The Debt Arrangement Scheme (DAS) is now approaching its fourth anniversary, but before it reaches that it will go through its second review, which is expected to run between July and December this year. The first review, which was implemented at the end of June 2007, allowed, inter alia, for the automatic waiving of interest and charges on debts included in debt payment programmes, providing they were successfully completed. It also extended the role of the DAS Administrator[1] in the scheme, reducing the role of the Sheriff, and allowing the Administrator, whenever a creditor refused consent, to apply a fair and reasonable test, before approving or refusing a Programme under the Scheme.

Although, there will be a process of consultation in the review, allowing for all stakeholders to participate, it is clear that what is being asked is whether the Scheme is working the way it was intended. The DAS Administrator has indicated she will be looking at a number of factors in relation to the Scheme, primarily the quality of applications being made by Approved Money Advisers^[2] and the use of the Scheme by debtors.

The Application Process for Debt Payment Programmes

The Administrator has clearly indicated, through her staff, she is concerned with the proposed duration of some of the programmes being applied for. When the Scheme was originally implemented, there were two principles in the legislation which underpinned when a programme should be approved. The fist of these was contractual freedom, that is “the client and the creditors can reach whatever agreement suits them.”^[3] The second was where a creditor did actively refuse consent that a fair and reasonable test should be applied.

The DAS Administrator’s concern that the Scheme is being used in a way that was not intended appears to be directed to the first of these routes for a payment programme being approved: that is through the agreement of the debtor and the creditors. This is partly because, at present, where a creditor fails to reply to a notification that a Debt Payment Programme is being applied for, they are deemed to have implied consent. A programme can, therefore, be automatically approved despite the fact no creditor has actively agreed to it, even if it will take twenty years or more to complete. These cases are being automatically approved as a result of the creditor’s active and implied consent. It is true many creditors are prepared to wait lengthy periods for their debts to be repaid, knowing they will in all likelihood recover far less if the debtor chooses another route, such as personal insolvency. It is also true, however, that another significant reason for these programmes being approved is poor creditor participation, resulting in them being deemed to have consented when they fail to reply within the statutory time limits.

Does this constitute misuse of the Scheme? In the situation where all creditors actively consent it would be hard to argue there is any abuse and, therefore, little justification for limiting the principle of contractual freedom, as surely the parties involved must be presumed to know what is in their best interests. When the programme is approved as a result of deemed consent, the question is more complex. There is a strong public interest in the DAS: it provides a remedy for those in debt and restricts the right of creditors, by implying they have consented, when they have not. Where those creditor rights are lost as a result of a legal fiction, there is a duty for the DAS Administrator to ensure any infringement is limited and proportionate.

However, removing the concept of deemed consent is unlikely to be the solution. For a start, the concept is hardly an alien one, already existing in Scots Law in relation to Protected Trust Deeds and was recently reaffirmed with The Protected Trust Deeds (Scotland) Regulations 2008. In the case of trust deeds, the creditor who fails to respond loses far more rights, than the creditor who fails to respond to a notification of an application for a Debt Payment Programme (DPPs pay 90p in the pound in comparison to Protected Trust Deeds, which on average pay only 10-20p in the pound). Also if the concept of deemed consent was removed from the DAS, it would not necessarily increase creditor participation and, arguably, would remove one of the incentives that currently exist for creditors to participate in the scheme: that is, they ignore it at their peril. In terms of restricting the rights of creditors, the approval of a programme still allows creditors to apply for a variation or appeal, on a point of law, and although the DAS does currently include an element of debt relief for debtors from interest, fee and charges, this is only realised if the DPP is successfully completed. The creditor, therefore, retains the right to pursue the debtor for these sums should the plan fail. The creditor whose debts are included in a Debt Payment Programme, therefore, is in a significantly stronger position in regard to his rights, than the creditor with debts included in a Protected Trust Deed or Sequestration. Arguably, therefore, the rights of the creditor who fails to respond to notification are outweighed by the public interest of ensuring creditors act responsibly and meet their obligations to assist debtors facing financial difficulties. It cannot be argued, for example, that the creditor is obstructed from participating in the procedure or is having his rights infringed upon without due process.

In light of this, it is difficult to argue that those programmes currently being applied for, which may have proposed durations of twenty or more years are in actual fact abuses of the scheme. Firstly, the DAS Administrator has said, in the guidance provided, that where it is felt a case is fair and reasonable, an application should be submitted.[4] What is fair and reasonable will always depend on the particular facts of a case and also the views of those involved. It is not possible for an Approved Money Adviser to know in advance whether a creditor will respond or what his view will be.

The possible reason why it is felt such applications may be a misuse of the scheme appears to derive from the second way a DPP can be approved. That is, when a creditor actively refuses consent. As mentioned above, in such situations the DAS Administrator has to apply a ‘fair and reasonable’ test. There is nothing in the legislation that stipulates such a test should apply to a programme when creditors don‘t refuse consent. It would appear, however, the fair and reasonable test is being used as a benchmark against which cases where creditors either do consent, or are deemed to have consented, are being measured. If this is the case, the question needs to be: should the fair and reasonable test be used as a benchmark in all cases?

Possibly the first question that needs to be asked, is how is the fair and reasonable test being applied? At present there is nothing in the primary or secondary legislation stipulating how long a DPP should last, although, The DAS Guidance for Approved Money Advisers does state “…the DAS Administrator is likely to approve anything under 5 years in duration and refuse to approve anything over 10 years. Between these periods will be a matter of individual assessment”.[5]

Although, such guidelines can be helpful, they are arbitrary. They appear to be more for convenience than because they have any basis in fact or in law in determining when a case is fair and reasonable. The regulations do, however, provide a list of other factors that the administrator should consider, such as the total amount of debt, the level of equity a debtor has in his home, the extent to which creditors have consented and any other factors considered appropriate.[6]

At present there is little information what weight is being given, on a case to case basis, to these factors and what other factors are considered relevant. For example, there is no indication whether relevant factors would include the length of time the original debt was for, or whether a client risks losing their home.

The current practice is that when an application is rejected, the Administrator states the application failed the fair and reasonable test. This lack of specificity creates two problems: first it is near on impossible to decide if there are any grounds for appeal by the debtor (albeit it would need to be on a point of law). And, secondly, without any understanding as to the reasoning behind decisions, money advisers are not able to improve the quality of the applications they make.

If the DAS Administrator is determined to restrict the duration of payment programmes under the scheme, possible solutions could be sought from examining English Administration Orders. Although these orders have no statutory limit on their duration, it is generally accepted debts included in such schemes should be repaid within a reasonable time. Where repayment plans are likely to exceed such a reasonable time, a Composition Order can be imposed, only requiring the debtor to repay a percentage of the debt. The DAS could be reformed along the lines of such a model. This would help resolve some of the issues concerning the duration of programmes, although it would involve a greater infringement on the rights of creditors.

Another option used in Administration Orders would be to impose limits on the level of debt that can be included in DPPs, although caution needs to be exercised here as the scheme could become too restrictive. It should also be noted such limits are believed to be the reason behind the declining use of this remedy in England and Wales.

It would still need to be decided, however, how programmes get approved. That is whether the fair and reasonable test should be applied in all cases or whether the principle of contractual freedom should still apply, with or without deemed consent. Also, arguably the grounds of appeal should be widened to include appeals not only on points of law but also on the merits of the case. This would not only improve decision making and accountability, but considering the gravity of the decisions on both creditors and debtors alike and the fact composition of debts could be included, would be in the interests of justice. This would also be in line with the Administration Order model.

Freezing of Interest

The other issue the DAS Administrator has raised through her staff, concerns the reforms that arose after the first review of the scheme. Currently, when a debtor’s programme becomes approved, all interest, fees and charges on their debts are frozen and ultimately waived, should the programme be successfully completed.

Concerns have been raised that some debtors are opting for the Scheme as a less expensive alternative to consolidation loans and as a way of evading their contractual obligations to pay interest. This is without doubt a possibility. However, two points are being ignored: firstly, under the present climate many debtors are not able to access consolidation loans; secondly, even when debtors are able to obtain consolidation loans, they usually face adverse interest rates. This often exacerbates the debtor’s financial situation and can eventually be the precursor to the debtor becoming insolvent.

The same concerns could also be raised with regards sequestration and protected trust deeds, but there is no suggestion that access to these remedies should be restricted because debtors have not yet borrowed enough. The purpose of debtors using these remedies is that they are acting responsibly to manage their financial difficulties and not acting irresponsibly, posing a hazard to other lenders.

Recognising there is the potential for abuse, the qualifying criteria should be that the debtor should be able to demonstrate with their financial statement that they cannot meet their contractual obligations and are, to that extent, practically insolvent. The alternative to this, that the debtor either must first have defaulted on their debts or that a creditor has obtained a court order, would mean that a debtor would need to wait much later before they can act. It was never intended the DAS would work like this, as the idea was to reduce litigation and encourage debtors to act sooner rather than later.

The Future of the Debt Arrangement Scheme

On average, at present, the number of Approved Money Advisers fluctuates between 90 -100 and in some local authority regions in Scotland there are still no Approved Money Advisers being employed by the public and voluntary sector. Part of the problem has been stretched public and voluntary sector services.

As Approved Money Advisers are the gateway which debtors must pass through to enter a Programme, this creates a significant problem. The Debt Arrangement Scheme is a legal remedy and like other remedies, in the interest of justice people must be able to access it. The equivalent would be to say to people you are able to go bankrupt, but only if you live in certain parts of the country and not others.

In the coming review, therefore, attention should be focused on increasing access to the Scheme, either by providing further resources or countenancing greater private sector involvement.

If the private sector is to be encouraged to increase their involvement, the current standards must be maintained, for the sake of both the creditors and the debtors. One of the driving principles behind the DAS, however, was that it should be a free service. This, however, will have to be squared with the fact any private sector involvement will need to be commercially viable.

This isn’t an impossible task. One option would be to expand the statutory fees that creditors are liable for when their debts are included in a Programme. Currently, they pay 10% to the Payment Distributor. If they also had to pay 10% to the Money Advice Service Provider, this could act as an incentive for increased private sector involvement in providing access to the Scheme. Increased take up of the Scheme may also encourage greater creditor involvement.

Creditors, even with an additional charge, would still receive greater dividends than they do when debtors becoming insolvent and would benefit from no longer having to pursue customers for payment.

Whatever reforms come out of the review, what is important, is not only that some of the above problems are resolved, but that the Scheme continues to provide relief to debtors and an organized method for them to manage their complex multiple debt problems.