Do Those in Debt need Respect?

Do Those in Debt need Respect?

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.

The poor pay for the poor in modern Scotland, so the rest of us don’t have to.

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.

Mortgage Arrears to Increase as DWP Mortgage Support Cut

Mortgage Arrears to Increase as DWP Mortgage Support Cut

The announcement that the mortgage interest rate that the Department of Works and Pensions pays under the Support for Mortgage Interest Scheme is to be cut, will be devastating for many low income households.

The Scheme, which pays the interest part of a benefit claimant’s mortgage, does so only up to certain levels of interest rates. Currently, that rate is 6.08%, so if your mortgage rate is higher than that, there is a shortfall on the interest part of your mortgage payments which you need to make up. As the scheme only pays the interest part of you mortgage, many claimants, even when they are receiving full payments to the interest, must make additional payments from their benefits to the capital part of their mortgage.

After the 1st October, the rate will fall to 3.63%. This is the Bank of England’s average monthly mortgage interest payment. For many low income families, however, usually the groups that are more in need of help  and least able to get the most competitive rates available, this will not be enough.

With increasing signs that mortgage lenders are not allowing borrowers to switch to interest only mortgages, the most vulnerable could see shortfalls, not only in the capital repayment element of their mortgage, but the interest element also.

If further proof is needed that repossessions will begin rocketing out of control under this ConDem coalition, this is it. To date the actions of the previous  Government at Westminster and the Government in Edinburgh have prevented repossessions reaching the level predicted by the Council of Mortgage Lenders and in actual fact there is evidence they have fallen.

But not for long!

Why Scotland Needs 200,000 Bankrupts!

Why Scotland Needs 200,000 Bankrupts!

A couple of years ago I was speaking at a Credit Today Scotland conference in Edinburgh. The room was filled with creditors, debt collectors, debt management companies and insolvency practitioners. As the token money adviser I was just a tat out of my comfort zone.

I told the story of Donald Trump walking by Tiffany’s one day. He turned to a colleague as they passed a beggar and asked him if he knew the difference between himself and the beggar. The Colleague didn’t know, so Trump gave him the answer: about 900 million dollars. The irony was that whereas the beggar was probably solvent, trump wasn’t with his assets hugely outweighed by his liabilities. I was making the point to them they should be careful as many of their clients were effectively bankrupt.

It’s a sobering thought that if someone like Donald Trump could be effectively bankrupt, how many more of us could be as well. Last year in Scotland there was nearly 23,000 personal insolvencies in total, that’s approximately 0.5% of Scotland population over the age of 18.That means in the next two year, one in one hundred people in Scotland will be declared insolvent.

At another conference I was at last week, Citizen Advice Scotland, the Accountant in Bankruptcy office was there and said the figure was only about 0.3% of the population per year, which was an acceptable figure. However, the Accountant in Bankruptcy were not counting those who went into protected trust deeds, another type of personal insolvency in Scotland. Total personal insolvencies are 0.5% of the population. But should the laws be changed to allow that number to be doubled? Could it be in Scotland’s best economic interests if the number was double that?

The problem with bankruptcy is the University of Wales carried out research and believes there are over 2 million iceberg bankruptcies in the UK[1]. That is people who are paying only the minimum each month to their debts and cannot reduce their overall indebtness. People, that is, who could become bankrupt if they were to lose their jobs and if they don’t, will never repay all their liabilities. With some experts believing up to 30,000 jobs could be at risk in Scottish local authorities alone in the next couple of years[2], and assuming of those 2 million iceberg bankruptcies, up to 200,000 could be in Scotland, it’s not difficult to see we could see the numbers of personal insolvencies increase quickly over the next couple of years.

This is likely to be aided with new bankruptcy laws due to be implemented in November 2010 as part of the Home Owner and Debtor Protection (Scotland) Act 2010. Certificated sequestrations (the formal name for what most people consider to be bankruptcy in Scotland) will allow anyone who can show they can’t pay their debts as they fall due to apply for sequestration. That of course doesn’t mean everyone who meets that criteria will, as sequestration can result in people losing their homes and other assets, but where people have negative equity and cars worth under £1,000 (soon to be £3,000) bankruptcy may become an option.

But the question needs to be asked is this a bad thing? Of those 200,000 iceberg bankruptcies in Scotland, the reality is many of these people cannot reduce their indebtness. That is their situation is unlikely to improve and in most cases, will only get worse. That is people who are being left without any disposable income to spend on consumer goods in their local economies for prolonged periods of time, can’t take their children even modest holidays and are so dependent on credit that their debts only get worse. This is also people who are constantly juggling their credit cards and loans, suffering from stress and the frustration of not being able to address their problems. The links between debt and mental health are clear and well established.

So could we help more people to go bankrupt? It may even help the Scottish economy, breathing life back into consumers who are effectively dead financially – up to 200,000. Could we increase the rules in bankruptcy to protect people who have modest amounts of equity in their homes, so they don’t need to sell their home if they go bankrupt, but get to keep it? Such ideas aren’t that fantastic. In the United States, federal homestead protection laws protect the first $15,000 of equity in the home in bankruptcy. Some states have their own laws, which allow higher amounts and in states like Florida, there is no cap on the amount of equity someone can have.

In the United States, there is credit rationing between states, unlike in the UK, which means is it is easier to obtain credit in some states as opposed to others. This is often used as a reason for Scotland not going radically on its own, even though under devolution it could, but, then why not? The availability of credit throughout the EU varies as does the cost, which is part and parcel of having your own legal system. Why should the Scottish Government not use a economic lever like bankruptcy laws to control the availability of credit and indebtedness in Scotland, considering the wider social problems it can have.  In the United States the rate of self–employment and business start up is higher than it is here and one of the reasons for that is commonly believed to be the bankruptcy laws, which make people less risk averse. With thousands of jobs cut due in Scotland and a need to increase growth in the private sector, including business start ups, why should the Scottish Government not consider reforming our bankruptcy laws to encourage this?

But there lies a problem. Politically, even 30,000 insolvencies a year in Scotland is likely to be unacceptable, although very possible, soon. There could be repercussions if bankruptcy numbers begin increasing, like credit rationing and increased homelessness (especially under the current laws). We could, therefore, see obstacles being reintroduced into Scottish bankruptcy laws to artificially keep the numbers low. Artificially low that is because the number of people who will be able to go insolvent each year won't really reflect the numbers that are really bankrupt. So we end up with a bottle kneck, where we only allow so many through, not for economic reasons, but for political ones. This has happened before. Prior to 1985 in Scotland the number of bankruptcies in Scotland were less than 300, by 1993 after changes in the law, the numbers increased to over 11,000 and bankruptcy became a consumer remedy, instead of just a remedy for business people. This caused controversy as it saw huge costs for the public purse. The current situation, however, is completely different with the Accountant in Bankruptcy office soon to be full cost recovery – that is costing the public purse nothing. When the laws were changed again in 1993 the numbers went back down to 4,300 – but that didn’t mean the number of people needing to go bankrupt had fallen, just that there were thousands who were trapped in debt traps and weren’t being allowed to escape. Even by 2007/8 (14 years later) the number of insolvencies had only increased to 13,600. In 2008 the lid was again lifted  with changes in the law and the numbers increased to approximately 22,000 in the space of a year.

Now many may complain that with bankruptcy increasing their will be more small businesses not getting paid and ending up bankrupt themselves, laying off employees and creating a death spiral. The truth, however is the, the top ten creditors in bankruptcies are huge high street or multinational creditors, not small local businesses – although many of these suffer when local consumers spend years with no disposable income because of debt repayments and cannot be fully economically active in their local communities. The reality is, many of these big international firms still make profits even with thousands of bankruptcies each year and there is other multi national finance companies that specialise in buying up and speculating in their bankruptcy debts to make profits.

We need to change the way we see bankruptcy. Traditionally, in Scotland and the UK we have seen it as a method of debt recovery (which it isn’t – less than 13% of all personal insolvencies are initiated by creditors), but as part of the social safety net we have in society that allows people debt relief and the ability to rehabilitate themselves, not because of recklessness or fecklessness, but usually because of bad luck and misfortune. We need also to see bankruptcy laws as economic levers in society that can be used to reduce indebtedness for future generations by forcing creditors to ration the availability of credit and also as tools that can help encourage people to start up their own businesses by sending out the message, just because you go broke, doesn’t mean you lose everything.

If other countries can use their bankruptcy laws intelligently like this, there is no reason we can’t in Scotland. One percent of the Scottish population going bankrupt in the coming years is not a scandal, but a necessity for our future economic health. 0.3-0.5% is not enough with up to 200,000 iceberg bankruptcies out there.


[1] http://www.aib.gov.uk/Resource/Doc/4/0000840.pdf

 

[2] http://www.heraldscotland.com/news/politics/2000-staff-facing-axe-in-latest-council-cuts-1.1052835