Tag Archives: debt arrangement scheme

The Top 5 Debt Arrangement Scheme Providers 2017/18

9th February 2019 0 comments

The Scottish Government have released figures showing who the top five providers of the Scottish Debt Arrangement Scheme were in 2017/18.

The largest provider by far, was the UK debt charity, Stepchange.

This was followed by four other providers, only two of whom are Scottish-only providers: specialist private debt firm, Carrington Dean and also Citizen Advice Scotland member, Citizen Advice Rights Fife.

In total, there are 16 providers named, 4 of whom are local authorities, 3 Citizen Advice Bureaux and 7 insolvency practitioner firms.

The list only names those providers who did more than 25 Debt Payment Programmes (DPPs) in 2017/18, but notes “other ” money advice providers account for 14.9% of all other DPPs delivered.

Reduction in numbers linked to cut in public funding of money advice services

However, the 2,318 Debt Payments Programmes that were approved in 2017-18, represents a 45% reduction in the number of Debt Payment Programmes that were approved three years earlier in 2014-15.

Local authority funded money advice services over that period also saw a 45% reduction in funding, suggesting the fall in number is linked with cuts in funding for money advice services.

What is the Debt Arrangement Scheme?

The Scottish Debt Arrangement Scheme is a formal debt repayment plan that allows consumers who are struggling with their debts to repay them through an organised plan.

Benefits of the Scheme are it:

Freezes all interest and charges;
Those in the Scheme only make one payment per month; and
Borrowers are protected from all debt recovery action by lenders.

For more information on the Debt Arrangement Scheme, visit my page on it here.

Agency	DPPs	%
StepChange Debt Charity Scotland	1,151	49.65%
Pinnacle Debt Solutions	124	5.35%
Carrington Dean	104	4.49%
Citizens Advice & Rights Fife	99	4.27%
KPMG	95	4.10%
North Lanarkshire Council	68	2.93%
Campbell Dallas	56	2.42%
Wilson Andrews	52	2.24%
Murray Stewart Fraser	49	2.11%
South Lanarkshire Council	41	1.77%
Begbies Traynor	41	1.77%
Inverclyde Council HSCP	29	1.25%
Hamilton CAB	28	1.21%
Perth CAB	26	1.12%
The Moray Council	26	1.12%
All other money advisers	329	14.19%
Total	2,318	100.00%

Stepchange call for Reform of Debt Arrangement Scheme

28th April 2017

UK debt charity Stepchange has called for the Scottish Government to reform and extend the Debt Arrangement Scheme to make it more available to hard pressed Scottish families.

Following on from my report into the Debt Arrangement Scheme last week, a Stepchange spokesperson speaking in The Herald said:

“Expanding the DAS would give people time to get back on their feet without the worry of their debts spiralling out of control. By extending DAS, the Scottish Government would give people the best chance of getting themselves back into a position where they can start making payments on their debts.”

However, as I showed in my report, last year Stepchange only set up 424 debt payment programmes under the Debt Arrangement Scheme in 2015/16, down from the 632 they set up in 2014/15.

The Debt Arrangement Scheme has seen a substantial reduction in the number of cases proposed and approved since April 2015 after the Scottish Government introduced new rules that calculated how much people had to pay towards their debts in the Scheme.

In the first year after the rules were introduced, 2015/16, the number of cases reduced by 51%, and only increased in 2016/17 by 9%, meaning the numbers are still down by 46% from the 2014/15 figures.

In my report I called for the Scheme to be extended and reformed by:

reforming how the Common Financial Tool is applied to debtors entering into a Debt Payment Programme;
removing the requirement all debts had to be included, to allow priority debts like mortgage and rent arrears to be dealt with differently; and
by allowing more firms to become payment distributors as part of the Scheme

DAS: is it broken?

20th April 2017 0 comments

A new report (see here) produced by myself shows that the Scottish Government’s flagship personal debt remedy, the Debt Arrangement Scheme, is in trouble, with the numbers accessing it having fallen by over 50% in the last two years.

The report follows on from a recent high profile, public awareness campaign that was launched by the Scottish Government to raise awareness of the Scheme.

It reveals that the number of consumers accessing the Scheme through private sector firms have fallen by 64%; whilst those accessing it through free providers, like Citizen Advice Bureaux have fallen by 38%.

It lays the blame for the decline, not on a lack of awareness, but on changes that were introduced by the Debt Arrangement Scheme (Scotland) Amendment Regulations 2014, which introduced a new way of calculating how much people have to pay each month towards their debts. It meant debtors entering the Scheme had to pay as much as they would if they entered a personal insolvency remedy like bankruptcy or a protected trust deed.

Writing in the introduction, I state:

When the Debt Arrangement Scheme was introduced in 2004, it heralded “… a change in how Scots Law dealt with debt: no longer the land of poinding and warrant sales, but a country that took an enlightened and progressive view of how to help struggling consumers manage their debts, whilst still being able to maintain a reasonable standard of living.
“To now witness the numbers of consumers accessing it falling by 50% is disappointing. Particularly as all the evidence suggests with increasing levels of unmanageable debt, the need for it is as great as before.”
“The reasons for the reduction are complex, but speaking simply when emphasis moved away from creating sustainable repayment plans and onto plans that would recover money quicker for creditors, the benefits of the Scheme were eroded for many consumers.”
“What underpinned that policy change was a belief that consumers were getting their debt management too cheap. The truth is that despite the lip service often paid to understanding the reasons for debt and the causes of debt, there remains deeply engrained in the Scottish political psyche a deep suspicion that many debtors are not “can’t pays”, but “won’t pays”.

I call in the report for the Scottish Government to make a number of changes to the Debt Arrangement Scheme, amongst others to:

Introduce a different financial tool for the Debt Arrangement Scheme than that used in personal insolvency; and
To end the current practice of tendering out the role of payment distributor and to allow other providers to enter the market, allowing for more competition and take up of the Scheme.

This report has been written with the view the Debt Arrangement Scheme remains an excellent solution for many consumers, but is currently at risk of withering and going into irreversible decline. It is hoped that decline can be arrested and reversed, but argues some key changes will be necessary.

It was produced using data provided by the Accountant in Bankruptcy after a freedom of information request was submitted. That data can be accessed here.

DAS ist gut (for business)?

25th April 2015 0 comments

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.

Bankruptcy Policies Unravelling

27th January 2014

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

27th January 2014

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.

Should you sign a Trust Deed?

10th September 2013 0 comments

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

2nd November 2012

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.

DAS: The debtor’s panacea to bankruptcy?

2nd November 2012

First published in Scottish Legal News

Historically, in Scotland, if you were facing a creditor’s petition for sequestration, there was little to be done. Options under the Bankruptcy (Scotland) Act 1985 were limited. You either had to show it was not competent to award sequestration, or you had to be in a position to repay the debt in full or offer sufficient security for it.

For such reasons, over the years the threat of sequestration has been an invaluable tool in the debt recovery toolbox, especially in relation to debtors with assets that could be put at risk. The threat of an expired charge or the delivery of a statutory demand for payment was often sufficient to motivate the debtor into action.

Since 2004, however, the effectiveness of these debt recovery tools has been eroded with the Debt Arrangement Scheme. Under current regulations, introduced in July 2011, not only is it possible to defeat a creditor’s petition by applying for a Debt Payment Programme, but it’s also possible to prevent one being raised. This could provide an explanation why even in the last year the number of sequestrations awarded on the basis of creditor petitions has fallen by almost 25 per cent, despite the total number of sequestrations in the same period (2011/12) only having dropped by just 3 per cent.

The Debt Arrangement Scheme, however, is much more than a bankruptcy stopper. Launched in 2004, it suffered from a slow start, but last year saw over 3,300 programmes being approved by the Accountant in Bankruptcy in her capacity as DAS Administrator.

It is unique in that it provides individual debtors with a multiple debt remedy that is not a form of personal insolvency and does not require assets to vest in a trustee. It also prevents creditors using diligence or sequestration once a debtor is in a programme and freezes all interest, fees, penalties and charges. Other features are it provides a payment distribution service and an intimation procedure which can be used to obtain six weeks interim protection to allow an application to be made. It also is increasingly being used for not only consumer debts, but also for business debts by sole traders, partners and company directors, where personal guarantees have been provided for corporate loans.

In one recent case we acted in, a client who owned commercial property of significant value was cited to appear in front of a sheriff to show why sequestration should not be awarded. We assisted him in securing a continuation to allow an application to be made to the Debt Arrangement Scheme, which eventually was successful. The petition for his sequestration was dismissed and he was able to enter into a repayment programme with his creditors, allowing his assets to be protected.

In another case, a sole trade who employed six staff and ran a haulage firm was able to protect not only himself, his home, his business assets, but also his business and staff’s employment by applying for a programme.

In all cases, whether its business or consumer, the key is pulling together credible offers for creditors and presenting them as such. As with protected trust deeds, creditors get a right to object, but where none do, they are deemed to consent. Where creditor objections are received, the DAS Administrator applies a fair and reasonable test to see whether she believes it should be protected or not.

Increasingly, we are finding the use of discretionary conditions in applications, such as proposing assets will be realised during the scheme, is widening the availability to more clients, particularly business clients who would not be able to repay their debts within a fair and reasonable time (ten years being the maximum period accepted). Such proposals, however, do tend to take more planning and professional expertise to put realistic valuations on property; where businesses are involved it’s also necessary to ensure proposals are realistic and credible and will assist the business in not only surviving but flourishing.

For creditors, however, although the scheme may make sequestration harder to secure, it does provide more attractive returns. Even in the longest running scheme, it is likely at least 30p in the pound will be received back within the first three years: few bankruptcies will pay so much. The added benefit in this is even after three years, if the scheme has not been completed, the debtor continues paying.

The scheme is also increasingly been seen as a possible tool in the Scottish Parliament’s toolbox that could allow them to use it more effectively and deal with the growing problem of payday loans. Consumer credit law and interest rates are out with their legislative authority, but debt isn’t and Govan Law Centre’s principal solicitor, Mike Dailly has drawn up a discussion paper proposing a new payday loan, fast track, DAS programme.

The future for DAS is bright: the Scottish Government have indicated they are fully behind the Scheme and consider it a growing success and one they wish to encourage as an alternative to bankruptcy and protected trust deeds. From what I can see, they have already achieved that and, for once, I share their optimism.

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

18th September 2012

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.