Too Late, Too Late for Debt Advice Services?

Too Late, Too Late for Debt Advice Services?

With levels of personal debt reaching pre-credit crunch levels and money advice services facing further funding cuts, is it too late for transformative change in support for such agencies? I considered the issue in December’s Journal of the Law Society of Scotland.

Money advice services in Scotland are in bad shape, arguably the worst they have been in since 2003. Unlike the years that followed 2008, however, when the sector rose to the challenge of the credit crunch, it is now questionable whether it could cope with another financial crisis.

With years of funding cuts and legislative reform, provision for free money advice services in Scotland is now fragmented, and in some areas, of little consequence to many of those they are supposed to help.

This was illustrated recently by the BBC documentary, Country Council, which spotlighted the challenges faced by Scottish local authorities in delivering services. In Argyll & Bute, a vast area that covers Helensburgh, Dunoon, Lochgilphead and Oban, the local money adviser, Des Middleton, was featured as one of only two employed to cover that huge swathe of the country. Across Scotland, however, it is not just councils that are facing cuts: some citizens’ advice bureaux are also looking at up to 100% of their core funding being axed in 2018-19.

Supply and demand

This dire situation comes just two and half years after the introduction of the Bankruptcy and Debt Advice (Scotland) Act 2014 (BADAS Act), which placed significant demands on money advisers and the work they undertake for their clients in assisting them to access formal debt solutions. These demands have seen the number of debtors accessing the Debt Arrangement Scheme fall by 46%, the number accessing sequestration drop by 23% and the number granting trust deeds decline by a third. Meanwhile, across the border, by contrast, individual voluntary arrangements are at their highest level in three decades.

UK consumer debt also continues to rise and is now again at pre-credit crunch levels, topping £200 billion for the UK. With inflation at 3% and interest rates rising, all the evidence points to a sector that will face increased demand in the coming years.

Much of this has been confirmed by a recent review, carried out by the Money Advice Outcomes Project, funded by the Money Advice Service and Improvement Service, which found that local authorities need to implement wide-ranging, transformative changes to maintain money advice services going forward and mitigate the effect of cuts.

National agency?

What form these transformative changes will take is up for debate, but there are some obvious mistakes that can be avoided. An overreliance on remote telephone and internet services would be an error, although they have their place. There will always be a class of clients who require face-to-face interventions and whom such remote services cannot satisfy. Evidence of this can be found in the recent admission by Stepchange, the national debt charity, that it lacks the capacity to provide face-to-face interviews for clients who are struggling to complete financial education modules introduced by the BADAS Act.

Transformation, however, could be aided by the creation of a new executive agency, that could act nationally as Scotland’s Money Advice Service. Such a body could be the recipient of the financial levy for debt advice which is collected by the Financial Conduct Authority from lenders and will be devolved in 2019-20. It could also ensure funding is invested and distributed in a way that not only increases the provision of local services, but could undertake strategic investment in new technology, such as open banking, which could revolutionise the way money advice services are delivered by providing a valuable tool to advisers. Such an agency could also prescribe a single set of national standards for advice agencies in Scotland, cutting back on duplication.

Equitable fees

Another obvious improvement could be reforming the current fee structures for formal debt solutions in Scotland. At present the Debt Arrangement Scheme only recovers half the £1.2 million it costs to deliver the service, but in 2016-17 distributed £37 million to creditors. A minimal increase in fees could easily recover the rest.

However, a more radical, transformative change could be achieved with the introduction of a statutory fair-share scheme, based on the voluntary one currently operated by clearing banks, for organisations like Stepchange. This allows organisations to retain a percentage of the funds collected to fund their services. On a statutory basis, such a scheme could allow private sector fees to be abolished and the Debt Arrangement Scheme to be provided free to clients, by the public, voluntary and, importantly, also the private sector, increasing capacity, but with no increased risk of consumer harm.

Fees for formal debt solutions on a wider basis should also be reviewed. In March 2017, the Scottish Government withdrew draft bankruptcy fee regulations, after evidence was provided by Govan Law Centre and me that showed they would, among other things, result in fee increases of up to 188% for debtors who had their homes sold. No replacement fees have since been forthcoming, although the Accountant in Bankruptcy remains committed to the principle of full cost recovery. It would appear, however, that that principle only operates when the fees are being charged to those least able to afford them – the consumers. Yet statutory debt relief and debt management remedies returned £80 million to creditors in 2016-17.

A fee of less than 1% on those funds could easily remove any bankruptcy application fees for debtors, and ensure access to justice is based on need and not ability to pay. A lesser amount could easily fund services like Govan Law Centre’s pilot Personal Insolvency Law Unit which operated between July 2016 and March 2017 and provided independent advice to those in formal debt solutions: a need the unit showed to exist, but which remains unsatisfied.

Past experience

The last time the free money advice sector in Scotland experienced the type of transformative change it currently needs was in 2003. It followed the introduction of the Debt Arrangement and Attachment (Scotland) Act 2002. Ringfenced funding of £3 million per year was provided until 2005 and was then increased to £5 million per year until 2007. Fortuitously, when the credit crunch hit and the Bankruptcy and Diligence etc (Scotland) Act 2007 was introduced, Scotland’s money advice services were able to cope.

As someone who has worked in the sector for more than 16 years, I witnessed that transformative change and how, with the rising tide of debt, all boats were lifted. However, with the current budget cuts, the consequences of the BADAS Act still looming over us and personal debt at record levels, the waterlines for Scotland’s money advice services are still submerged. If the opportunity to introduce meaningful change does come, I fear it will already be too late, too late.

DAS ist gut (for business)?

DAS ist gut (for business)?

Scottish businesses in financial difficulty now have the option of a Business Debt Arrangement Scheme service if they are unable to take part in formal company insolvency arrangements. (This article first appeared in the January 2015 edition of The Journal of The Law Society of Scotland).

Scottish businesses currently unable to access formal rescue measures like administration and company voluntary arrangements are now able to access a new formal debt rescue remedy known as business DAS, as a result of the Debt Arrangement Scheme (Scotland) Amendment Regulations 2014.

The new provisions, which came into force on 11 December 2014, amend the Debt Arrangement Scheme (Scotland) Regulations 2011 and extend access to the scheme to a number of different legal persons.

Who can apply?

The types of persons that can access the new scheme are partnerships, limited partnerships within the meaning of the Limited Partnership Act 1907, corporate bodies (other than bodies registered under the Companies Act 2006), trusts and unincorporated bodies of persons.

Sole traders are not covered by the new provisions, but are still able to apply under the existing scheme as individuals.

Where applications are made by partnerships, the agreement of all partners will be required; where a limited partnership applies, all general partners will have to consent to the application, as will limited partners where they have at any time been involved in the management of the business.

Only a majority of trustees will be required to consent to an application for a trust to apply, and in the case of corporate and unincorporated bodies, applications will be made by a nominated person authorised to act on behalf of the body.

Like the existing scheme, all applications will need to be made by a money adviser, but the definition of who constitutes a money adviser will be limited to a licensed insolvency practitioner, who in making any proposals will have to make a declaration of viability for the business.

Approval of programmes

Proposals under the scheme will operate like current proposals under the existing scheme, but applications will only be possible where businesses have more than one debt, and will have to be completed within five years.

The option of using the current intimation procedure will also be available, providing businesses with a six week moratorium period during which creditors will not be able to execute diligence or raise petitions for the sequestration of the business.

The benefit of using the scheme will be to provide distressed businesses with a vital breathing space, during which they can explore the viability of any programme before making an application. Where petitions for sequestration have been raised, sheriffs will also have the option of not making an award immediately, to allow an application for a business DAS to proceed.

It will also be possible to compel creditors to participate in any programme, where they object, if the Debt Arrangement Scheme administrator finds the proposals fair and reasonable, with all interest, charges, penalties and other fees on debts being frozen from the point the application is made.

Once approved, programmes will provide for payments to be made through a payment distributor, with the cost of the payment distribution being a cost creditors will have to bear.

Benefits of the scheme

The primary benefit of extending the Debt Arrangement Scheme to now include businesses is that it closes a gap in Scots law that allows a number of different legal persons to be subject to creditor petitions for sequestration and diligence, but does not provide them with the same protection that is available to individuals, limited liability partnerships and companies registered under the Companies Act 2006.

It further extends these protections to individuals involved in the business, where they are also liable for the business’s debts, in that one of the effects of a proposal being approved is that the protections will also cover them for their liability.

Business DAS is a rescue procedure that will provide businesses with a lifeline where they are at the latter stages of creditors taking recovery action through the courts and demanding ransom payments; but importantly tempers that protection by ensuring it is only available to those businesses that are viable and can remedy their distress within five years.

It may even provide a lifeline to so-called zombie or walking dead businesses, which are only able to pay interest on debts, in that programmes will freeze interest and write it off on the successful completion of a programme, whilst the capital amounts are paid off.

A Debt Lifeline?

A Debt Lifeline?

Recent changes to the Debt Arrangement Scheme have increased its usefulness to debtors, while providing a means for creditors often to obtain more than they would in an insolvency

There is a common misconception that in times of economic hardship the use of formal debt remedies increases. This isn’t necessarily true. It is true to say that in such times there is a greater demand for such remedies, but what determines whether they are used or not is the legislative conditions that exist at the time.

For the Scottish Debt Arrangement Scheme the correct legislative conditions for increased use of this remedy were created with the introduction of the Debt Arrangement Scheme (Scotland) Regulations 2011. The Scheme has existed since 2004, but prior to the 2011 Regulations it had been plagued with problems such as not offering sufficient protection to debtors, and access to the Scheme being a postcode lottery.

The 2011 Regulations dealt with these problems by widening the gateway into the Scheme, and increasing protections for debtors. Since then, numbers have increased by 73%, from 1,910 programmes in 2010-11 to 3,319 in 2011-12.

How does the Scheme work?

The Debt Arrangement Scheme is a statutory repayment plan for debtors, not a type of personal insolvency. It was introduced with the Debt Arrangement and Attachment (Scotland) Act 2002 and provides a number of benefits for debtors who enter into debt payment programmes under the Scheme. These include not only protecting those in programmes from diligence and sequestration, but also freezing interest, fees and charges on the debts that are included.

Those creditors whose debts are included into programmes do have a say, much like they do in protected trust deeds, but where they fail to respond within the statutory notification period of three weeks, they are deemed to consent. Where they object, the proposals are then considered under a “fair and reasonable” test by the Accountant in Bankruptcy, in her role as the Debt Arrangement Scheme administrator. If she finds that a proposal is fair and reasonable she can set aside the objections and approve a programme.

Once in a programme, debtors are provided with a payment distribution service, which administers the payment and distribution of monies towards their debts for them. In addition to this, if during the programme a debtor suffers an income shock and loses over 50% of their income, they can obtain a payment break for up to six months whilst remaining in the programme.

Where a debtor has not applied to the Scheme, but fears they may be in imminent danger of enforcement action or someone raising a petition for their sequestration, they can intimate an intention to apply to the Scheme, in which case they receive up to six weeks’ interim protection.

The benefits of the Scheme do not stop there, however. Where a creditor’s petition for bankruptcy is being heard, it is possible for a sheriff to allow a continuation to allow an application to be considered, with sheriffs not being limited in the amount of time they allow for such continuations.

How is the Scheme being used?

As was intended, the Scheme is now primarily being used to deal with multiple consumer debt problems, and particularly to protect those debtors who have assets they wish to protect from sequestration and diligence, such as cars and family homes.

It is also increasingly being used by debtors trapped in the vicious cycle of payday loans, as a means of freezing interest and stopping the dangerous practice of having to continually roll over such loans.

However, it has also become an extremely useful tool for assisting debtors who have had petitions for their sequestration raised and are in court facing bankruptcy. How successful it has been in such cases is hard to quantify, but it can be said that the number of bankruptcies being awarded on the strength of creditor petitions was down in 2011-12 by 25% on the previous year, despite bankruptcies themselves only being down by 3%.

The Scheme is also increasingly being used to deal with business debts. In one recent case, we helped a large commercial property owner facing sequestration to protect not only his commercial assets, but also his personal assets from business creditors intent on sequestrating him. In another, we were able to put the owner of a small haulage firm into the Scheme, protecting not only his trucks, but his home and business and also the jobs of his six employees. Other programmes have been used to assist landlords and property developers where they have been sole traders.

Another emerging use for the Scheme is to provide protection to company directors who have provided personal guarantees for corporate debts. As was observed by Eric Baijal (“No guarantee of easy recovery”, Journal, April 2012, online exclusive), the use of such securities is on the increase by lenders, and correspondingly we are also seeing an increase in the number of debtors coming to us with liabilities they have acquired as a result of such guarantees.

What we find is crucial to such programmes being approved is ensuring that we work with both debtors and creditors to draw up plans that are credible and sustainable. We do have the benefit of being able to say to creditors that even in the longest running programmes, they will normally receive back within the first three years almost double what on average is received under a protected trust deed, with the prospect of more thereafter.

However, we are also finding that, through qualifying proposals by including discretionary conditions, access to the Scheme is being widened, especially where the repayment of debts would take longer than the maximum 10 years normally allowed.

Such qualifications can take the form of offering to increase payments at later dates where circumstances allow, and offering where other assets are available, to realise those assets within a timeframe that avoids distressed selling.

Future outlook

Going forward, the Scheme is now a key part of the Scottish Government’s strategy for dealing with the problem of personal overindebtedness, and has been heavily promoted with road shows and TV commercials, which is unprecedented in relation to other formal debt remedies.

The Government is also now committed to finding more ways to improve the Scheme and make it more effective, and in all likelihood it will become a remedy that will continue to grow in popularity, providing not only an alternative to personal insolvency for many debtors, but also a more measured and appropriate remedy in these difficult economic conditions.

First Published in The Journal Online, the journal of the Law Society of Scotland.