(First Published in the January 2014 edition of SCOLAG).

There is a joke in the money advice industry that the Bankruptcy and Diligence Etc (Scotland)
Act 2007 was the BAD Act, but the Bankruptcy and Debt Advice (Scotland) Bill is the BADAS
Bill.

Is it living up to its name?

The Bankruptcy and Debt Advice Scotland Bill passed stage
one in its parliamentary journey on the 18th December with
thirty-three votes against and seventy-three votes in favour.
The objections were from the parliamentary Labour Party. How-
ever, it has not only been the Labour Party who has objected to
elements of the Bill. A wide range of Civic Scotland bodies have
also raised their concerns with aspects of it, particularly Clause
Four, which allows the Accountant in Bankruptcy (AIB) to
award Debtor Contribution Orders against debtors.
Debtor Contribution Orders unlike the current Income Pay-
ment Orders differ in a number of respects. First they are not
granted by the Court, but by the Accountant in Bankruptcy
and secondly, unlike Income Payment Orders, they last for 48
months instead of 36.
Power to Grant
The power to grant a Debtor’s Contribution Order is an
example of what is arguably the most controversial aspect of
the Bankruptcy and Debt Advice (Scotland) Bill: that is the pro-
posal to transfer large amounts of decision making powers from
the courts to the Accountant in Bankruptcy, an executive agency
of the Scottish Government.
The fact these currently judicial decisions will in future be
made by the executive has not gone unnoticed, with concerns
being raised by the Law Society of Scotland, the Insolvency
Practitioners Association and The Institute of Chartered Ac-
countants that where decisions do not relate to administrative
or non-contentious matters they should remain with the courts.
Even the Sheriff’s Association has called for caution, stating
that where decisions affect the rights and obligations of indi-
viduals these should be made by the courts, while accepting
purely administrative decisions can be safely transferred.
The danger of transferring potentially contentious issues
from the courts to the AIB can be seen in clause four, where if
debtors disagree with the decision of the AIB as to what they
can afford to pay towards their bankruptcy, it will fall upon
them to request an internal review of the decision by the AIB
and then appeal the decision to the sheriff court. This will trans-
fer the onus and cost of challenging decisions onto the debtor
where previously, with Income Payment Orders, if an Income
Payment Agreement could not be agreed it was for the Trustee
in Bankruptcy or the AIB to apply to the courts for the Order.
The fear is many debtors, where they disagree with the
decision of the AIB will not raise an appeal to the courts, de-
terred by the cost and a procedure they do not understand.
Instead non-cooperation with trustees will increase and there
will then be an increase in the number of deductions being made
directly from earnings.
Common Financial Tool
The Scottish Government have argued, however, such dis-
putes are less likely to occur with the adoption of a common
financial tool in the Bill, not just for Sequestration, but for all
formal statutory debt remedies in Scotland. This common fi-
nancial tool of choice, it has been agreed, will be the Common
Financial Statement (CFS) that is produced by the Money Ad-
vice Trust and the British Bankers Association and is already
widely used by the free and private sector money advice in-
dustry. The Scottish Government’s argument is that as the CFS
is generally accepted to be more generous than other financial
tools, such as the Stepchange debt charity figures which the
Scottish Government still currently use for sequestration, the
scope for disputes will be minimised. However, although there
is an element of truth in this, it must be said that even the CFS
still allows an element of discretion for trustees as to what is a
reasonable expense and will not remove the possibility of dis-
putes.
Forty-Eight-Month Contribution Periods
The Scottish Government have also seized on the use of the
CFS to justify the extension of the payment period in bank-
ruptcy from 36 months to 48 months, stating that as people
will now be allowed more generous living costs, they will be
able to continue making payments for longer. However, what
the Scottish Government has omitted to mention is that the CFS
has already widely been used within Scotland by the insol-
vency industry to determine what are reasonable living
expenses for debtors and their families. For these debtors, there-
fore, extending bankruptcy payment periods by 12 months will
not simply allow more time to pay to bankruptcy, but will mean
paying more and for longer: longer, in actual fact, than any-
where else in the UK for formal bankruptcy.
In defence of 48 month payment periods Fergus Ewing, the
Minister for Energy, Enterprise and Tourism, argued such ex-
tensions were necessary to harmonise the payment period for
bankruptcy with that for Protected Trust Deeds, which was
extended to 48 months on the 27th November 2013. If the pay-
ment period was not extended, he argued, debtors would just
choose bankruptcy as an easier option.
However, on the 11th of October 2013, whilst giving evi-
dence to the Energy, Enterprise and Tourism Committee in
support of the Protected Trust Deed (Scotland) Regulation 2013,
the Minister made a completely contradictory argument after
concerns were raised that extending the duration of Protected
Trust Deeds ahead of the commencement of the Bill would re-
sult in increased numbers of debtors applying for sequestration.
On that occasion the Minister argued, using the example of
England and Wales, that contribution periods for insolvency
arrangements could be different, such as those for formal bank-
ruptcy and Individual Voluntary Arrangements in England and
Wales without fear that debtors would use the easier option.
Debtor’s, he argued, preferred to try and pay what they could
back to their debts.
He also used the example of the Debt Arrangement Scheme
(DAS) to support his argument for longer payment periods,
citing the fact that use of the DAS was on the increase and that
average payment periods were 6.8 years. In response to those
who argued such extended payment periods led to increased
level of defaults, he drew attention to the fact only 3% of DAS
cases were revoked each quarter. What the Minister failed to
acknowledge was evidence from the debt charity Stepchange
which showed in their own Debt Management Plans the level
of defaults increased by 15% between 3 and 4 year repayment plan.

He also demonstrated the same level of dexterity a payday
loan company does when it sets out to misrepresent its interest
rates by focusing on the daily, rather than the annual rates.
Revocation rates in the Debt Arrangement Scheme may well
just be 3% per quarter; however, research conducted by others
in the Scottish insolvency industry1
shows these figures could
be as high as 13.4% per annum and ultimately the cumulative
affect could mean less than 50% of average duration Debt Pay-
ment Programmes (DPPS) succeeding: meaning no long-term
solution for those debtors. An illustration of this can be found
by just looking at the last quarter statistics for the Debt Ar-
rangement Scheme where 1,170 Debt Payment Programmes
where approved but 347 were revoked. In the quarter before
that, 1,200 Debt Payment Programmes were approved with 438
being revoked.
Clearly significant numbers of debtors in the Debt Arrange-
ment Scheme are finding such longer payment periods are not
suitable or sustainable.
Payment Breaks
Another argument the Scottish Government have relied on
to defend the extension of bankruptcy payment periods to 48
months is the insertion of payment breaks, by clause four, into
the Bankruptcy (Scotland) Act 1985 (1985 Act). Previously no
formal payment break existed in the 1985 Act for bankruptcy.
Quite simply, if a debtor could not afford to make a payment
because a drop in income or a reasonable increase in expendi-
ture, they did not have to pay anything.
The new section 32F that is to be introduced into the 1985
Act, however, allows a debtor to apply for a payment break
where their disposable income falls by 50% and is caused by a
number of particular events. These events are unemployment,
a change in employment, a period of illness, the birth or adop-
tion of a child, the breakdown in a marriage or civil partnership
or the death of a partner who jointly cared for the dependant of
a debtor.
Why a debtor in those circumstances would apply for a
payment break is not readily easy to see. They are not com-
pelled to do so and under existing rules they would simply be
deemed to be unable to pay towards their bankruptcy. Why
would they then request a payment break and a possible 6-
month extension of their payment period in a bankruptcy?
The point has also been made that the introduction of a
formal payment period would also be more useful, not for those
debtors who experience a drop in disposable income, as they
are simply unable to pay anything, but for those debtors who
are able to make a payment but experience an emergency such
as a broken boiler or car and need to prioritise use of dispos-
able income for those purposes. They could arrange for the
repairs to be carried out, avoiding hardship and then catch up
on their payments to their bankruptcy.
The introduction of a payment break into sequestration
makes no sense and it is difficult to perceive how it will work.
For example, debtors who suffer an income drop because the
death of a spouse (where there are no dependants) or the break-
down of a relationship other than a marriage or civil partnership
will not be able to apply, but trustees will not be able to ignore
these factors when deciding whether a debtor is still able to
make a contribution.
Scotland’s New Financial Health Service
For many it will appear ironic that such regressive meas-
ures are being introduced into Scotland’s bankruptcy laws
under the guise of Scotland launching a new Financial Health
Service. The Minister, Fergus Ewing, even suggested in the
Stage One debate the new Service may be like a new Financial
National Health Service for Scotland.
If it is like a new National Health Service, it will not be one
underpinned by the type of principles that most Scots associ-
ate with that other post-war institution. It will not be free at the
point of service and arguably, unlike that other institution, is
not driven by the principle of doing no harm.
The fact that the Scottish Government are likely to drive
ahead with Clause Four in its present form, ignoring the con-
cerns raised by a wide range of organisations, including Money
Advice Scotland, Govan Law Centre, Citizen Advice Scotland,
Lloyds Banking Group, The Consumer Finance Association,
the Law Society of Scotland, The Church of Scotland, The STUC,
Stepchange and the Institute of Chartered Accountants speaks
volumes.
The BADAS Bill is indeed living up to its name.
*Alan McIntosh is the Legal and Social Policy Manager of The
Carrington Dean Group. He writes here in a personal capacity
and his opinions are his own.
1. www.trust-deed.co.uk/news/debtarrangementschemefailurerateincreases.php