September 2013

Scottish Gov To Introduce UKs Longest Bankruptcy

Scottish Gov To Introduce UKs Longest Bankruptcy

As the Scottish Government host on Monday, the 24th Annual General Meeting of the International Association of Insolvency Regulators, their surroundings will be far from those where most bankrupts spend their time.

The conference itself will be hosted in the Edinburgh’s plush George Hotel and be opened by Scottish Government Minister, Fergus Ewing.

Later there will be a drink’s reception in the Great Hall of Edinburgh Castle and a formal conference dinner on the Royal Yacht Britannia.

The event is expected to be attended by insolvency regulators from 24 countries, including the Republic of Ireland which, like Scotland, is currently modernising its own bankruptcy laws.

Unlike Scotland, however, whereas the Irish are liberalising their laws to reduce the time someone will be bankrupt from 12 years to 3 years, Scotland, under Minister Fergus Ewing is introducing new legislation, which will may see Scots remaining bankrupt for longer than anyone else in UK.

Currently under existing legislation, bankrupts throughout the UK are only bankrupt for 1 year, then they receive a discharge from their bankruptcy.

Where debtors can afford to pay something towards their bankruptcy, however, they have to pay for three years.

New proposals being made by the Scottish Government, however, will see this change.

First, they are proposing removing the automatic discharge of debtors from their bankruptcy after one year and leaving it to the discretion of their trustees to decide when they should be discharged.

Second, they are changing the law so bankrupts don’t just pay for three years, but for four years, one year longer than anywhere else in the United Kingdom.

Many insolvency practitioners have already indicated that if it is left to their discretion when a debtor is discharged, then they will likely only discharge debtors when all payments to the bankruptcy have been paid, meaning for most Scots, bankruptcy will last four years.

The poor are being trapped in a cycle of debt

Last year over 40% of all Scottish bankrupts were low income, low asset bankrupts (LILA), which mean they were either entirely dependent on means tested benefits or living on less than the 40 times the national minimum wage and didn't own their own home.

Previously these types of bankrupts in Scotland composed a larger number of those who went bankrupt, but applications by LILA debtors dropped by 60% last year after Fergus Ewing increased the cost of applying for bankruptcy from £100 to £200.

Since then many Citizen Advice Bureau and local authority money advisers have reported a sharp increase in the number of poor debtors unable to find solutions to their debts and who are now trapped in a cycle of debt.

Low Income, Low Asset Bankruptcies

The Scottish Government are now proposing a new procedure for Low Income, Low Asset debtors, but the procedure will be more restrictive than the current procedure and it is not expected as many debtors will be able to apply.

It will, however, allow those do meet the criteria to be discharged automatically after 6 months, but with the maximum amount of debt in such bankruptcy’s being restricted to £10,000 (average level of debt in LILA’s is £17,000), many low income debtors will be forced into the more formal, longer bankruptcy procedure.

The problem is the Scottish Government has not produced any evidence to suggest debtors in Scotland are able to pay for longer than anywhere else in the United Kingdom and no research has been undertaken to discover if this will increase hardship for bankrupt debtors and their families, although most money advice agencies are expecting it will. 

Even if the motivation is to raise more money for creditors, it is expected four year bankruptcies will also increase the costs of administering bankrupties and any increased returns will be minimal. 

Wolves in Sheep’s Clothing

Wolves in Sheep’s Clothing

As the Scottish Government continue its Help out of the Hole campaign, raising awareness of the Debt Arrangement Scheme, some providers of the Scheme are behaving like wolves in sheep’s clothing, plunging consumers further into the hole of debt.

Ever since its launch the Scottish Government have taken a “broad church” approach to the Debt Arrangement Scheme.   This has been so successful that the 3 main providers of the Debt Arrangement Scheme are now all private sector firms, albeit it can also be accessed free through Citizen Advice Bureaux and local authorities.

To offset the risk that this would result in some consumers paying for services that they couldn’t afford, Regulation 12(2) of the Debt Arrangement Scheme (Scotland) Regulations 2011 required fee chargers to advise consumers  that they could access services for free and where they could access them.

In practice where a consumer disputes this has been done, the Debt Arrangement Scheme Administrator requires written proof showing such advice has been given.

Where it hasn’t, all fees have to be repaid to the consumer.

However, it would appear Scottish Government protection of consumers  is not going far enough.

Some firms are now including clauses that mean should the consumer leave their Debt Payment Programmes (DPPs) or transfer them to other providers, all fees that would have been due during the programme becoming instantly payable. Alternatively, other firms it is believed, instead of charging monthly fees, charge a one off high fee, but then allow the consumers to repay it by monthly instalments, to the same effect.

This means in reality there are likely to be cases where a consumers circumstances change and they are no longer able to pay their DPP. Their DAS provider, the very person supposed to be helping them, then serves an all sums due notice, further indebting them.

It also means where consumers wish to transfer to another provider, because their fees are cheaper, they are obstructed from doing so with the fear they will incur further debts.

It is impossible to say whether such clauses are unfair under consumer contract regulations without examining the individual clauses, but clearly standard term contracts that bind consumers into paying for services that may last years, at times when they may be distressed and vulnerable, are reprehensible. This is more so the case where such contracts prevent competition in the market and the ability of consumers to switch to obtain better services for both themselves and their creditors.

I am aware of cases where such contracts have been used and where the DAS provider has turned into a raging bull, conducting themselves in a manner you would expect of debt collectors. This includes employing the threat of pursuing the debtor to prevent them from switching to other remedies or providers.

The Scottish Government is currently progressing regulations through the Scottish Parliament to change the way Trustee’s in Protected Trust Deeds charge their fees; I would urge the Minister Fergus Ewing to consider similar regulations in relation to the Debt Arrangement Scheme and for the DAS Administrator, Rosemary Winter Scott, to consider whether such providers are fit to do so.

MSP urges Scottish Parliament to protect vulnerable debtors

MSP urges Scottish Parliament to protect vulnerable debtors

Glasgow MSP Bob Doris has urged the Scottish Parliament to consider taking more action to clamp down on rogue marketing companies who are mis-selling personal debt solutions to vulnerable Scots.

Echoing concerns I raised in an earlier article for the FIRM (Trust Deed Bubble to Burst), the MSP made the calls whilst speaking in the Scottish Parliament.

Discussing the Scottish Government’s new legislative programme, Bob Doris urged MSPs to look closely at the new Bankruptcy and Debt Advice (Scotland) Bill and emphasised the bill could be vital in improving debt solutions for the most vulnerable people.

The Glasgow MSP raised concerns, however, that some lead generation firms were offering Protected Trust Deeds irresponsibly, incentivised by lucrative fees and called for the Scottish Parliament to take further action to regulate them.

At present any firm involved in providing debt advice must have a category E and D Consumer Credit Licence, issued by the Office of Fair Trading (OFT); but there are concerns by many in the debt advice industry that the OFT is an ineffective regulator and many of those involved in providing advice are unqualified or unsuitable to do so.

The Glasgow MSP, therefore, called for the Scottish Government to consider creating an Approved Intermediary Scheme that would require anyone involved in advising on Scottish statutory debt remedies for financial gain to be approved by the Scottish Government.

This Scheme could be deliberately targeted at lead generation firms and would not authorise them in itself to provide access to those remedies, but would allow the Scottish Government to issue guidance to them, or sanction them where they believed it necessary.

By requiring only those who provide leads for financial gain to be registered, this would ensure those that provide advice as part of their profession would not be prevented from doing so, such as elected representatives, solicitors or other professionals.

There is a powerful case for requiring further regulation where firms provide leads for financial gain. The debt advice industry is already recognised as a high risk industry due to the vulnerability of the people involved and the fact debtors have a tendency to panic buy and be distressed sold solutions. If you incentivise those generating leads with lucrative fees, it’s not hard to understand why then the risk of mis-selling or bad advice increases immeasurably.

The Scottish Government do currently operate a similar scheme in that to actually provide access to the Debt Arrangement Scheme, it is necessary to be approved as a money adviser and hold a Consumer Credit Licence, or alternatively be a licenced insolvency practitioner.

The argument, therefore, is to extend this approval scheme to not only those providing access to formal remedies, but also to those providing advice on statutory remedies for financial gain.

The fact such a scheme already exists, however, could also be an argument against any additional regulation. Lead generators acting as intermediaries cannot themselves provide access to remedies, so arguably debtors are already protected in that regardless of who gives them initial advice they must go through an approved money adviser or licenced insolvency practitioner.

However, this ignores the fact the current system is failing. There is fierce competition for referrals and some firms are prepared to pay in excess of £2,000. Also as most advisers and MSPs can testify, too many debtors are ending up in inappropriate solutions.

The simple and brutal fact is lead generators have become too powerful within the Scottish formal debt remedy industry.

They are not as well regulated as those who provide access to debt solutions, they do not have the same administrative and regulatory costs and, therefore, can channel their funds into dominating the internet, TV and radio waves and dominate the flow of clients seeking debt relief and debt management remedies. This is forcing firms to pay more for referrals and in some cases as a result they can exert too much influence over what cases are signed.

Additional regulation would not destroy the market, nor would it prevent legitimate and responsible lead generators from continuing to operate.

However, it would increase the quality of advice and allow the Scottish Government to exercise more control over how their formal remedies are marketed.

More importantly it would ensure vulnerable debtors are protected.

I believe this is what Bob Doris wants and I totally support him in that aim.

Should you sign a Trust Deed?

Should you sign a Trust Deed?

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Five Things To Ask First

I recently explained in a blog how the Scottish Government were taking action to stop the human trade of debtors in the Scottish Protected Trust Deed market.

They have now released regulations that will take effect from the 28th of November.

It’s hoped these regulations will prevent such lead generation firms targeting financially vulnerable debtors and selling on their details to other firms, sometimes for as much as £2,000.

The problem is so bad, Glasgow MSP, Bob Doris, recently highlighted the issue in a speech in the Scottish Parliament and called on the Scottish Government to go further and create an approved scheme for such firms, so they are better regulated.

The problem is when such middle men are receiving such lucrative fees, how can anyone be certain they are receiving “best advice”.

Other possible debt remedies don’t earn them the same kind of money, so there is an incentive for the less scrupulous to wrongly advise.

So if you are thinking of signing a Protected Trust Deed, ask yourself some questions first.

How do you know a Trust Deed is the correct solution?

If you have not yet had advice from a money adviser, how do you know a Protected Trust Deed is right for you?

Keep an open mind.

Protected Trust Deeds are only one option. There are others and some less severe.

Are you speaking to the correct person?

If you have not spoken to someone, make sure you do speak to someone who is reputable. If they are not a licenced insolvency practitioners, a Citizen Advice Bureau or your local authority, ask them for their consumer credit licence number.

Only licenced insolvency practitioners can actually sign you up for a protected trust deed, so deal with one directly – miss out the middle man.

Alternatively, contact your local free advice agency.

If you have been contacted by someone offering you a Protected Trust Deed, ask if they are actually insolvency practitioners. If not, say no thanks.

What happens to your home?

If you have been advised to sign a Protected Trust Deed and you are a home owner, ask what will happen to it.

Trust Deeds are a form of insolvency, so your Trustee acquires a right in your home when you sign. This does not necessarily mean your home will be sold or that you will have to leave it, but you have to be sure before your sign. A reputable Trustee will tell you before you sign how your home will be dealt with.

They will also tell you what is expected of you.

Is it affordable?

If you cannot afford for the next three or four years to pay what is being asked of you, you may be making your situation worse.

If you sign a Protected Trust Deed and then stop paying, the Trustee can hand you back all your debts, plus interest . You could end up owing more than you started with and lose the money you have paid in.

If it is not affordable there may be other solutions.

Ask about Bankruptcy and the Debt Arrangement Scheme. These may be viable alternatives.

Set up fees

If you are being asked to pay a set up fee, refuse.

Never agree to pay money to setup a Protected Trust Deed, they can be set up quickly and you should not have to pay anything until it is protected.