Tag Archives: bankruptcy

Re-opening sequestration for whose benefit?

Re-opening sequestration for whose benefit?

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?

Are Bankruptcy Fees Immoral and Illegal?

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.

Bankruptcy Policies Unravelling

Bankruptcy Policies Unravelling

Fergus Ewing has acknowledged that he got his decision to increase the application fee for bankruptcy wrong. Speaking in response to the third quarter insolvency statistics for 2013-14, he has said “Scotland’s bankruptcy legislation has to do more to provide a safety net for vulnerable, low-income debtors and their families.”

However, despite this, with the new Bankruptcy and Debt Advice (Scotland) Bill 2013, lessons are still not being learned

For the fourth quarter in a row, Low Income, Low Asset bankruptcies (LILA) in Scotland have increased as an overall percentage of all bankruptcies, now representing 39.6% of all bankruptcy awards in Scotland.

The increase, reported in the Accountant in Bankruptcy’s (AIB) third quarter insolvency statistics for 2013-14, show that LILA bankruptcies as a total percentage of all sequestrations are now returning to their pre-first quarter levels for 2012-13, when the application fee was increased by 100% from £100 to £200, which reduced LILA awards by 60%.

However, although as a proportion of all bankruptcies the numbers of LILA awards continue to increase, LILA numbers themselves remain significantly reduced from their pre-fee increase levels, with many organisations such as Citizen Advice Scotland and Money Advice Scotland, claiming many debtors are still being priced out of any formal remedy for dealing with their debts.

In acknowledgement that they got it wrong, the Scottish Government in the Bankruptcy and Debt Advice (Scotland) Bill 2013 are now proposing a new Minimum Asset Procedure (MAP) to replace the LILA route into bankruptcy.

This new type of bankruptcy it is anticipated will reduce fees to £100 or less, but it is anticipated will only be available to 75% of all current LILA applicants with debtors only being able to apply if they have debts of less than £17,000, whereas under the current LILA route, there is no debt level cap.

For those debtors unable to apply using the new route, they will have to apply for normal bankruptcy and pay the full application fee, which is likely to be significantly more.

Although it is to be welcomed that the Scottish Government are now beginning to accept that for most bankrupts the purpose of bankruptcy legislation is to provide a social safety net, with more than eighty percent of all applications being debtor applications, and more than three quarters being unable to make a contribution from their income to their bankruptcy, more needs to be done.

This includes looking again at their decision in the new bill to increase contribution periods from 36 to 48 months against overwhelming evidence from debt charity NGOs, regulatory professional bodies and even creditor organisations that such a policy is wrong. They also need to reconsider their decision to replace the Low Income, Low Asset route into bankruptcy with a more restrictive type of bankruptcy which will exclude rather than include more debtors.

They also need to ask themselves, although it is commendable that they have accepted in sequestration and protected trust deeds it is wrong (and illegal) for debtors to make contributions from social security benefits, why is it correct for those debtors to have to use those same social security benefits to apply for bankruptcy, when prior to 2008 (and the SNP minority Government) they would have been covered by a fee waiver.

Debt Arrangement Scheme

The other revealing figures from the third quarter statistics relate to the Scottish Debt Arrangement Scheme.

Although still very much the little brother of all Scotland’s formal statutory debt remedies (representing 26.1% of all remedies used), the Scottish Government have wrongly reported in their press statements that applications have increase by 20.9% on the same period last year.

The actual increase is only 10.7% (applications 3rd quarter 2012-13: 1,067; applications 3rdquarter 2013-14: 1,181).

On the last quarter, the increase is less than 1%, confirming the view of many that, allowing for occasional seasonal variations, take up of the Scheme has now plateaued.

What is increasingly of concern, however, is the number of Schemes being revoked. Although the Minister has claimed only 3% of Debt Payment Programmes under administration are being revoked quarterly, some research by others in the insolvency industry suggests this amounts to 13.9% per annum and the cumulative effect of which will mean over 50% of all average length programmes (6.8 years) will fail.

Evidence of this can be seen in the figures for 2013-14, which show although 3,551 programmes were approved by the end of the third quarter, 1,064 have been revoked.

There are clearly a significant number of debtors entering the Debt Arrangement Scheme for whom the Scheme is not suitable and for whom it is failing to provide a sustainable, lasting solution.

There was always a danger with the Debt Arrangement Scheme that it would be seen, for political reasons, as a panacea for all debtor’s debt problems, but it has never been more than just another tool in the toolbox: suitable for some, but not others.

As the fee increase for bankruptcy has shown, policy decisions in this area without supporting evidence from those at the coal face or other empirical evidence risks unintended consequences. The danger now is we will see more of those unintended consequences if the Scottish Government continues with its policy of trying to make bankrupts pay more in sequestration, whilst hailing the Debt Arrangement Scheme as a one size fits all solution for all debtors, whilst failing to research why, for so many debtors, it continues to fail to provide solutions for their problems.

Opinion column: Alan McIntosh

Opinion column: Alan McIntosh

First pubished in The Journal of the Law Society of Scotland.

The proposal to extend the contribution period in bankruptcy from 36 to 48 months is unsupported, and arguments contradict ministerial statements relating to protected trust deeds

In money advice and personal insolvency, it is accepted as a truism that the longer people pay into any debt repayment plan, the likelihood of them defaulting increases. However, this is not universally accepted. The Minister for Energy, Enterprise & Tourism, Fergus Ewing, believes debtors can pay for longer and have not been paying long enough for the last 28 years, since the Bankruptcy (Scotland) Act 1985 was introduced.

In support of this belief, he has cited evidence from the Scottish Debt Arrangement Scheme, where the average payment period is six and a half years: if these debtors can pay that long, he believes others can too. He has also made the point that only 3% of all DAS cases are revoked each quarter. Obviously a success, until you realise that some in the insolvency industry who have researched this are equating it to 13.4% per annum and, with the average lifetime of a debt payment programme being six and a half years, are suggesting the attrition rates for DAS could eventually be more than 50% for average length programmes. Not so successful, and not so supportive of the argument that paying for longer is suitable for all debtors.

The minister also believes that bankrupts can pay for longer, despite evidence heard by the Energy, Enterprise & Tourism (EET) Committee during stage 1 of the Bankruptcy and Debt Advice (Scotland) Bill. Organisations such as Money Advice Scotland, Citizens Advice Scotland, the Law Society of Scotland, Stepchange, Lloyds Banking Group and the Consumer Finance Association all opposed the change, fearing it could result in increased defaults, hardship and disputes between debtors and trustees.

Part of the problem with the Government’s proposal is that many feel it is completely left field and was never consulted on. The minister has said it was consulted on, and supported by respondents. He cites question 10:41A, where respondents were asked whether they would support an extension of the payment period in one particular type of bankruptcy product. Only 27 supported retaining the three-year period, while 32 supported a rise to five years.

This ignores, however, that the original consultation had proposals for five different bankruptcy products, and, in relation to another product, question 10:47A, in identical terms to question 10:41A, produced 33 responses for keeping the three-year period and only 28 wanting it extended.

What has been overlooked, however, in relation to both questions is that more than half of the 129 respondents ignored both questions, and many indicated they did not feel any additional products were required. Eventually, the proposal to have five different products was shelved.

The minister has argued that the extension is necessary as payment periods must be harmonised with those for protected trust deeds which, since 27 November 2013, now last a minimum of four years. Without harmonisation, it is said, debtors may opt to use bankruptcy as an easier option for dealing with their debts.

However, on 11 October 2013, while giving evidence to the EET Committee on the Protected Trust Deed (Scotland) Regulations 2013, which extended the minimum payment period to four years, the minister dismissed concerns that introducing such changes ahead of the bill being commenced would result in debtors using bankruptcy as an easier way to deal with debts.

He pointed to the rest of the UK, where individual voluntary arrangements, which normally last five years, remain popular despite bankruptcy only having a three-year payment period. Debtors, he argued, did not take the easiest remedy for dealing with their debts and wanted to pay back what they could.

In my view, the real problem here is that the Scottish Government’s proposals to extend bankruptcy payment periods have not been thought through, and are not supported by research. They are not supported by the vast majority of civic Scotland, who make up the key stakeholders and, bizarrely, for once the debt charities and the trade body of payday lenders are all singing from the same hymn sheet.

The four-year period appears to be completely arbitrary, and the arguments in favour of it are weak. They have also been inconsistent, with the minister arguing one minute that harmonisation is not necessary and the next that it is vital.

The Institute of Chartered Accountants in Scotland has called for more research before stage 2 of the bill to explore what, if any, net benefits there would be for creditors. I would support that, but suggest such research should also extend to consider how debtors will be affected.

The Scottish Government may be launching a new Financial Health Service, but it is no National Health Service, and it is not even clear whether it has a Hippocratic Oath of doing no harm.

The Cuckoo in the Nest: Four Year Bankruptcies

The Cuckoo in the Nest: Four Year Bankruptcies

In the campaign for Independence, the campaign for social justice is a key battle ground.

The idea being Scotland’s commitment to social justice is best served by ruling ourselves than relying on Westminster to protect the poor and vulnerable.

Typical sentiments are “we believe in Society”; “we believe in supporting the weak and vulnerable”; “we do not believe in the coalition’s welfare reforms”; “we will abolish the bedroom tax post-independence”…et cetera, et cetera.

Then you come to the Scottish Government’s position on bankruptcy law and if you support independence, it’s bewildering: the Scottish Government’s social justice gear in this area is completely in reverse.

In Clause Four of the Bankruptcy and Debt Advice (Scotland) Bill 2013 it is proposed in future Scottish bankrupts will pay for four years instead of three, meaning Scots will pay more and for longer than elsewhere in the UK.

The reasons behind this being the Scottish Government have said they want to create a Society where people pay their debts (don’t the majority of us already?) and wants to rebalance bankruptcy laws towards the rights of creditors.  

On the face of it, this appears reasonable, but there is a problem. The vast majority of bankrupts in Scotland apply only as a last resort and usually because their income is too low to apply for other formal debt remedies like Protected Trust Deeds and the Debt Arrangement Scheme. So making bankrupts pay more and for longer doesn’t make a lot of sense, unless your committed to punishing the poor.

Even if this point is lost on the Scottish Government, it is not lost on many of the largest creditors in Scottish bankruptcies.  Both the Lloyds Banking Group and the Consumer Finance Association got the point and made it patently clear when they gave evidence to the Scottish Parliament: stating bankruptcy was about allowing people a fresh start and paying for three years, and not four, in line with the rest of the UK, seemed reasonable.

Money Advice Scotland, Step Change, Citizen Advice Scotland, The Law Society of Scotland, Christians against Poverty, The STUC and The Church and Society Council of the Church of Scotland all agree, as do many individual advice agencies and advisers.

Even many Insolvency practitioners, who arguably could benefit from the changes, have voiced their concerns that forcing people to pay for four years instead of three, will lead to more defaults and disputes arising with debtors.

So what is driving the policy?

The Credit Union movement is in favour of it, possibly because they are less able to suffer the losses and are disproportionately affected by debts being included in bankruptcy. However, they represent less than 0.5% of all bankruptcy debts in Scotland: so it’s ridiculous that Scottish Government policy in this area should be driven by them.  There may be an argument that their debts should be treated differently in bankruptcy, however, that’s a separate matter and although the Scottish Government consulted on it, have chosen not to bring anything forward on it in the bill.

If the truth be told there is little logic driving forward this policy, but there is a wilful ignorance being shown by the Scottish Government to the effects such a policy will have on low income debtors. It will leave many of them having to subsist for longer on only essentials, whilst forcing them to pay back more as they struggle with rising living costs, stagnating wages and unexpected financial emergencies.

It will not just affect debtors, but also their families and with over 60,000 having been made bankrupt in Scotland in the last five years, it’s not unreasonable to suspect tens of thousands, not including their dependants, will be affected in coming years.

In real terms this means cars not being repaired, boilers remaining broken and children continuing to wear last year’s winter coats, whilst going 4-5 years without even the most humble of summer holidays.

The Scottish Government’s policy of extending bankruptcy payment periods from three to four years is a cuckoo of a policy in a pro-independence social justice nest. Unlike the bedroom tax and other cut backs, it cannot be blamed on Westminster. It is wholly Scottish in its making, with nothing else as regressive being proposed elsewhere in the UK and should be a cause of concern for those SNP members that believe in social justice.

How such a policy, less than a year before the independence referendum, has found its way into a SNP Government Bill, is beyond me.

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. 

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.

The Good, the Bad and the Ugly

The Scottish Government have released their response to the consultation they held earlier this year on bankruptcy law reform. Alan McIntosh takes a look at the implications.

After 10 years of progressive modernisation of Scotland’s debt laws and increased debtor protections being introduced by the Scottish Parliament, the current Government have now set out a number of proposals that can best be described as the good, the bad and the ugly. Considered as a whole, the proposed reforms can only be viewed as a backward step and instead of reforming our current system to ensure its fit for an era of austerity, will only likely exacerbate the effects of that austerity on many Scottish consumers and creditors.

The Good is the length of payment holidays in debt payment programmes under the Debt Arrangement Scheme will be increased as will the accessibility of the scheme for joint applications to be made; a new 6 week moratorium period will be introduced for all of Scottish formal debt remedies that will see interest , fees and charges on debts being frozen at an earlier stage and debtors will be provided with protection from enforcement action; there will be earlier discharges for those debtors who qualify for a new “no income” route into bankruptcy; and there will be a common financial tool introduced to harmonise how much debtors pay, regardless of the remedy they use.

The Bad is there are the proposals for a new route into bankruptcy, which will be known as a “no Income product” and be far less accessible than the current Low Income, Low Asset route; there will be an increase in the length of time that debtors will have to pay contributions in Protected Trust Deeds and Sequestrations, from three to four years; there will also be no automatic discharge after one year and debtors will have to apply for this, which will be linked to financial education and co-operation with trustees, increasing uncertainty; the power to make income payment orders will be taken off sheriffs and transferred to the Accountant in Bankruptcy’s office, creating Article 6 issues under the ECHR in relation to the right to a fair hearing as the Accountant in Bankruptcy will also be the trustee in most cases.

The ugly will be the exclusion of debts accrued within 120 days of the debtor entering a protected trust deed or bankruptcy, which will benefit the payday loan companies and others who prey on distressed debtors and only force debtors to delay in seeking protection; there will also be the introduction of a statutory minimum dividend for Protected Trust Deeds, which will limit accessibility to a wealthy few and force thousands more each year to become bankrupt.

To understand the thinking behind these policies, the temptation may be to think it’s the fear of creating a moral hazard that the Government is guarding against, which may lead to people believing it’s too easy to just not pay their debts; but this is unlikely considering it was this Government in 2010 which made it easier for debtors to go bankrupt; and where is the need to guard against such a hazard in a system where the numbers going bankrupt each year has been in decline for the last three years?

More plausibly, at the heart of the Scottish Government programme for reform is the need for the Accountant in Bankruptcy to be fully self funding. Already their level of public funding is at a 20 year low and saw 40% of cuts this year on top of the 37% of cuts the year previous to that.

In actual fact, it’s only when you place the events that surrounded the announcement of this consultation and its execution in this context, does any of it make sense.

In August last year, the Scottish Law Commission at the behest of the Accountant in Bankruptcy began a consultation on consolidation of bankruptcy law. All the indications were the Scottish Government were getting ready to let this much reformed area of law bed in. Then in December, unexpectedly it was announced there would be a root and branch reform of Scots law on bankruptcy to make it fit for the 21st century. No-one had anticipated such a move, especially as the implementation of the Bankruptcy and Diligence Etc (Scotland) Act 2007 and Part 2 of the Home Owner and Debtor Protection (Scotland) Act 2010 had only been implemented; but then it was probably around such times the decisions were made to further slash their public funding.

Then the consultation was hurried. It ran only between February and May this year. There was no underlying, unifying theme underpinning the consultation and when the eventual 124 page consultation document was released, it was made up of what some described as a ragbag of ideas that you wouldn’t expect to appear in the same strain of thought. There was no clear analysis of what was wrong or what the challenges were for the future.

Then there was the bizarre events during the consultation when the AIB announced they were developing a triage advice tool, with funding from the Money Advice Service, despite the fact this was an issue still being consulted on; then an advertisement was sent out to money advisers asking them to apply to be seconded to the AIB to provide an in house advice service, despite the fact they was no statutory role for them to perform such functions.

Then with little notice, it was announced the bankruptcy application fee was to be increased by 100% across the board for debtors, which resulted in a 36% increase in debtor applications as debtors hurried to beat the fee hike and was followed by a 50% decrease in the latest quarterly insolvency statistics.

We now have a non cohesive programme of reform. The good are to be welcomed, but none are that urgent to justify the bill that is being proposed or the hurried consultation process. The bad clearly appears driven to help the AIB meet the financial needs of their service, largely caused by the funding cuts, and the ugly are just that, policies with no evidence underpinning them and almost definitely will have consequences that will harm the vast majority of creditors and debtors.

There was a hope, albeit a tentative one at the beginning of this process, that the Scottish Government was going to rise to the challenge of the economic crisis and use imagination and innovation to develop a system that would help Scottish consumers and creditors tackle the problems facing both.

That hope, I believe, was dashed yesterday with the Government’s response to the consultation on bankruptcy law reform. It’s not all ugly, some of it is good, but on the whole its bad and arguably we’d be better off with what we have.

 

The Rangers Effect (or is it Sevco 5088…?)

The Rangers Effect (or is it Sevco 5088…?)

As the Scottish Government considers creating a new business Debt Arrangement Scheme, Alan McIntosh explains how the current scheme works and how it can be used to help flailing businesses and consumers.

If you are like me, you will have followed the demise of Rangers football club with some interest and probably participated in many discussions about Company Voluntary Arrangements (CVAs), Administration and Corporate liquidations that seemed to spring up everywhere, including online, over the water cooler and at dinner.

Remarkably much of it has been well informed and has led me to wonder whether there could be a Ranger’s effect: a silver lining in those dark clouds where more businesses, now their awareness has been heightened, begin seeking advice and assistance when they begin to experience financial difficulties.

I have seen a number of small businesses over the last year that fit this description, whether it’s been the result of rising fixed costs, adverse weather, falling sales or HMRC pursuing a more aggressive recovery strategy.

Although CVAs, Administrations and Corporate liquidations are inappropriate for these types of business models the Scottish Debt Arrangement Scheme can be used to assist them. A formal debt management tool that was introduced in 2004 by the Scottish Government, the Scheme was created to help debtors manage their personal liabilities and was provided for initially by the Debt Arrangement and Attachment (Scotland) Act 2002 and the Debt Arrangement Scheme (Scotland) Regulations 2004.

It was updated in 2007 to include provisions which allowed the freezing of interest and charges and again in 2011 to widen access to the scheme. The Scottish Government is now seeing over 4,000 applications being made each year to the Accountant in Bankruptcy, in her role as Debt Arrangement Scheme Administrator.

If debtors wish to apply to the Scheme they must do so through an approved money adviser or insolvency practitioner, who gives holistic advice to the debtor on their finances and options and then makes an application on their behalf. Creditors of the debtor get 21 days to agree or object to a plan and if they fail to do so are deemed to have consented. If no creditor objects or responds the plan is automatically approved. Where someone does object, it is sent to the Accountant in Bankruptcy who applies a fair and reasonable test to see if the plan should be approved.

Where plans are approved, it is not possible to sequestrate the client, execute a earning or bank arrestment or carry out any other form of diligence. Where an earnings arrestment has been executed, it is formally recalled.

Although an application to the Debt Arrangement Scheme will prevent a petition for bankruptcy being raised in the sheriff court by a creditor, where it has been raised prior to an application being made or intimated, the debtor can seek a continuation from the sheriff under s12 (3C) of the Bankruptcy (Scotland) Act 1985 to allow the DAS application to be decided.

The effect of approval is the debtor gets full protection and is allowed to repay their debts each month through an appointed payment distributor to the Scheme.

What makes the scheme suitable for sole traders and individual partners is not only does it protect individual debtors, but Regulation 25 (3) of the 2011 Regulations allows the DAS Administrator when considering whether a programme should be approved to consider anything she considers relevant. The fact certain business assets may have to be kept, therefore, to produce an income is relevant and means the owners of such businesses can often enter the scheme, obtain protection and continue trading to help pay off their debts.

Discretionary conditions are also possible in making an application to the Scheme and it can be proposed that the realisations of assets will be delayed until a later date or if at all or where it is known assets will become available, that at that point these will be used to reduce the outstanding balances.

The many businesses that are using this scheme at present may not be on the scale of Rangers Football Club, but it is providing many with vital breathing space to reorganise their affairs and seek advice for the first time. It is a credit to the scheme that this has been possible and is providing many small Scottish businesses with a life line during the current economic turmoil.

It also provides fantastic returns for creditors with the longest scheme running generally no more than 10 years, meaning in reality creditors receive a 10 pence dividend for each year a plan operates. These results compare favourably with other remedies such as protected trust deeds and sequestrations.

It may be some time before the Debt Arrangement Scheme attracts the same attention that corporate insolvency has, barring a high profile application being made by someone, but its popularity is only likely to continue to grow.

Six Ways For The Scottish Parliament To Now Tackle Poverty

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As the Scottish Government take their turn to do the okey cokey and shuffle the cabinet, I suggest some ideas the Cabinet Secretaries and Ministers may wish to consider that could help reduce poverty and the worse effects of it in Scotland.

Margaret Burgess (Mininster for Housing)

We have already seen significant advances in housing law over the last few years, with Part One of the Home Owner and Debtor Protection (Scotland) Act 2010, the Housing (Scotland) Act 2010 and the Private Rented Housing (Scotland) Act 2011.

Here, however, is an interesting suggestion by Jon Kiddie, the Principal Solicitor of Renfrewshire Law Centre to end evictions during the coldest months of the year. Similar rules already exist in many EU countries. Why not have similar protections in Scotland, one of the coldest and wettest countries in Western Europe?

Fergus Ewing (Minister for Energy, Enterprise and Tourism)

Or what if we follow the example of Norway and use our legislative authority over debt laws to right down mortgages when people are facing repossession and have negative equity?

Often people get into arrears as they can no longer maintain their mortgage payments. This result in their homes being repossessed and sold at a loss as they have negative equity. If we acknowledge the lenders are going to suffer a loss anyway, why not allow for the debt to be reduced and allow the borrower to repay the loan at the reduced rate?

We will have a new Bankruptcy bill  introduced in this parliament. As I have already blogged we should be bold and recognise the role such laws can have in not only assisting economic recovery, but freeing people from the vicious cycle that is caused by debt, whilst providing a social safety net for the poorest.  We could draw on the laws of Canada and the United States and increase protection for homes in bankruptcy by protecting certain levels of equity. This would allow more to access the remedy where debts are no longer manageable, without placing homes at risk.

We could also introduce a new Debt Payment Programme for pay day loans as has been suggested by Mike Dailly, Principal Solicitor of Govan Law Centre which he has blogged about here and I have also covered.

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John Swinney (Cabinet Secretary for Finance)

We all know before the last election The Scottish Government had its efforts to reform local taxation (the council tax) blocked by Labour.

What’s now stopping us?

Council tax is recognised as an unprogressive form of taxation and even those on income support have to pay water and sewage charges.

Under the last Labour Government there was no guarantee also that if Scotland did replace local taxation with a Local Service Tax that the funds currently given in Council Tax Benefit would continue. The Coalition has now, however, devolved this benefit to the regions, including Scotland.

However after they made cuts, Scotland is now funding a benefit shortfall of £40 million per year on top of the current Council Tax freeze.

Why not reintroduce a bill to reform this tax and make local taxation fairer?

Mike Russell (Cabinet Secretary for Education and Life Long Learning)

More often than not, poverty is  the result of low income, illness and unemployment as well as an array of other issues. However, greater financial education can only help Scots.

Financial education should be taught in all primary and secondary schools. We must equip our children with the skills they need in a world where many by the age of 20  will already be sinking  into a sea of debt.