB’s decision within 14 days of receipt of their notification of the decision

(e) On receipt of a request for a review AiB should notify the other parties to the Trust Deed of the request and complete the review within 28 days of the request being received. AiB must notify all parties to the Trust Deed of the outcome of the review.

(h) In completing a review of their decision, AiB must either decide to uphold their original decision or amend their decision as if they were deciding an application under (b).

(i) Any Party to the Trust Deed can appeal AiB’s decision under (h) to the Sheriff within 14 day of being notified of that decision. Appeals are on a point of law only. The Sheriff’s decision is final.

Replace section 184 (8) with:

Section 184 Protected trust deed: discharge of debtor

(8) If, on request by the debtor or as soon as reasonably practicable after the end of the period for which payments are required under the trust deed, the trustee believes the debtor should be refused a discharge, the trustee must make an application to AiB for the Debtor to be refused a discharge and

(a) inform the debtor and the Creditors that an application has been made by notice in writing—

(i) of the facts and the reason why a refusal should be granted,

(ii) that the debtor will not be discharged from their debts and obligations in terms of the trust deed if the application is granted, and

(iii) of their right to make representations to AiB within 28 days of receipt of the notification as to why the application should or should not be granted

(iv) The Trustee must advise the Debtor they can seek independent advice from a solicitor or from a Citizen Advice Bureau or Local Authority Money Advice Service and provide details of free money advice services within the local authority area the Debtor resides

(b) The Application will be in the form of a statement (being a statement in such form as may be prescribed for the purposes of this paragraph) and must specify:

The reasons why the Trustee believes the Debtor has failed to meet their obligations under the Trust Deed and failed to co-operate with the administration of the Trust Deed;
Whether the Debtor has consented to the Application being made;
Outline what funds have been ingathered
What the fees and outlays of the Trustee are at the date of the application;
What dividends have been paid to Creditors and are likely to be paid in any final distribution by the Trustee

(c) AIB must not decide whether any application should be granted or rejected until 28 days have passed from receipt of the application

(d) In considering the application AiB must decide and have regard to any representations that are made, whether it is fair and reasonable to grant the application having regard to the interests of the Trustee, the Debtor and the Creditors.

(e) In deciding the application AiB can only:

Grant the application
Grant the application and issue a direction to the Trustee under section 179 (1)
Reject the application
Reject the application and issue a direction to the Trustee under section 179 (1)

(f) AiB decision on the application must be notified to the Trustee, the Creditors and the Debtor with a statement as to the reasons for their decision and a copy of any direction issued.

(e) Any party to the Trust Deed can request a review of AiB decision within 14 days of receipt of their notification of the decision

(g) On request for a review AiB should notify the other parties of the request and complete the review within 28 days of the request being received. AiB should notify all parties to the Trust Deed of the outcome of the review.

(h) In completing a review of their decision, AiB must either decide to uphold their original decision or amend their decision as if they were deciding an application under s184 (8) (e).

(i) Any Party to the Trust Deed can appeal AiB’s decision under (h) to the Sheriff within 14 day of being notified of that decision on a point of law only. The Sheriff’s decision is final.

(j) The status of a Trust Deed should not be amended on the Register of Insolvencies until the review and appeal process has been completed or the time allowed to seek a review or appeal has lapsed.

Insert after s184 (8)

(8A) A Money Adviser may make an application on behalf of a Debtor to AiB for the early termination of their Trust Deed (without a discharge from their liability to repay their debts), if that Money Adviser is a Money Adviser for the purposes of section 9.

The Application will be in the form of a statement (being a statement in such form as may be prescribed for the purposes of this paragraph) and must be sent to the Trustee in the Trust Deed at the same time as the application is made to AiB and specify:
The Name of the Money Adviser and their employers contact details
The reasons why they believe the Debtor should be released from their Trust Deed, including any information they believe relevant as to how the Debtor entered the Trust Deed and how it has been administered
How the Debtor proposes to deal with their debts should they be released from their obligations under the Trust Deed
On receipt of the Application AiB must contact the Trustee and invite them to indicate within 28 days whether they support the Application and to make any representations they believe AiB should consider in determining whether to grant the application or reject it.
On being notified of the Application, the Trustee should have regard to the interests of general body of Creditors to the Trust Deed.
AiB should decide the application only after the Trustee has had 28 days notification of the application
In deciding the application AiB must either:
Grant the Application
Grant the application and issue a direction to the Trustee under section 179 (1)
Reject the Application
Reject the application and issue a direction to the Trustee under section 179 (1)
AiB’s decision on the application must be notified to the Trustee, creditors and the Debtor with a statement as to the reasons for their decision and a copy of any direction issued
Any party to the Trust Deed can request a review of AiB decision within 14 days of receipt of their notification of the decision
On request for a review AiB should notify the other parties of the request and complete the review within 28 days of the request being received. AiB should notify all parties to the Trust Deed of the outcome of the review.
In completing a review of their decision, AiB must either decide to uphold their original decision or amend their decision as if they were deciding an application under s184 (8A) (e).
Any Party to the Trust Deed can appeal AiB’s decision under (h) to the Sheriff within 14 day of being notified of that decision on a point of law only. The Sheriff’s decision is final.
The status of a Trust Deed should not be amended on the Register of Insolvencies until the review and appeal process has been completed or the period allowed to seek a review or appeal has lapsed.

Increased use of Sheriff Officers By Scottish Councils is a Cause for Concern

9th December 2019 0 comments

New statistics, produced by the Accountant in Bankruptcy Office show that in 2018-19 Scotland’s Local Authorities increased the number of times they instructed Sheriff Officers to recover Council Tax debts by over 15%, adding, it is believed, up to £30 million in Sheriff Officer fees to those in debt.

Also, the type of action the Local Authorities have been instructing Sheriff Officers to take appears to be focused on one particular type of enforcement action: Bank Account Arrestments, which many believe are a particularly harsh form of debt recovery.

Bank Account Arrestments for Council Tax Increase by 21%

In 2018-19 there were 167,356 bank account arrestments by Local Authorities for Council Tax debts (up 21% on the 138,021 there was in 2017-18).

When a bank account is frozen, any funds that are held in the account that are above the Protected Minimum Balance of £529.90 are frozen, up to the level of the debt that is owed.

So if there is £1,000 in an account and £1,200 is owed, then all funds that are in the account that are above £529.90 are frozen. If only £200 was owed then the first £529.90 would be protected, the next £200 would be taken by the Sheriff Officers and the remainder of the balance would be returned to the bank account holder.

The problem is people are usually only left with the £529.90 and this frequently leaves them without enough money to pay their mortgage, rent, gas, electricity or to buy other household essentials such as food.

If the funds held in the account are below the Protected Minimum Balance of £529.90, then the Bank Account Arrestment fails, but the Sheriff Officers fees are still added to the debt and most banks will still add a £25 administration fee to the person’s account.

So for most, whose only income is social security benefits, and whose funds in their account are never above £529.90, the pointless arrestment plunges them more into debt.

In contrast to the sharp increase by Councils in their use of Bank Account Arrestments is their use of other types of arrestments, such as wage arrestments, (there were 71,835 in 2018-19, which only increased by 4% on the 68,858 there were in 2017-18).

Wage Arrestments are not as harsh as Bank Account Arrestments, as although the first £529.90 per month is protected, the amount that can be taken after that is only a percentage of the remaining funds, based on a sliding scale, meaning people are not just left with £529.90.

The increased use of Bank Account Arrestments by Local Authorities is, therefore, an indication that they are opting to increase their use of one of harsher forms of debt recovery, even if it means forcing more people into hardship.

This is not a proportionate debt recovery strategy.

Increased use of Sheriff Officers to Recover Council Tax Debts

What the Scottish Diligence Statistics also clearly shows is that Local Authorities are now some of the most aggressive creditors in Scotland.

Whilst their use of Sheriff Officers increased by over 15%, other creditors (Banks, Credit Card Companies Etc.) saw their use fall by 42%.

What this suggests is whereas commercial creditors are not using coercive debt recovery tactics, possibly because they don’t consider it to be effective, Councils are increasing their use of it.

If the Commercial Creditors are correct and it is not an effective form of debt recovery, then Councils have to show why their increased use of it is, as in addition to causing hardship, it is significantly increasing the levels of debt that people owe.

With nearly 90% of all legal debt recovery procedures executed by Sheriff Officers now being for Council Tax arrears, the picture that is being painted is one where Sheriff Officers are almost exclusively working for Local Authorities.

The question has to be asked is this increased use in the best interests of local authorities or is it in the best interest of those Sheriff Officer that advise them?

The figures also demonstrate, that contrary to claims that Scotland is better than the rest of the UK, where the over-use of Bailiffs has been criticized by bodies such as the House of Commons Treasury Select Committee, the situation here does not appear to be much better.

Local Authority Debt Recovery Strategies Need to be Revised

Scottish Local Authorities now need to revise their debt recovery strategies by increasing the amount they are investing in free money advice services, which are believed to have been cut by 45% between 2014-2017 and is now believed to be worth less than £11.72 million per year.

Contrast that with up to £30 million in fees it is believed Sheriff Officer action is adding to people’s Council Tax Debts each year.

In addition to this the Scottish Government need to accept some responsibility.

If they are going to allow Local Authorities to increase the level that Council Tax rates can be increased by next year, they must also ensure with that power comes the responsibility to ensure those who are most affected can access advice and assistance to help mitigate the worst effects of any hike.

This could be done by increasing funding for free money advice by introducing a Scottish Debt Advice Levy and also national best practice guidance for Council Tax Debt Recovery, that places an emphasis on ensuring Local Authority Debt Recovery departments work in collaboration with local advice agencies and current year council tax is prioritised over arrears.

The Scottish Government could also, as part of the Accountant in Bankruptcy’s review of Diligence, look at how bank account arrestments are working in practice.

In particular they could review whether the Protected Minimum Balance of £529.90 offers sufficient protections and whether the process to recall or restrict a bank arrestment could be made more effective, by transferring the powers from the Courts to the Accountant in Bankruptcy, with a right to appeal to the Courts only on a point of law.

The Scottish Parliament could also take a leaf out of the House of Commons Treasury Select Committee’s book and independently launch an inquiry into the issue of Council Tax debt recovery.

Then again, the Scottish Government could just see through on its promise and reform local government taxation and introduce a more progressive model of Local Government funding.

The Accountant in Bankruptcy’s Shame: Bankruptcy Application Fees

6th December 2019 0 comments

New Research carried out for the Accountant in Bankruptcy (AIB), has provided an invaluable insight into Scotland’s Minimum Asset Bankruptcy procedure (MAP).

Importantly the research has also provided the first real insight into how consumers find the application fees that are required for them to apply for bankruptcy.

The fees are charged by the Accountant in Bankruptcy and are £90 and £200 respectively for Minimum Asset and Full Administration Bankruptcies.

The research carried out by EKOS, an Independent Economic and Social Research Consultancy based in Glasgow, investigated the experience of people using bankruptcy as a means of dealing with their over-indebtedness and focused on Minimum Asset Bankruptcies in particular.

What are Minimum Asset Bankruptcies?

Minimum Asset Bankruptcies are a type of Bankruptcies that allow people who cannot afford to contribute to their bankruptcy to use an administrative lite version of the Full Administration Bankruptcy process.

In addition to not being able to contribute anything financially to their bankruptcy, applicants must also have debts of less than £17,000 and cannot own any heritable property, such as a home.

In 2018-19 of the 4,873 bankruptcies awarded in Scotland, 44% were Minimum Asset Bankruptcies.

The Application Fee

Ever since 2008, Scots who have applied for their bankruptcy have had to pay an application fee.

No fee waiver is available for application fees, even if the applicants are on a low income or wholly in receipt of social security benefits, which is almost always the case in relation to those that use Minimum Asset Bankruptcy.

This is in stark contrast to the position prior to 2008 when a legal fee waiver was available for those in receipt of an income-based benefit.

The research found that of those surveyed over one third of those who applied for Minimum Asset Bankruptcies had to either borrow the money or apply to a charity for the fee to be paid.

The report also found that almost three quarters of those surveyed found that paying the fee was either “somewhat hard”, “Hard” or “Very Hard”.

The research also provided an insight into the reason people who use MAP became over-indebted in the first place.

Only 31% attributed their problem debts to overspending, with the remaining 69% attributing the cause to changes in their circumstances that led to financial hardship. Importantly, 62% attributed the cause to health problems.

Additional insight was also provided by the research that shows of those surveyed 77% said they suffered mental health problems, whilst 48% said they had mobility issues and 35% said they had physical health problems that affected their stamina, breathing or left them feeling fatigued.

Despite the research painting a picture of people that on the whole appear to be suffering from low incomes and were suffering financial hardship as a result of changes in their circumstances, and who were struggling with both physical and mental health problems, disappointingly EKOS does not recommend an abolition of the bankruptcy fee or the introduction of a fee waiver.

Why, is unfathomable, as it would appear the only reasonable conclusion that can be reached is the application fee for both Minimum Asset and Full Administration Bankruptcies is causing some of the most vulnerable financial hardship.

EKOS, does state in defence of the application fees:

“There is a clear rationale for the upfront application fee. It makes a contribution towards the administration cost associated with processing MAP bankruptcy applications and awards. Further, the decision to apply for MAP bankruptcy should not be taken lightly, and the fee helps people consider this formal debt solution more seriously. It has appropriately been pitched lower than that which applies to Full Bankruptcy”

However, such a conclusion can only be treated with some cynicism.

Conclusion

First, EKOS has no expertise in the area of debt and bankruptcy.

Second, access to debt relief is an access to justice issue. Prior to 2008, Bankruptcy was a court process and it was only removed from the Courts for administrative purposes. When it was part of the court process, fee waivers were available through the legal aid system. The nature of bankruptcy has not changed, an as such as a legal remedy, it should be available to people regardless of whether they can afford it or not.

Thirdly, the idea that people who are bankrupt are being forced to borrow money on the eve of their bankruptcy is highly irresponsible. Particularly as by their own admission and that of their money adviser or insolvency practitioner, they cannot pay their debts as they fall due.

Fourthly, it is nothing short of cruel and inhumane to force people, many of whom are suffering mental and physical health problems, to go through a process many find difficult financially, and clearly causes many further hardships. This is particularly the case when you consider many of those applying for Minimum Asset Bankruptcies will be having some of their debts (council tax arrears, benefit overpayment, Universal Credit Advances) recovered from their benefits, and these will not be stopped until the bankruptcy application is made. These people are, therefore, trapped between a rock and hard place of having debts recovered from their benefits, so they cannot afford the application fee, and cannot stop the deductions until they do.

Fifthly, it is a sad indictment that both the Scottish Government and the Accountant in Bankruptcy are knowingly relying on funds intended for charitable purposes to pay for their administration of bankruptcies, when in 2018-19 they distributed £18 million to creditors from bankruptcies, whilst recovering over £2 million in various fees they charge to bankruptcies themselves.

Sixthly, the cost of application fees is not just one borne by the bankruptcy applicant, their family and friends or charities, but also by the free advice sector who have to undertake the work of assisting clients to make applications to charities for bankruptcy fees.

Seventh, the argument that a fee has a cautionary effect on consumers, is absolute nonsense.

As EKOS research showed 76% of those surveyed only found out about the Minimum Asset Procedure after they spoke to a money adviser, so this idea that applicants would recklessly be making applications for bankruptcy if it wasn’t for the fee is nonsense.

Also, no bankruptcy application can be made without the assistance of a money adviser or insolvency practitioner, which provides important safeguards. This is strongly supported by the result from those surveyed on how they found the advice process, with high numbers of people stating they felt they were properly informed and advised of all options.

The simple truth is applications fees cause varying degrees of hardship for many very vulnerable people and the fee has no cautionary value, but acts a financial obstacle to people getting relief from their debt.

It’s appears obvious because of EKOS’s lack of experience in this area, few of these points were considered in making their recommendations and unfortunately means what is a good report, ends in a whimper.

Equally, the fact that such weak arguments are made by the Scottish Government, whilst they blind themselves to the effects of their policies, is nothing short of dishonesty.

This is about money and it is about the Scottish Government being prepared to raise that money from some of the most vulnerable in society, even if it causes them suffering and even if they must beg and borrow to raise it.

That is morally bankrupt.

Where Has The Scottish Debt Advice Levy Gone?

6th November 2019 2 comments

It is now believed that up to a quarter of a fund that has been set up to help Scottish Debt Advice Services has already been earmarked for UK-wide debt charities, by the Scottish Government, giving them priority over locally-based, face to face money advice services.

The Scottish Debt Advice Levy, believed to be worth £3.96 million per year, is intended to help free debt advice services that help people struggling with their debts like credit cards, personal loans and other consumer credit borrowing.

However, despite there being very little Scottish demand on the UK National Debtlines and charities like Stepchange having self-funding business-like models, the Scottish Government, it is understood, has already allocated them up to a quarter of the entire Scottish Debt Advice Levy, leaving less for local face to face money advice services.

What is the Scottish Debt Advice Levy?

The fund that was previously managed by the Money Advice Service (now the Money and Pensions Service) is raised by the UK Financial Conduct Authority by applying a levy to UK Clearing banks and consumer credit businesses.

The fund was devolved to the Scottish Government in January 2019 under the Financial Claims and Guidance Act 2018.

To help with the transitioning of the fund into the hands of the Scottish Government, it was decided in 2019-20, the previous allocations of funding should continue, with a view to producing by September 2019, a new Debt Advice Route Map that would outline how funding would be spent in years to come in Scotland.

However, to-date the Scottish Government have failed to produce its Debt Advice Route Map and appears ready to honour pre-devolution arrangements of giving up to half a million of the funding to UK National Debt Lines and another half a million to the UK Debt Charity Stepchange.

No other organisation, such as a local authority or Citizen Advice Bureau is understood to have been given any commitment of funding next year.

UK National Debt Lines

The UK National Debt Lines are understood to be the Birmingham based National Debt Line and Business Debt Line, both of which are owned by the Money Advice Trust. It is also believed to include the national debt charity, Stepchange.

However, it is understood that neither the Money Advice Trust’s National Debtline or the Business Debt Line received many calls from Scotland, with the National Debtline reporting only 4,732 calls in 2017 and the Business Debtline only receiving 1,010.

To put that in context, many local authority money advice services or locally based Citizen Advice Bureaux will receive similar number of calls in a year.

In addition to this, neither the National Debtline or the Business Debtline actually provide face to face appointments to consumers, and often after giving initial advice, have to refer them back to locally based front line services.

Stepchange

Stepchange, also operates a national debtline, as do many large private sector debt advice firms.

Like these firms, Stepchange’s primary funding model is to raise funds from the cases of the clients they deal with.

So, in relation to Debt Management Plans, through a special arrangement they have with the Banks, known as the Fair Share Scheme, it is believed they collect between 11-12% of everything that is paid by a consumer in such a plan.

Across the UK this is believed to have raised them about £43 million in 2018.

They are also believed to have raised a further £3.7 million from insolvency services and a further £1.08 million from equity release services, (helping people release equity from their homes to pay their debts).

In addition to that it is also also believed in 2018 they raised a further £323,000 in commission from mortgage advisers and insolvency practitioners.

In Scotland, it is known they do generate fees from several insolvency practitioners, who they refer bankruptcy and protected trust deed clients onto.

It is also believed their Chief Executive, earned £167,675 in total remunerations in 2018 (more than the First Minister of Scotland)

Who Are The Winners?

Stepchange, it is believed, will also be one of the big “winners” from the Scottish Government’s Debt Arrangement Scheme (Scotland) Amendment Regulations 2019, which will see them increasing their fees on Scotland’s equivalent of a Debt Management Plan from 8% to 20% per case.

Despite this, Stepchange do not offer the same services to people struggling with debts, that other local money advice services do.

For example, those that are self-employed, it is understood, are told to go back to their local money advice service if they want to enter the Debt Arrangement Scheme, as it is believed they find their cases too difficult.

Also, if people don’t have enough money to allow them to be slotted into one of the solutions that Stepchange generate fees from, they are sent copies of letters that they can copy and send to their creditors themselves.

So self-help, if you are poor.

Local Authority Funded Money Advice Services

In contrast, it is understood local authority-funded money advice services, which include services such a law centres, Citizen Advice Bureaux and services provided by local authorities themselves, have seen cuts to their funding of over 45% since 2014.

These services are still the primary providers of both formal and informal debt solutions in Scotland, including solutions like Bankruptcies and Debt Payment Programmes under the Debt Arrangement Scheme.

These services also provide solutions to all clients, including those that don’t fit into traditional formal or informal solutions, or are self-employed or whose outgoings exceed their incomes (believed to be more than 40% of all their clients).

Scotland Needs a Debt Advice Route Map

If it is correct that the Scottish Government has decided to continue with pre-devolution funding arrangements, then this is disappointing.

It shows a complete lack of analysis and understanding and with the Debt Advice Route Map still not having been published, a lack of strategy by the Scottish Government to fund free money advice services in Scotland.

Prior to the funding being devolved, it was not known how much of the funding was being given to the Money Advice Trust and Stepchange, as the Money Advice Service was not subject to Freedom of Information requests, unlike the Scottish Government is.

However, now it is known, questions need to be asked.

The National Debtlines owned by the Money Advice Trust are not services high in demand in Scotland, and calls to many local advice services each year easily compete with the numbers they are doing.

Equally, Stepchange has a business model that is modeled in many ways on that of private sector firms, despite them being a charity and should easily be self-funded, with no requirement for them to have access to public funds.

They are also believed to have £21 million in reserves, whilst many local authorities are eating into theirs.

There financial position has also been strengthened in Scotland with the introduction of the Debt Arrangement Scheme (Scotland) Amendment Regulations 2019, as they can now more than double their fees from Debt Payment Programmes.

The Scottish Government, now have to decide how they will fund free money advice services in Scotland and how the Scottish Debt Advice Levy should be spent.

They must bring forward and publish their Debt Advice Route Map and ensure it will support Scotland’s varied and rich advice landscape of both statutory and third sector organisations , who have suffered most from austerity and remain in the greatest demand: face to face, local, money advice services.

Debt Arrangement Scheme: What is Changing?

6th October 2019 2 comments

The Scottish Debt Arrangement Scheme (DAS), the UK’s only formal debt repayment plan, is intended to help people struggling with problem debt and will be changing from the 4th November 2019.

The changes, that will come into force are contained in the Debt Arrangement Scheme Amendment (Scotland) Regulations 2019, and ARE intended to introduce a number of improvements to the Scheme.

Private Management Fees to be Abolished

The first of these change are that no-one who applies to the Scheme will have to pay a fee, even if they apply to the Scheme through a private debt management firm or insolvency practitioner.

In actual fact, charging a fee to the consumer in relation to the Scheme will be illegal after the 4th November 2019.

Automatic Approval

Second, whenever someone makes a proposal to the Scheme, it will now be automatically approved, even if some of the creditors object to it, providing they don’t have more than 10% of the total debt owed.

Where they are owed more than 10% of the debts in a proposal, the proposal will go to a fair and reasonable test administered by the Debt Arrangement Scheme Administrator, who will decide whether or not to approve the programme. However, with 96% of all applications being approved by automatic approval or the fair and reasonable test, it is anticipated even if more applications are not approved, those that are, will be approved quicker after the change are introduced.

Changes in Circumstances

Thirdly, where someone is already in a Debt Payment Programme, the Debt Arrangement Scheme Administrator, must approve that variation if all the creditors agree to it; or the change in the payments will mean the Programme will finish sooner than was originally proposed.

Payment Breaks

Finally, it will now also be possible for those in the Debt Arrangement Scheme to request up to two payment breaks each year (each break cannot be for more than one month), if they experience an unexpected crisis. Where they experience such a crisis, it will be for their money adviser to approve the payment break.

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