Sequestration

Scottish Debt Solution League Tables

18th January 2022 0 comments

Information from the Scottish Government, covering the period from the 20th December 2020 and the 30th of September 2021, shows which organisations provided debt solutions to people struggling with problem debt over that period.

The Scottish Debt Arrangement Scheme

The Scottish Debt Arrangement Scheme is a formal debt repayment plan that allows people to repay their debts. Under the Scheme, those struggling with problem debt can propose to repay their debts to their creditors, using just one payment per month, through a Payment Distributor. Importantly, the Scheme is free to those in debts, although creditors who have their debts included in a Scheme have to pay 22% towards the cost of setting up and administering the Scheme.

The Scottish Government only report organisations that have done more than 25 DPPs. The rest are included in other.

Money Advice Organisation	Number of Approved DPPs.
Total	3,812
Carrington Dean Group	2,035
Harper McDermott	592
Stepchange	430
J3 Debt Solutions	241
Interpath Advisory	88
Wilson Andrews	67
Begbie Traynors	61
Citizen Advice Fife	37
Wylie & Bisset	30
Payplan	25
Other	207

Local Authorities and Citizen Advice Bureaux

Local Authority and Citizen Advice Bureaux, not for profit, local advice organisations also provide Debt Payment Programmes. In the list above (organisations that have done more than 25) only one of these types of organisations appeared, and that was Citizen Advice Rights Fife. Of those “Other” Organisations, 165 DPPs were carried out by Local Authorities and Citizen Advice Bureaux.

Organisation Type	Number of DPPS Approved
Local Authorities	69
Citizen Advice Bureaux	96

Bankruptcy: Certificate of Sequestration

For people in Scotland to apply for their own Bankruptcy (also known as Sequestration), they first need to have a Certificate of Sequestration signed. Between the 1st December 2020 and the 30th September 2021, the following organisations signed Certificates of Sequestration.

There are two processes that can be used when someone is going Bankrupt in Scotland, one is Full Administration Bankruptcy and the other is using the Minimum Asset Procedure. The figures for Certificates of Sequestration are broken down into the two procedures used.

Money Advice Organisation	Number of Certificate of Sequestrations (MAP)
Total	1,263
Stepchange	286
Citizen Advice Rights Fife	115
Christian Against Poverty	44
South Lanarkshire Council – Money Matters	39
West Lothian Council	37
Inverness, Badenoch and Strathspey CAB	30
Aberdeen Council	28
North Lanarkshire Council	27
Moray Council	27
Haddington CAB	25
Other	605

Scottish Government only report organisations doing more than 25 Certificates of Sequestration

Money Advice Organisation	Number of Certificate of Sequestrations (FAB)
Total	484
Stepchange	91
Wylie and Bisset	36
Other	357

The Scottish Government only report Organisations that have done more than 25 COS

Protected Trust Deeds

Protected Trust Deeds are a type of personal insolvency in Scotland and must be administered by private insolvency practitioners.

Trustee Organisation	Number of Protected Trust Deeds
Total	4,259
Carrington Dean	1,549
Harper McDermot	1,349
J3 Debt Solutions	473
Wilson Andrews	249
Interpath Advisory	197
Wylie and Bisset	146
YEG Insolvency (formally AGT Insolvency)	95
Payplan	49
Begbie Traynors	36
Hanover Insolvency	34
Parker Phillips Insolvency	26
Other	56

Parents Clubs Scotland

26th January 2019 0 comments

The Scottish Government have launched their new Parents Club Scotland website, to help support families raising young children in Scotland and to promote child and parental welfare.

Designed to take a holistic approach to family well-being, Parents Club Scotland aims to provide information on new Scottish Government benefits, including the Baby Box Scheme and the newly launched Pregnancy and Baby Payment Grants.

It also contains information on how to ensure your children are receiving a healthy diet and offers, day to day, practical tips on how to entertain your children and how to help get them to sleep.

Financial Health Checks

However, the site is not all about children, it is also about parents and recognising they need information, advice and support.

To that end, Parents Club Scotland is also seeking to promote uptake of the new Scottish Financial Health Check, which the Scottish Government has launched with Citizen Advice Scotland.

The new Financial Health Checks will support parents by providing them with benefit and budgeting advice and showing them how to access their credit reports, whilst also providing them with holistic advice on all their options when dealing with problem debts, including providing information on

For more information on Parents Club Scotland, visit the site here, or to get a Financial Health Check call 0800 085 7145. Alternatively, browse Advice Scotland for more information.

Money Advice Update – August 2018

29th August 2018 0 comments

John McGleish v Graham Cameron Tough and Maureen Leslie

This case, decided by the Sheriff Appeals Court considered an obscure area of bankruptcy law, which has not seen much discussion, nor had much judicial consideration since its introduction in the Bankruptcy (Scotland) Act 1913.

The provision, now contained in section 78 (9) and (10) of the Bankruptcy (Scotland) Act 2016, (previously section 31(5) of the Bankruptcy (Scotland) Act 1985), relates to the non-vested contingent interests of the debtor.

The facts of the case were Mr McGleish and his wife took out a life insurance policy with critical illness insurance in 2001. They were then sequestrated in 2008 and received an automatic discharge in 2009. In 2010, Mrs McGleish passed away and her trustee took the proceeds from her life insurance policy.

The reason for this was the deceased’s interest in her life insurance policy was believed to vest with the trustee and was, therefore, a realisable asset that the trustee could use for the benefits of her creditors.

However, the argument put forward for Mr McGleish and which the Sheriff Appeal Court upheld, was that the life insurance policy constituted a non-vested contingent interest and, therefore on the discharge of Mrs McGleish in 2009, because of changes introduced by the Bankruptcy and Diligence Etc. (Scotland) Act 2008 (2008 Act), reinvested in her post-insolvent estate.

The argument being that the interest in a life insurance policy, which is only payable on death, only vests in the debtor on the purification of the contingency, which is death. The interest, therefore, is a non-vest contingent interest.

It is known that what constituted a non-vested contingent interest was never clear and even when the 2008 Act was passing through the Scottish Parliament one Scottish Government solicitor described it as unfathomable.

However, the argument has previously been made to the Accountant in Bankruptcy (AIB) that life insurance policies were non-vested contingent interests.

In one case that this author was involved in, they even gave a direction ruling against such an interpretation. It is, therefore, known that policies have been taken by the AIB, where it now is clear they had no legal basis for doing so.

Non-vested contingent interests now re-invest in debtors, not on their discharge, but if sequestrated after the 1st April 2015, on the expiry of 4 years from the date of their sequestration.

The Debt Arrangement Scheme (Scotland) (Amendment) Regulations 2018

The Scottish Government have put before the Scottish Parliament the latest changes being proposed for the Debt Arrangement Scheme.

The Regulations, which will be considered by the Economy, Jobs and Fair Work Committee, are aimed at increasing access to the Scheme, which in recent years has seen a substantial drop in the number of consumers applying to it.

They are also designed to reduce the likelihood of Debt Payment Programmes (DPPs) under the Scheme being revoked, after it was revealed that 2016-17 was the first year, in the history of the Scheme, which commenced in 2004, where more DPPs were approved than revoked.

The primary changes that are being introduced, are first to remove the requirement that debtors need to include all their debts in proposals to creditors.

This requirement was first introduced in 2013 and meant that even mortgage and rent arrears had to be included, despite the fact that although DPPs are diligence stoppers, they do not step creditors or landlords raising actions for repossession or eviction.

Although, the proposed changes do not exclude the possibility such debts can still be included, they allow, where they are omitted, for money advisers working with debtors to work with the debtor’s secured creditors and landlords to avoid any action for repossession or eviction. It may be that such changes will allow such creditors to obtain a priority status again and allow these debts to be cleared off quicker.

The other fundamental change that will be introduced will allow debtors to not have to offer their full disposable income to creditors when proposing a Debt Payment Programme. This change, it is believed, will be more controversial and some creditors may be inclined to object where they are offered only part of the debtor’s disposable income.

However, with the average length of a DPP now being over 7 years, the concern is that debtors are being expected to live on quite austere budgets, which although sustainable over the 4 year payment period in sequestration and protected trust deeds, is not suitable for longer term repayment plans. The counter argument to creditors who object to such proposals being that they will recover more through the Debt Arrangement Scheme, not only over its lifetime, but even in the first four years.

If passed the Debt Arrangement Scheme (Scotland) Regulations 2018 will commence on the 29th October 2018.

Common Financial Tool (Scotland) Regulations 2018

At the same time the new Debt Arrangement Scheme Regulations were laid in front of parliament, the Common Financial Tool (Scotland) Regulations were also laid.

The Common Financial Tool (CFT), first introduced on the 1st April 2015, is the income and expenditure tool that is used to determine how much debtors can pay towards their bankruptcy or protected trust deed. The preferred CFT is currently the Common Financial Statement ( CFS) that is produced by the Money Advice Trust, but the new regulations proposed this should become the Standard Financial Statement (SFS), which is owned by the Money Advice Service.

The decision by the Accountant in Bankruptcy to recommend the adoption of the SFS as the new CFT has proven controversial, as it is believed in some circumstances it may result in debtors paying more than they were required to pay under the CFS, or being required to pay a contribution where they were not required to under the CFS.

This is important, as one of the requirements for a Minimum Asset Bankruptcy, where the application fee is £90, is that the debtor cannot afford to make a contribution towards their bankruptcy. Where they can make a contribution, they must not only pay that contribution for 4 years, but also must use the Full Administration Bankruptcy procedure which has an application fee of £200.

Both tools are also controversial because of the way they are designed and formulated. Both break down a debtor’s expenditure into categories, such as essential expenditure and household expenditure. These categories, except the essential expenditure category, then have trigger figure assigned to them, based on the household composition of the debtor, which act as a rebuttable presumption that any expenditure over that amount is unreasonable.

The trigger figures for both Schemes are arrived at by looking at the average expenditure of the lowest 20% group contained in the Living Costs and Food Survey produced by the Office of National Statistics.

The argument why this is an inappropriate methodology to use to calculate trigger figures is that such a group are already living in poverty, with many dependent on means tested benefits to survive. Also the survey only shows what people are able to spend, rather than what they require to spend to afford a reasonable standard of living. The flaws in the methodology were recently exposed when the update trigger figures for the Common Financial Statement actually had some of the trigger figures being reduced at a time when it was clear living costs are increasing.

The regulations, however, have been withdrawn, as due to a timing error, they would not have been passed until after the summer recess and would have commenced on the 29th October 2018, leaving insufficient time for money advice agencies to adapt case management software systems and for training to be provided.

The Scottish Government have indicated they will resubmit the regulations after the summer recess with a view to commence them in April 2019.

Standard Financial Statement: Is it fit for purpose in Scotland?

15th April 2018 0 comments

The Credit Services Association (CSA), a trade body that represents debt recovery and purchase organisations, has raised its concerns that new guidelines for the Standard Financial Statement (SFS) may exacerbate the position many consumers find themselves in when struggling with problem debts.

The Standard Financial Statement, which the Accountant in Bankruptcy (AIB) have recommended be adopted as the new financial statement for formal debt solutions in Scotland, is produced by the Money Advice Service and is intended to be a common financial tool for all creditors and debt advisers to use in determining how much consumers can afford to pay towards their debts.

The CSA, which is part of the governing body for the SFS, is concerned that new trigger figures, which are used to create a rebuttable presumption that someone’s expenditure may be excessive, are concerned that new guidelines for the figures may be excessive after being updated by as much as 30% in some category areas.

Their fears are that by indicating some consumers have less to spend on their debts, consumers may enter repayment plans that may last longer and, therefore, keep the debtor in debt longer, whilst others may feel a type of insolvency may be a better solution for them, when it isn’t.

However, in Scotland, fears amongst money advisers and the AIB are that the figures are already too austere for consumers, who are in repayment plans, and the SFS’s predecessor, the Common Financial Statement (CFS) which adopts a similar methodology to the SFS, has been instrumental in large numbers of Debt Payment Programmes under the Debt Arrangement Scheme failing.

Scottish Government Minister Paul Wheelhouse has recently announced plans to introduce new rules that even if the SFS is used for the DAS in future, it will not be necessary for consumers to propose paying all their disposable income to their debts each month.

Comparative Studies

The problem with the Standard Financial Statement, like the Common Financial Statement is both seek to determine what is a “reasonable” level of expenditure by looking at the average expenditure of the lowest 20% in the Office of National Statistics Living Costs and Food Survey. This survey looks at what people are actually spending, rather than what they require to be spending to maintain a reasonable standard of living.

The consequences of this can be seen in the guidance notes for the Common Financial Statement 2018, which actually saw “trigger figures” for categories of expenditure reduced, despite inflation running at 3%.

However, as both the CFS and the SFS both look at what people are spending, rather than what is needed for a reasonable standard of living, the methodology used can result in expenditure amounts being downgraded at a time of rising living costs. This is for the simple reason that with stagnating income levels, rising living costs and much expenditure in recent years being driven by consumer borrowing, which is now becoming harder for lower income groups to access, people are now being forced to spend less.

This has led to some uprating of figures in the SFS, by removing for example, some of the lower income groups in the Living Costs and Food Survey sample group. This has included those in receipt of Universal Credit and has contributed to the uprating of the average expenditure overall within the study group.

Scotland’s Dilemma

The problem for Scotland is whether now to adopt the SFS, which the Accountant in Bankruptcy have recommended or whether to seek an alternative to the Common Financial Statement 2018 when it expires in 2019?

The problem is the SFS has proven volatile in the first year of it’s existence, with initial concerns in Scotland that the trigger figures for the SFS 2017 were too low and would have led to more consumers being presumed, albeit the presumption is rebuttable, as having unreasonable expenditure amounts.

There was also a concern many consumers who were wishing to utilise the Minimum Asset Route into bankruptcy may be found to have disposable income and, therefore, be deemed ineligible to apply, forcing them to use full administration bankruptcy procedures instead. This in turn leads to complicated debates as to what types of income can consumers legally be expected to pay their debts from. There is no question, for example, that consumers cannot be forced to pay towards bankruptcy from benefit only income, although the AIB do hold that contributions can be taken from child maintenance money (for a fuller debate on this issue, see here). The consequence is that people whose only income is benefits and child maintenance, may be forced to use full administration bankruptcy simply because the AIB believes it is legitimate to take a contribution from income that is paid to a child via their parent and the CFS or SFS help determine that the consumer can afford a contribution.

In support of adoption of the SFS 2018 guidelines, however, the AiB have released a comparative study of financial statements which they believe shows the SFS 18 guidelines are more favourable than the CFS 18 guidelines (although a smaller study by Money Advice Scotland suggests this may not be the case). What the AIB have not released, however, is a comparative study between SFS 18 and CFS 17, which still applied in Scotland until a few weeks ago, or any response to the recent downgrading of expenditure items in CFS 18 that resulted from the methodology that can see average expenditure amounts fall at times of increasing living costs.

In addition to this, no explanation has been provided as to why the CFS 18, in the guidance notes, was not given the same corrective treatment that SFS 18 received by removing lower income groups from the sample group.

The problem is now likely to be exacerbated as the Scottish Government have announced that even if SFS 18 is adopted in Scotland, new changes will not require applicants to the Debt Arrangement Scheme to propose 100% of their disposable income to repayment programmes. The fact the Credit Services Association already believes the SFS 18 is overly generous, it’s likely their members would not accept DAS proposals that only offer say 75% of a Debtor’s disposable income as payment, although the AIB will be able to force acceptance using their fair and reasonable test under the Scheme.

The Way Forward

The problem for the Scottish Government is there is no clear way forward.

It was only in 2016/17, for example, that for the first time more debt payment programmes were successfully completed than were revoked. One of the main reasons believed to be behind this being that consumers have been finding that they are being told to pay more than they can afford.

The AIB, however, are reluctant to see contribution levels in any formal solution reduce, as they themselves realise much of their operating costs from fees charged against cases where contributions are made and are expecting, because of a reduced number of cases, a shortfall of approximately £4.2 million in their funding.

The problem is, however, section 89 of the Bankruptcy (Scotland) Act 2016 (2016 Act) requires Scottish Ministers to establish a Common Financial Tool (CFT) to determine contribution levels, that allows for reasonable levels of expenditure by debtors. Whether that has been achieved by CFS 18 that has seen trigger figures reduced for certain categories at a time of rising living costs is questionable.

Whether designating the SFS as the new CFT will achieve this is also debateable, considering it’s volatility and the fact key stakeholders are already questioning the recent uprating of figures and calling for a further review as soon as possible.

The question now must be asked, as the CSA, is part of the governing body for the SFS and accepted the 2018 figures, whether other governing body members also have concerns?

The question also has to be asked if a further review of the SFS or even the CFS were to see a further downgrading of the figures at a time of rising living costs, whether Scottish Ministers would be fulfilling they obligations in creating a tool that allowed for reasonable expenditure by consumers?

The danger being that in designating either the CFS or the SFS as the Common Financial Tool, Scottish Ministers are delegating this legal responsibility that they have under section 89 of the 2016 Act, to a third party that does not have such a legal responsibility, is not accountable to Ministers or Parliament and does not publicly release it’s trigger figures for public scrutiny or comment.

Mis-Use of Trigger Figures

One argument is that much of the problem arises from a misunderstanding of how trigger figures should be used.

Creditor and AiB concerns are they are used as an allowance by money advisers for their clients, whereas money advisers complain they are used as a cap by the AIB and creditors to drive down the reasonable living expenditure of consumers, which if you wish to exceed places an increased administrative burden on the money adviser and evidential burden on the consumer.

You then get anecdotal stories from money advisers of clients having to provide evidential proof of purchasing incontinence pads, or having to explain how the Disability Living Allowance of their children is spent or of having to fight to ensure contributions are not taken from the child maintenance money of children to pay towards their parent’s debts.

The problem is there is a lack of understanding by the Money Advice Service as to how trigger figures are in practice used. They are clearly a key battle ground for the AIB, money advisers and creditors alike, as recently evidenced by the concerns raised by the Credit Services Association and their calls for them to be downgraded.

A Scottish Solution?

There is now a clear and comprehensive case for Scotland to devise it’s own Common Financial Tool.

There is no overwhelming case for a UK wide solution, albeit it is clear it would be preferable from the perspective of UK wide financial service organisations and also debt advice bodies.

However, there is no UK wide system of laws for dealing with debts; debt law historically always being different under Scotland’s legal system and being devolved to the Scottish Parliament.
Also, unlike the rest of the UK, the Common Financial Tool was placed on a statutory footing in Scotland in 2015 and carried with it particular legal responsibilities for Scottish Ministers that the Money Advice Service, who own the SFS and the Money Advice Trust, who own the CFS, don’t have either in Scotland or elsewhere in the UK.

In addition to that, it is clear that Scotland, with the recent proposals by Scottish Ministers as to how contributions in the Debt Arrangement Scheme are determined, has already begun to diverge further from what is likely to be considered good practice across the UK and by the SFS governing body.

Clearly it would now be more advisable for the Scottish Government to look to establish it’s own Common Financial Tool, that is best suited to the peculiarities of the Scottish system of debt laws, with 48 month payment periods in Bankruptcy and a Debt Arrangement Scheme, where not all a debtor’s disposable income has to be offered as a contribution in a payment plan.

Child Maintenance: whose money is It?

18th February 2018 0 comments

In the 1970s, Margaret Thatcher was accused of being a “milk snatcher” when she attempted to end free milk in schools for all over sevens. It was a name that haunted her for the rest of her career.

It would be a sad indictment on the Scottish Government, so soon after they passed the Child Poverty (Scotland) Act 2017, if they were now to acquire a new moniker of being the “Maintenance Snatchers”, but the recent approach of the Accountant in Bankruptcy (AiB) to child maintenance appears to make this inevitable.

It appears the Accountant in Bankruptcy has recently received legal advice that when assessing how a debtor’s contribution in bankruptcy is calculated any maintenance for a Child must not only be used in making that calculation, but is also available to take a contribution from.

This is despite Scottish and UK legislation clearly stating otherwise, but as legal opinions are never made public, it’s unclear how the AiB are reaching the conclusions they are.

Debtor Contributions in Bankruptcy

In Scotland when you apply to enter a formal debt remedy, like sequestration (bankruptcy), a Protected Trust Deed or a Debt Payment Programme under the Debt Arrangement Scheme, the first step you must take is to complete a Financial Statement.

A financial statement has two parts to it, the first shows your income and expenditure, the second part shows your assets and liabilities .

The reason for this is both parts perform two separate solvency tests. The first, is known as the “pay your debts as they fall due” test. This looks at whether, once all your essential expenditure has been allowed for, you have sufficient disposable income left to make the minimum contractual payments due on your debts. If you don’t, this is known as “practical insolvency” and basically means you cannot pay your debts as they fall due.

The second part is known as the “balance sheet test” and compares all your assets with your liabilities. This is to see if your liabilities outweigh you assets, and can be useful to see if you have any non-essential assets that could be used to pay off your debts.

If your assets are outweighed by your liabilities, then this known as “absolute insolvency” (you owe more than you own).

Where you fail the practical solvency test, this allows the AiB to see what you can pay. In the case of a bankruptcy this payment, known as a contribution, then has to be paid for 48 months.

However, in drafting a financial statement, the AiB will look at all the income coming into a household, including child maintenance money, which is reasonable as child maintenance money is supposed to pay for the maintenance of a child, so should contribute to the costs of feeding them, housing them and clothing them.

However, what happens when there are funds left over after the household expenditure and some of this can be identified to being made up of some of the child’s maintenance money? The current view of the AiB is that can be used to pay the parent’s contribution towards their debts

Example:
Take the case of a single parent. She is in receipt of Employment Support Allowance, Child Benefit and Child Tax Credits. She also receives child maintenance from her child’s absent Father.
It is not disputed that no contribution can be taken from the Mother’s benefits, as these are “inalienable” in law. However, if there is a surplus left over once all the family’s reasonable expenditure has been calculated, can this be taken?

It would appear the AiB’s legal advice states they can, providing it is equal to or less than the total amount the Mother received in child maintenance (as, therefore, it cannot be coming from her benefits).

Whose Income is It?

Section 1 (1) of the Family Law (Scotland) Act 1985 (Obligation of Aliment) states:

(1)From the commencement of this Act, an obligation of aliment shall be owed by, and only by—
(c)a father or mother to his or her child;

It is, therefore, clear the obligation to pay maintenance is one owed by the absent parent to the child, not to the guardian parent.

Likewise, in terms of the Child Support Act 1991:

Section 1: For the purposes of this Act, each parent of a qualifying child is responsible for maintaining him.

Again this clearly suggests the obligation to pay maintenance is owed by the absent parent to the child, not to the other parent.

Furthermore, if you consider section 7 of the Child Support Act it states:

Right of child in Scotland to apply for assessment
(1) A qualifying child who has attained the age of 12 years and who is habitually resident in Scotland may apply to the Secretary of State for a maintenance assessment to be made with respect to him if—

This further suggest that child maintenance income belongs to the Child and not the parent, if they themselves can request a maintenance assessment when they turn 12.

Contributions from Income of Children

It is clearly wrong the idea that where a child is paid an income, even if that income is paid to their parent as their guardian, that income should be considered to be available by a government agency to pay the parent’s debts.

It is one thing to say it can be used in drafting a financial statement for the household, as clearly many of the expenditure items in the financial statement will relate to the child’s maintenance, which is clearly the purpose of the income. However, to say where there are surplus funds and some of those funds are identifiable as child maintenance, a contribution can be taken from it, does not only appear to be legally wrong, but morally akin to being a “milk snatcher”.

If you want to share your experiences of how child maintenance has been treated in a formal debt solution in Scotland, you can contribute to our Forum.

Bankruptcies Down, Protected Trust Deeds Up

25th January 2018 0 comments

The Accountant in Bankruptcy in Scotland have released their third quarter Statistics for 2017-18.

The figures show that the number of sequestration in Scotland have fallen, whilst the number of debtors granting protected trust deeds has increased.

There has also been a slight increase on the number of debtors who have entered debt payment programmes under the Debt Arrangement Scheme.

Speaking on the release of the figures, the Minister for Business, Innovation and Energy Paul Wheelhouse said: “The longer term trend for bankruptcy is very much a downward one and it is heartening to see this reflected in these recent figures.

“There is absolutely no doubt in my mind the UK Government’s persistence with its failed policy of austerity is causing real hardship and strain for financially vulnerable families all across Scotland. They face even more challenges once the impact of the UK Government’s reckless determination to pursue an economically damaging Brexit becomes known.
“However, these Accountant in Bankruptcy figures indicate the numbers of people falling into bankruptcy and signing protected trust deeds are around half of what we saw eight or nine years ago. The Scottish Government is doing what it can to mitigate the worst of these Westminster policies.
“The Debt Arrangement Scheme is the only statutory debt management programme in the UK and we are rightly proud of its success in providing a viable option for those seeking to pay their debts without plunging into insolvency.”

The full report can be accessed here.

Can Benefit Overpayments be Recovered during a Formal Debt Solution?

18th January 2018 4 comments

It is not unusual for clients in formal debt solutions to find they are still subject to debt recovery action by the Department of Works and Pensions (DWP) for benefit overpayments, when they believed such action should have stopped.

So can the DWP still recover overpaid benefits whilst a claimant is in a formal debt solution?

The answer depends on whether the debt owed is included in the solution or not.

How do you know?

Personal Insolvency

In terms of personal insolvency in Scotland, there are two types of formal solutions: the first is a protected trust deed and the second is sequestration (which includes bankruptcies accessed through the Minimum Asset Procedure).

In terms of both these solutions all debts are included up to specific dates. For sequestration, that date is known as the “date of sequestration”. So any benefits overpaid up to that date are included.

In terms of Protected Trust Deeds, the relevant date is the date when the trust deed was granted.

Date of Sequestration

What date constitutes the date of sequestration depends on the route that was taken to make the debtor bankrupt.

If a creditor makes the debtor bankrupt, then the date of sequestration is the date the petition to sequestrate the debtor was warranted by the court. This is also known as the first order date ; and is always before the date when the court awards the bankruptcy.

Where the debtor has applied for their own bankruptcy, the date of sequestration is the date the bankruptcy is awarded.

Can the DWP recover debts that are included?

In essence, the DWP don’t, although arguably they could during the bankruptcy or protected trust deed if they were to use direct deductions from benefits or a Deduction from Earnings order.

The Department of Works and Pensions recover benefits according to guidance (see here).

This guidance states in relation to personal insolvency, at paragraph 6.3:

Once the insolvency period has commenced, any deductions from benefit
should cease, and any deductions made after the start date of the insolvency should
be refunded to the debtor. This includes any monies recovered for a fraud debt

And at paragraph 6.7 in relation to sequestration, it states:

Where the recoverable overpayment period is entirely before the start date of the bankruptcy order, or where the overpayment period spans the bankruptcy order, recovery should be suspended until after the end date of the order. This is regardless of when the overpayment decision is made, for example a decision could be made after the order date. On discharge the outstanding balance is written off unless it is a fraud overpayment, when normal recovery action should commence.

What, is important, therefore, is the date the overpayment occurred, not the date that it was decided there had been an overpayment.

Protected Trust Deeds

In terms of Protected Trust Deeds, the law is similar, although the important date is not the date of sequestration, but the date the trust deed was granted.

It is also important to note the guidance only applies to trust deeds that are protected and not unprotected trust deeds. Recovery action, therefore, does not cease until the trust deed actually becomes protected.

It also important to note, that the overpayment is only written off when the debtor is discharged. If the debtor is refused a discharge by his Trustee, recovery action can be commenced again.

In terms of whether the debt is included or not, all debts are included providing they arose in a period prior to the trust deed being granted.

The relevant paragraph in the guidance is at 6.9, where it is stated:

The recoverable overpayment(s) must be included in the Protected Trust Deed and any debts not included will not be discharged at the end of the period. Recovery is suspended until discharge at which point any debt included in the Protected Trust Deed is written off unless it has been classed as fraud when normal recovery action can commence, or recommence. Unprotected Trust Deeds are not considered a form of insolvency and recovery will continue as normal.

The Debt Arrangement Scheme

The Debt Arrangement Scheme is different from protected trust deeds and sequestration, in that it is not a form of personal insolvency, albeit it is a formal debt solution.

Debts remain owed until they are paid off in full, although all interest, fees and charges are stopped from the date an application is made to the scheme, providing it is subsequently approved.

In terms of benefit overpayments, this is also covered by the DWP guidance at paragraph 6.15, where it states:

DAS is NOT insolvency, but is a government-run, voluntary debt solution administered by the AiB [Accountant in Bankruptcy], but not involving the courts. It allows the debtor to freeze any interest, fees and charges on their debts whilst repaying their debts in full over a longer period by way of a Debt Payment Programme. The debtor makes agreed regular payments to an approved payments distributor who then makes payment to DWP Debt Management if included in the DAS. If our debt is included in the DAS we would suspend recovery until the period ends, but where it is not included we would continue with deductions throughout the DAS period.

All debts are normally included in debt payment programmes, but unlike with trust deeds and sequestration, where they are included by operation of law, in the Debt Arrangement Scheme the claimant must notify their adviser they have the debt and the adviser must include it.

If the debt payment programme is subsequently revoked, the debt again becomes recoverable .

Time to Rethink the Common Financial Tool

18th October 2017 0 comments

In the first year of implementation of the Bankruptcy and Debt Advice (Scotland) Act 2014 (BADAS), the number of sequestrations in Scotland dropped by 44%; Debt Payment Programmes dropped by 50%; and although protected trust deeds fell only by 6%, they had dropped the previous year by 33%, with the implementation of trust deed regulations.

Two years on, those numbers have barely improved, with sequestrations still down 32%, trust deeds down 23% and debt payment programmes down 46%.

There is plenty of evidence to suggest this decline is substantially linked to changes introduced by the BADAS Act and not to falling levels of personal debt, which again are reaching pre-credit crunch levels.

There is also reason to believe,if changes are not made, the consequence of the current regime will be a build-up of personal debt over the next few years, as happened between the abolition of poinding and warrant sales in 2003 and 2008, before the introduction of low income, low asset bankruptcies led to a 140% increase in the number of sequestrations.

This time, however, it’s the introduction of the Common Financial Tool in Scotland and a proposed change from the Common Financial Statement (CFS) to the Standard Financial Statement (SFS) that threatens another blockage in the system.

What is the CFS and the SFS?

The CFS is a financial statement, which since being incorporated into Scots Law has been used to determine how much a debtor can pay in a bankruptcy, whether a trust deed should be protected or what debtors pay in debt payment programmes.

It adopts a similar approach to the Standard Financial Statement, which is now produced by the Money Advice Service and is what the Scottish Government are proposing should replace the Common Financial Statement.

Neither are tools for public use and although spending guideline are available to advisers, creditors, and the Accountant in Bankruptcy, they are not available to debtors. A bizarre situation and one where the legality of incorporating them into law must be questioned? Where else do we have secret rules in legislation? The situation is so bad, many advisers who are currently being consulted on the figures by the Accountant in Bankruptcy, have not yet seen them.

Both utilise trigger figures for certain categories of expenditure, such as food and housekeeping and stipulate these trigger figures must be used as spending limits. These limits can be exceeded, but where they are, additional evidence must be produced, showing good reason for any breaches.

Methodology for reaching trigger figures?

The methodology for determining the trigger figures takes the Living Costs and Food Survey produced by the Office for National Statistics, and looks at what is being spent by the group in the lowest 20%. It takes an average of what is spent by this group and these are how the trigger figures are arrived at. The fact this group is made up of many people dependant on mean tested benefits and whose spending levels are determined by their low level of income, rather than their needs, apparently has been overlooked. The survey only shows what people are spending, not what they need to maintain a reasonable standard of living.

A standard of living which, David Hilferty of Money Advice Scotland has said, if you use the methodology of the Standard Financial Statement, is not socially acceptable.

Consumer harm will rise

Money Advice Scotland has already voiced its concerns and research it has carried out shows the level of trigger figure breaches rise under the Standard Financial Statement,from one in nine under the Common Financial Statement, to one in four under the SFS.

The Scottish Government’s own research shows in thirteen percent of cases, people pay more under the SFS than they do under the CFS.

In conclusion

We are walking into a cycle of interest rate hikes, likely to begin in the next few weeks, and levels of inflation, likely to remain at 3% for the near future, still higher than anticipated wage level increases. There is evidence that a switch from the Common Financial Tool to the Standard Financial Statement will only further tighten access for consumers to debt solutions.

When the BADAS Bill was first announced, the policy objective behind it was to rebalance the law between debtors and creditors, the implication being the law had previously weighed more heavily in favour of debtors than creditors.

If the results of the implementation of the Act are to be judged, then they can only be considered a success if it was agreed too many debtors had in the past been accessing solutions; if this is not the case, then it can only be considered a failure, as substantially less consumers are now accessing remedies. People with no disposable income, people fearing for the future and people who live with the stress and pressure of unmanageable debts.

This cannot be correct. The Scottish Government has laid out the fundamental principles for their new social security system as being dignity and respect. These are admirable aims. Where is the dignity and respect, however, for debtors who are being forced to live at a standard, which for many people, is only possible if they are in receipt of income based benefits.

Instead there are other ways. There are consensual, open, and transparent budgeting tools, such as the Minimum Income Standard, produced by the Joseph Rowntree foundation and recently endorsed by the Supreme Court in the landmark decision on Employment Tribunal Fees. There is also the Reasonable Living Expenses model, created by the Insolvency Service of Ireland and based on a model created by the Vincentian Partnership for Social Justice.

It is time for the Economy, Jobs, and Fair Wok Committee, of the Scottish Parliament, to pull in the Common Financial Tool for review, before any further decisions are taken which may result in harm. A considered, evidence led review by the Committee could avoid months of preparatory work being undertaken to draft new regulations, which may then have to be rejected. Evidence should be taken from consumers who live under these budgeting limits and should be taken from advisers working with the common financial tool and from The Joseph Rowntree Foundation on Minimum Income Standards.

Scotland should adopt a Common Financial Tool model, which is open and transparent and like the Irish Reasonable Living Expenses, does not set a maximum spending limit, but a minimum standard of living which must be protected.

A reasonable standard of living which the Irish Reasonable Living Expenses states:

“…is one which meets a person’s physical, psychological and social needs…it does not mean a person should live at…luxury level, but neither does it mean…a person should…live at subsistence level. A debtor should be able to participate in the life of the community, as other citizens do…to eat nutritious food, to have clothes for different weather and situations, to keep the home clean and tidy [and] to have furniture and equipment at home for rest and recreation”

The Scottish Government’s consultation on the Future of Scotland’s Common Financial Tool is open to the 27th October and can be accessed here.

Re-opening sequestration for whose benefit?

15th August 2017

In a recent note, issued by Glasgow Sheriff Court, Sheriff Deutsch, has refused an application to re-open a sequestration, which he found failed to provide sufficient evidence that re-opening the sequestration would benefit anyone, but the professionals involved.

The application to re-open the sequestration, after the trustee and the debtor were discharged, was to allow the trustee to be re-appointed in order that he could take possession of funds that had become available from a mis-sold payment protection insurance claim.

As these funds related to a claim that would have vested with the trustee during the sequestration, if it had been known about, s63 (1) (b) of the Bankruptcy (Scotland) Act 1985, allow a trustee to apply to the court to re-open a sequestration in order that the funds be ingathered and distributed to the creditors of the sequestration.

In this case, the problem was there were none, or at least any who had submitted a claim.

Exercising his discretion, the sheriff could see insufficient benefits that would arise from the re-opening of the case, other than for the professionals involved, and declined to do so.

Of the £2,817.91 available to the trustee, it was shown approximately only 16% of this would be available to be distributed to the creditors, none of whom had made a claim in the previous sequestration, and £2,344.38 would be consumed by the fees and outlays of the trustee and his legal advisers.

Consignation of Funds

Interestingly, the solictors acting for the trustee, suggested to the sheriff that if the sequestration was not re-opened, the funds would have to be consigned to the Accountant in Bankruptcy (AiB). This is a process that allows for funds to be deposited with the AiB at the end of a sequestration, where funds have been allocated to a creditor, but not uplifted or cashed, or which have been allocated to a claim by a creditor that has been set aside.

In the sequestration in this case, however, no claims were received by creditors, so it is not simply a case they had not been uplifted of cashed. The only apparent grounds for consigning the funds, therefore, would be the creditor had failed to make a claim and provided reasonable reasons for failing to submit one, under section 52 (8) of the 1985 Act. However, it would appear no reasonable reasons were provided by those creditors that failed to submit claims.

As the Trustee is no longer in office, and the court clearly decided to not allow the case to be re-opened, it must be wondered what capacity they would have to take any funds, even to just consign them to the AiB. Equally, it must also be wondered what would be the statutory basis for the AiB accepting the funds. No claims were made in the sequestration and apparently creditors did not provide reasons for failing to submit claims.

Multiple Poinding

Sheriff Deutsch, however, suggested there may be other routes, even informal ones available for dealing with the funds. One option he suggested, was an action of multiple-poinding. Multiple poinding is an action that can be raised when there are multiple competing claims that need to be dealt with. However, in this case, there are no claims, presuming the trustee himself has no fees and outlays outstanding from the original sequestration.

Offer of Composition

Another informal route that could be used is to make an offer of composition to the creditors in full and final settlement of the debts. There are, however, also problems with this. First, the trustee has no official capacity to do this and until the funds are released to the debtor, they lack any means of implementing it. It would also require creditors to submit claims and, there may still be problems agreeing the claims submitted.

Personal Bar

Possibly a better way of dealing with a case like this, is where no claims have been received, or reasons for failing to submit a claim have been made prior to the trustee being discharged, is to take a view that the creditors have personally barred themselves from making a claim in the future. This would allow the funds to be reverted back to the debtor. It cannot be argued they didn’t have sufficient time to make a claim or at least submit a reason for why they had not.

This would appear more sensible. Its one thing re-opening sequestrations where creditors have made claims which are unsatisfied, or have submitted reasons why no claim has been submitted prior to a trustee receiving their discharge; its another thing to re-open a case where no claims are known about and no fees are owed to the trustee in the original seqeustration.

It also has to be questioned on what basis someone else’s property is being consigned to a government agency to be held in trust for creditors, who have made no claim or failed to provide any reason for failing to make a claim. It would appear fairer to assume all debts have been paid and the funds should be reverted back to the debtor.

Are Bankruptcy Fees Immoral and Illegal?

15th August 2017

The Scottish Government’s decision to reject a call by Govan Law Centre for a fee waiver for consumers wanting to use bankruptcy laws, is not only disappointing, but ultimately likely to be an expensive mistake, resulting in £8.6 million of fees having to be repaid if legal challenges are successful.

There have always been application fees for people who want to go bankrupt; however, prior to 2008 the process was carried out by the courts, and as such, where someone was not able to afford the fee and in receipt of certain benefits, they could get a fee waiver or apply for legal aid.

In 2008 this changed, when the function was transferred to an officer of the court, the Accountant in Bankruptcy (AiB). With that change, fee waivers and legal aid were removed. The effect of this is we have people crippled with debt, surviving on £73.10 per week, who must find £90 to apply for their bankruptcy, or £200 where their debts are over £17,000.

The nature of the remedy has not changed, so why abandon the principle of helping people access justice when they cannot afford it? An AIB spokesperson has said that they are “fully satisfied that fees for accessing bankruptcy are fully compliant with the law”, but provide no explanation as to why,in light of the Supreme Court ruling in relation to Employment Tribunal Fees.

We do not know how many people who apply for bankruptcy can afford to do so and the AiB have never explained it, particularly when they are on benefits. The irony is that once a debtor is bankrupt and their only income is Jobseekers Allowance or Income Support,they are not required to pay anything towards their debts, as their income is too low, yet we expect them to find £200.

They can pay the application fees in instalments, but considering the subsistence lifestyle of many, there is irrefutable evidence that this causes hardship.There is also evidence many are forced to borrow money, which is a reckless situation for the Scottish Government to create, knowing as they do, that those wanting to apply for bankruptcy cannot afford to repay the debts they already have.

The problem with the Scottish Government bankruptcy fees are they do not recognise some people cannot afford to pay them and don’t offer any form of fee waiver or remission on the grounds of affordability. That is what is likely to make them illegal. They lack proportionality.

This inevitably will mean, considering the Supreme Court ruling, there will be challenges and if it is found the fees are unlawful, the AiB may have to refund the £8.6 million in fees they have collected since 2008.

Or they could just join their clients in bankruptcy.