Tag Archives: Debt

Stepchange call for Reform of Debt Arrangement Scheme

Stepchange call for Reform of Debt Arrangement Scheme

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
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.

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. 

DAS: The debtor’s panacea to bankruptcy?

DAS: The debtor’s panacea to bankruptcy?

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.

1,000s could go bankrupt as a result of law reform

1,000s could go bankrupt as a result of law reform

First published in Scottish Legal News

Alan McIntosh explains how the Scottish Government’s response to its Bankruptcy Law Reform Consultation will lead to thousands more debtors unnecessarily becoming bankrupt.

When the Scottish Government announced late in 2011 that it intended to consult on bankruptcy law reform, it came as a surprise to most who worked in the industry. The Bankruptcy and Diligence Etc (Scotland) Act 2007 had only been passed a few years earlier and part two of the Home Owner and Debtor Protection (Scotland) Act 2010 had only commenced in November 2010.

There had also been an announcement in August 2011 that the Scottish Law Commission had been asked by the Scottish Government to consult on consolidating Scottish Bankruptcy law, suggesting the intention at that time was to allow this much reformed area of law to bed in for the foreseeable future.

Then there was the announcement by the Scottish Government that it intended to consult on further reform to create a system suitable for the 21st century.

In its response to that consultation yesterday, however, it became clear although there a number of admirable reforms being proposed, at the heart of the reform agenda are changes that will not benefit debtors or creditors, but instead result in thousands of debtors each year being forced into sequestration in an attempt to address the funding crisis that the Accountant in Bankruptcy’s office is facing due to the Scottish Government’s policy of full cost recovery.

Public funding of the Accountant in Bankruptcy’s office is now at a 20-year low, with 40 per cent of cuts this year following on from 37 per cent of cuts last year. To address its current funding crisis, other than making cuts themselves, the AIB, has to find other sources of revenue. This is only possible in two ways: one is by increasing the fees it charges; and the other is by increasing its market share of the personal insolvency work it undertakes.

In relation to increasing its fees the AIB has already done this in relation to debtor application fees, where it raised the fee in June 2012 by 100 per cent from £100 to £200. This resulted in a 50 per cent decrease in the last quarter in the number of debtor’s applications being made. Fee increases, therefore, carry problems: the more they increase the more that is added to the cost of the remedy and the less people will use that remedy, resulting in falling fees and increasing costs per unit of work you undertake. It’s a vicious circle.

Increasing market share, however, provides more potential, although to do that you must compete with the private sector, except in relation to Low Income, Low Assets bankruptcies, where only the Accountant in Bankruptcy’s office is allowed to be appointed. In relation to other types of sequestrations, the AIBs office is the default trustee, meaning where a debtor chooses or cannot appoint a Licensed Insolvency Practitioner, the AIB acts. Previously the AIB had attempted to increase its market share of bankruptcies when part 2 of the Home Owner and Debtor Protection (Scotland) Bill was announced by proposing only they could act as trustee when the new route of certificate of sequestration was used. However, that proposal was controversial and a breach of competition rules and had to be dropped.

Since then, there has been increasing debtor and money adviser dissatisfaction with how the AIB treats debtors when they are the trustee and this has resulted increasingly in debtors appointing their own licensed insolvency practitioner. The main source of this dissatisfaction has surrounded the level of contribution the AIB agents are seeking from debtors once they are in place, whereas private insolvency practitioners can normally advise on this before being appointed.

In response to this, the Scottish Government have now proposed they will create a common financial tool which will harmonise the amount debtors will pay regardless of the remedy they use. This will allow debtors to know beforehand how much they will pay prior to signing up to any remedy and to that extent is a commendable proposal, although as the AIB will be deciding on the details of any financial tool, much of what is contained in the detail will be crucial.

Of more concern, however, is the proposal that a new statutory minimum dividend of between 35-50p in the pound be introduced for protected trust deeds. Protected Trust Deeds are voluntary, less formal type of personal insolvency in Scotland and over 9,000 people entered into them last year. They generally provide better returns for creditors than sequestrations and, although the majority only last 3 years, significant numbers do run for four to five years to allow debtors to buy out equity in their properties and pay additional amounts to satisfy creditor criteria for the deeds to be protected.

Legally, all Protected Trust Deeds in Scotland, therefore, are agreed to by creditors as they do get an opportunity to object. The effect of protection being legally all creditors are deemed to have acquiesced in the agreement.

Currently, the average dividend payable in a protected trust deed is approximately 16 pence in the pound. If the level of dividend is statutorily fixed at 35-50 pence in the pound, as opposed to it being agreed freely between the parties involved, the simple reality will be thousands of debtors each year will not be able to afford to such remedies and instead will have to enter more severe and damaging sequestrations. The alternative to this will be to enter into a Debt Payment Programme under the Debt Arrangement Scheme, which could see many debtors being trapped in repayments plans lasting up to 12 years.

This is only one feature of the current proposals being made by the Scottish Government and not all should be condemned, but it must be asked, as the AIB cannot act as trustee in Protected Trust Deeds, whether it is being proposed such criteria should apply to Protected Trust Deeds in the knowledge that it will kill off that remedy or restrict its use. The resultant effect being more will have to use sequestration and with the common financial tool, it must be in the AIB’s calculations that this will increase their market share of sequestrations and, therefore, their income from such work.

If this is the case and part of the strategy of the AIB becoming fully self-funding, the proposals must be condemned. A bankruptcy system that we all know will increase damage to the interests of debtors and creditors cannot be a system that is fit for the 21st century, nor can it be in the interest of the country as a whole to force more people into such a drastic remedy. If it’s not, then the question must be asked, why introduce statutory criteria into what is already currently a very popular remedy?

Payday Loans: The Scottish Parliament Must Act

Payday Loans: The Scottish Parliament Must Act

First published in Bella Caledonia

Pay day lending is a dangerous business. There are no doubts about it. It preys on the needs of the vulnerable that have been created by failure: the failure of our banking system; the failure of our consumer right laws; the failure of our benefit system; and most importantly our failure to protect the most vulnerable.

It less seduces it’s victims with the honeyed fragrance of easy money, than pedals quick fixes to them with all the subtlety and tact of drug dealers. It targets its victims by identifying their weaknesses. Can’t pay the rent: that’s okay we can help; can’t feed the children: here you go; electricity about to be cut: don’t worry.

The experience of many with pay day loans is one of helplessness and desperation. Helplessness as each month the loan rolls over and you know you are sinking deeper and deeper into a hole. Desperation as you realise the possibility of being able to replace the children’s shoes, clothes and uniforms is growing increasingly remote. The desperation that comes from the realisation that one day it may be your children who will be going to school with inappropriate shoes; jackets; lunches.

It causes depression; fear of answering the phone; avoidance of opening the door. Mail lies unopened. Strangers intrude on your doorstep and violate you and your family’s privacy seeking payment.

And Fergus Ewing, the Minister for Energy, Enterprise and Tourism calls this a “legal, fair and transparent”business.

I don’t blame the Scottish Government for the pay day loan industry. How could I? They don’t have legislative authority over consumer credit laws, they can’t cap the interest rates and they don’t have any control over the key economic levers they need to boost employment and growth in our economy.

I can be angry with them, however, for not going to war with them. I can be angry that they won’t do more to discourage the use of these loans, to promote alternatives such as credit unions and I can be angry that they won’t use the powers they have to send a message that they aren’t welcome here.

Fergus Ewing takes the view this would be “inappropriate”; but for reasons of public health it was not inappropriate to take action to discourage smoking; it was not inappropriate to use our existing powers to restrict the use of alcohol through minimum pricing and it wasn’t inappropriate for the Scottish Government to challenge the authority of the Supreme Court.

Pay day loans are a scourge on our society and have grown up and thrived in the cesspit of financial failure that we have been exposed to in the last few years.

But powers do exist which would allow the Scottish Government to act now.

Debt law is an area that has been devolved to the Scottish Parliament. It is possible for certain debts to be treated differently and for interest rates to be frozen or varied once someone is struggling to pay them. Already such a Scheme exists in the form of the Debt Arrangement Scheme, but although this allows pay day loans to be included and for all interest, fees and charges to be frozen, it takes too long to use and allows payday loan companies to benefit from dragging their feet.

It’s within the legislative authority of the Scottish Government to create a new scheme or amend the existing one to create a more streamlined approach with specific rules for pay day loans. The powers allowing for such a scheme exist in the Debt Arrangement and Attachment (Scotland) Act 2004 s7 and s7a.

This, however, requires political commitment: a commitment borne out of a belief that pay day loans are nothing but fair or transparent and the only thing that would be inappropriate is to do nothing. A commitment that is borne out of an understanding of how closely related these firms and their practices are to the issue of poverty; and a commitment that is driven by a belief that the powers of the Scottish Parliament exist if for no other reason, but to make the lives of Scots better and to protect the most vulnerable.

Six Ways For The Scottish Parliament To Now Tackle Poverty

0 comments

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.

[polldaddy poll=6515109]

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.

Taming the Rest

0 comments

Mike Dailly in his blog for The Firm has called for a new Debt Arrangement Scheme to deal with payday lenders.  I consider whether such a scheme is feasible and if so how it should differ from the current scheme

The Scottish Government’s Debt Arrangement Scheme (DAS) currently allows pay day loans to be included into Debt Payment Programmes. That’s not a problem.

What is a problem is the fact the number of DAS’s where these types of debts are being included is now sharply on the increase, particularly amongst those under 30.

This highlights the problem that is payday loans: they are rapidly on the increase and can quickly turn temporary financial difficulties into longterm serious financial hardship. They also create a problem in that their laissez faire policy of high risk lending often damages not only the interests of the borrower, but their family who may be unaware of the borrowing and other lenders.

The debts that are rolled over often quickly increase in size and with continuing payment authorities being used to deduct funds directly from bank accounts often force clients to default on other debts.

But if the DAS can already be used are we seeking a problem for the solution?

Well maybe, but payday loans being included into Debt Payment Programmes bring their own problems. One of these is it can take between 2-3 months to get a normal DPP programme set up and approved and in that time payday loans can quickly increase due to the fact interest, charges, fees and penalties are not frozen until the DAS is approved. This can significantly lengthen the time of the programme. Also good practice states all unsecured debts should be included into a programme, even when if it wasn’t for the payday loan, the contractual payments to those other debts could be maintained.

So is there a way it may be possible to cut out the cancer without amputating the leg?

We could have a fast track scheme which could have a capital limit on the amount of debt that could be included, such as £3,000. There could  be a maximum length of time such schemes could run for such as 2 years. It would only be possible for short term pay day loans to be included into such programmes and it could be possible to continue to exclude other debts where the client could maintain the contractual payments.

In such cases, as Mike points out, interest could be set at the judicial rate of interest of 8% to reflect the fact other creditors and debts are not being included in the programme and presumably still getting interest paid.  Also programmes could automatically be approved in principle providing they meet the criteria for entry with lenders then having 3 weeks to submit objections. If the programmes is subsequently revoked as the lenders objection is upheld and it is found to be unfair or unreasonable, the lender would be able to reapply the interest, charges, fees and penalties they could have but for the scheme being approved.

In doing this we would be isolating a problem that often leads to more severe solutions becoming inevitable such as bankruptcy. It woul encourage early and limited intervention, in very much the same way a doctor would try and isolate and cut out a malign tumour before it spreads.

Such a Scheme would be a powerful deterrent to payday lenders in Scotland. It would also act as a powerful bulwark against their practice of rolling over accounts and contain the rot that sometimes begins with them but quickly spreads like gangrene to infect other more responsible lenders.

UPDATE:  Govan Law Centre have now published a discussion paper on the proposals. See here.

What has the Scottish Parliament ever done for us?

0 comments

The day after Professor Bonnington claimed the Scottish Parliament was damaging Scots Law, I provide one example in relation to debt law, where this is not the case.

Scotlands Best Kept Secret: The Debt Arrangement Scheme

In 1985 when the Scottish Law Commission produced it’s report into diligence, the area of Scots Law that deals with the legal recovery of debts, it was proposing reform of an area which had not been kept up to date with changing values .

It was possible back then when you owed money for your creditors to instruct officers of the court to seize your possessions and have your neighbours funnel through your home with a view to buying them. You not only had to contend with the embarrassment of being publicly humiliated, but also the knowledge that the predatory behaviour of those attending would mean your property would in all likelihood be sold for peanuts.

Unfortunately, the Scottish Law Commission didn’t think this was too bad and just a few adjustments were required, so it didn’t recommend abolition. However, it did make a number of other recommendations, one of which was there should be a new scheme for people with multiple debts who needed time to pay them off.

When the Debtors (Scotland) Act 1987 was introduced, Poindings and Warrant Sales as they were known, were kept, but slightly reformed (your neighbours couldn’t come into your home anymore, but they could watch from their windows as the court officer carried away your goods). And the scheme to help people repay their debts? Well that was a nice idea, but really why bother?

By 1997, nearly and 18,980 poindings were being executed in Scotland. Good times.

Then in 1999, Tommy Sheridan with the assistance of Mike Dailly, the Principle Solicitor of Govan Law Centre brought forward one of the first member bills in the newly formed Scottish Parliament: The Abolition of Poinding and Warrant Sales Bill.

Despite Scottish Executive resistance there was a back bench revolt (interestingly, primarily by woman) and this archaic practice was abolished. The Scottish Executive then brought forward their own legislation, the Debt Arrangement and Attachment (Scotland) Act 2002 which confirmed the abolition of poinding and warrant sales, albeit replacing them with a new type of attachment that distinguished between good kept in the home and outside the home. They also dusted off the old Scottish Law Commission recommendation of a new repayment scheme and called it the Debt Arrangement Scheme.

It was introduced in 2004 and allowed people to enter into formal repayment schemes with their creditors, letting them pay their debts, but with the full protection of the law. Once in a scheme, creditors could not do earning arrestment, bank arrestments, attach people’s property or make them bankrupt. And if the creditors objected? Well the new government officer, the Debt Arrangement Scheme Administrator could say tough, you’re in, providing she thought it was reasonable.

As a result of a painfully slow start, however, in 2007 the Scottish Government then introduced reforms so that once a  programme was approved, all interest, charges, fees and penalties on debts were frozen and if the plan successfully completed, written off.

Then in 2011, to give it another kick it was reformed again, this time to widen the type of money advisers who could apply for a programme on behalf of their clients. They also introduced payment breaks, so if your income dropped more than 50%, you could qualify for six month’s grace to get back on your feet again. And if you had ten different creditors to pay each month, well that was okay as everyone in the scheme has to pay their debts through a payment distributor who collects the money then distributes it to the creditors. And the cost of that service? The creditors have to pay for it.

The Scheme is still the little brother of Scotland’s two other formal debt remedies: 9,194 people signed Protected Trust Deeds last year; 11,056 people were declared bankrupt; and only 3,319 had Debt Payment Programmes approved.

However, as the graph below shows, if the first 8 years of the Debt Arrangement Scheme is compared with the first 8 years of Protected Trust Deeds, its growth pattern matches that of Protected Trust Deeds and in the last year has begun to grow even more steadily. In all likelihood in a few years time it will become Scotland’s main debtor remedy.

And it’s good for creditors also. The average dividend paid to a creditor in a Protected Trust Deed is less than 16p in the £ and less for bankruptcy: in a Debt Payment Programme, as the longest they normally last is 10 years, creditors get at least 30p in the £ back over the same period, but also with the hope of more in future years as it is not a form of personal insolvency.

The Scottish Government is also now looking to extend the Scheme so it can be used more easily by sole traders and partnerships to let them repay debts and avoid bankruptcy: creating a culture of recovery rather than one of liquidation.

And as for the replacement of poindings and warrant sales: in 2011/12 there were only 2,758 attachments, which is for property outside the home, such as cars and commercial property, and only 51 exceptional attachments carried out in the home (compared with the 18,980 poindings in 1998).

Now that’s not bad and as for the rest of the UK: they are still waiting for their reforms.