Morally Bankrupt Law Reform

Following the Scottish Government’s consultation on bankruptcy law reform, Alan McIntosh argues that the proposed reform is motivated by a need to find additional revenue raising sources for the Accountant in Bankruptcy, and the end result will be some of the poorest in our society paying more.


The Accountant in Bankruptcy, Rosemary Winter Scott, has called for Scotland’s bankruptcy laws to be rebalanced to recognise the importance of creditors, stating “compared to other countries, Scotland is “very debtor friendly. These comments echo the views of her predecessor Gillian Thompson, who once called Scottish MSPs debtor friendly.

Her comments have been supported by John Hall, Council Member of R3 the insolvency trade body who has stated we have “believed for some time that the pendulum has swung too far in favour of the debtor in Scottish Bankruptcy cases.

However, the Scottish Government’s Consultation on Bankruptcy Law Reform does not fundamentally propose changing two of the most significant debtor reforms of the last twenty five years: the one year automatic discharge and the widened access for consumers.

And there lies the problem for those that want to portray Scotland as a refuge for debtors: their arguments don’t stand up. It’s certainly true that levels of personal insolvencies in Scotland are higher than elsewhere in the UK, with 0.38% of those eligible using it, compared to 0.22% elsewhere, but Scotland’s law on bankruptcy have never fundamentally changed over the last 100 years: debtors still have to pay what they can afford and estates are wound up for the benefit of creditors.

There is, however, an ideological change taking place. Public funding of the Accountant in Bankruptcy’s office is now at a 20 year low, and the agency is operating with less than 30% of the public funding it had 2 years ago. With up to 40% of cuts this year, following on from 37% last year, these are not simply austerity measures: they go further and deeper than necessary and are politically motivated by the idea that debtors should pay more, even the poorest.

In their plans the AIB have announced they want to establish a Financial Health Service, but despite the name of this new service suggesting we will soon have a NHS for debtors, it will be nothing of the sort. If it was then we would all being paying at the point of NHS delivery and the poorest would be paying most.

Fifty-three per cent of all Scottish bankruptcies are debtors who qualify for the low income, low asset route (with the majority either wholly dependent on social security benefits or reliant on income based benefits) Significant number above that only just don’t meet the qualifying criteria. Most will be living in household and families suffering from fuel and child poverty. Yet the AIB want to raise the cost of going bankrupt from £100 to possibly as much as £700, despite the fact Citizen Advice Scotland have already criticised the current application fee as being out of reach for many or a severe cause of hardship.

They also want to change the way debtor contributions are calculated. Without even referencing the current law, contained in s31 of the Bankruptcy (Scotland) Act 1985, they appeared inclined to introduce a sliding scale similar to that used in the earnings arrestment procedure. This could result in debtors with incomes of £96 per week, who may be spending £20 of that on household fuel, having to pay £25 per month. It could also result in the farcical situation where someone with three children and earning £30,000 per annum will pay the same as debtors on the same income with no children, despite having more ability to repay their debts.

Contributions levels, however, are controversial and the problem is not the current law that states debtors must be allowed sufficient amounts for their aliment, but the way this it is currently calculated with various figures being used across the sector. Agents of the AIB have been criticised for not allowing enough for essentials, but in their defence this has been partly driven by the funding cuts to the AIB and the agency contracts which mean agents need to squeeze debtors harder to cover their costs.

The real issue that needs to be debated is not whether Scotland’s bankruptcy laws need rebalanced, but whether the level of funding cuts to the Accountant in Bankruptcy’s office are now dangerously low and likely to result in increased hardship for some of Scotland’s lowest income families and households. There are no suggestion of redundancies at the AIBs office and considering the amount of staff they employ, the national role they perform, the number of debtors they deal with and the number of functions they perform, £2 million per year is hardly an exorbitant cost for a society that’s is heavily dependent on financial services for employment and revenue.

One cannot escape the feeling the drive to make the AIB fully self funding is driven by hubris, but at what cost? A bankruptcy system that’s goals will be distorted by the needs of the agency that operates it and a Financial Health Service dependent on life support financed by Scotland’s poor and most indebted. That’s a system that will be morally bankrupt from the outset.