The rising cost of bankruptcy

A change in the administration of bankruptcy creates process price increases that will deny a remedy to those debtors most in need, warns Alan McIntosh 

Previously I raised my concerns that the Accountant in Bankruptcy’s (AIB) policy of working towards full cost recovery, would eventually lead to morally bankrupt law reforms, with the poorest having to pay more. On the 20th of April, as anticipated, the Scottish Government laid before the Scottish Parliament the Bankruptcy Fees Etc (Scotland) Regulations 2012. These regulations introduce a number of price changes, which include hiking up of the cost of applying for bankruptcy by 100% from £100 to £200.

I have since raised my concerns with Fergus Ewing, the Minister responsible that these changes would result in Scotland’s low income, low asset bankrupts (LILA) paying more than double what those south of the border have to pay in order to access the nearest equivalent remedy, a Debt Relief Order (DRO) (£90). The Minister has responded by claiming the comparison is not appropriate and has defended the increases by reference to the rising costs of administering bankruptcies, due to falling numbers of those applying. He has also pointed to the £700 cost of going bankrupt elsewhere in the UK and referred to the Accountant in Bankruptcy’s policy of working towards full cost recovery.

There are indeed differences between LILA in Scotland and DROs in England, but there are also differences between sequestration in Scotland and the similar procedure elsewhere in the UK: so, if it’s not appropriate to compare one type of procedure with another, then surely this should apply in all cases? The Scottish Government did carry out a review into Low Income, Low Asset bankruptcies in 2009, however and that showed the difference between those using LILA and DROs may not be that different. The average debt in a LILA bankruptcy it found was £17,160, only slightly above the £15,000 cap for debtor wishing to apply for a DRO (and approximately 38% had less than £10,000). It also found that 99% were unemployed, meaning the majority would either have no income of their own or be fully dependent on means tested benefits and likely to have less than £50 disposable income per month (another criteria for a DRO).

In addition to this LILA bankrupts cannot own heritable property, so few would have any non essential assets above £300 and therefore would satisfy another criteria specified for DROs.What about the rising costs of administering bankruptcies because of falling numbers? Well in the last year sequestrations in Scotland have fallen by less than 4%, however, protected trust deeds have increased by 1,214 (15%) and this would have resulted in an increase of over £300,000 in additional funds for the AIB. In their 2009 report, Drowning in Debt, Citizen Advice Scotland carried out a study of these debtors who they had as clients. They found that although the average level of debt was relatively low, with an average of £13,563 per person, the effects of it were disproportionate when compared to that on debtors with higher earnings. They found despite low income clients having good budgeting skills they often went without essentials to manage their debts, due to a lack of income. This was particularly the case for women, who in the Scottish Government’s 2009 report made up 64% of all LILA applications.

They also found that they suffered higher levels of “debt stress and that although 86% would consider bankruptcy, 80% would struggle to pay the £100 application fee and would either be forced to borrow or struggle to save the money. It is, therefore, worrying that when they have called for the bankruptcy application fee for LILAs to be cancelled, the Scottish Government’s new regulations double it.But is all this necessary? In 2010/11 the Accountant in Bankruptcy received £3.2 million of public funding. For the coming financial year, this was cut by 37% to £2 million, leaving a shortfall of £1.2 million.

However, the new regulations propose a number of other price increases, including a new supervision fee that will need to be paid by trustees in protected trust deeds. Based on the number of Protected Trust Deeds in 2011/12 this could mean an additional income of £450,000 for the AIB, with the hope of more as significant numbers of trust deeds run for four or five years.In addition to this, of the 11,023 sequestrations awarded last year, 58% were not low income low asset bankruptcies, so even if no price change was made for these bankruptcies, the £100 increase could generate another £640,000 of additional funding for the AIB. This would mean £1.09 million of extra funding without increasing the application fees for low income low asset bankruptcies: add those in and you have £1.4 million – vastly exceeding the shortfall created by the 37% cuts in funding.

None of these calculations include the additional fee increases proposed by the regulations, which include a new 25% fee on all realisations for bankruptcies where the AIB is trustee, where previously there was none; or increases in the percentage that can be charged by the AIB for realising assets. It doesn’t even include the hourly rate increase for their staff, which will rise from £39 per hour to £100. These price increases will deny a remedy to those debtors most in need and who have no other remedy such as a Debt Payment Programme under the Debt Arrangement Scheme.

The message is clear: the Scottish Government will not pay for bankruptcy to be a social safety net for Scotland’s poorest. Instead many will be forced to continue borrowing from pay day loan companies and other sharks to manage their debts.Even the Lib/Con Coalition in Westminster is not proposing this. Fergus Ewing should consider withdrawing these regulations, even if just to amend them to allow the current application fee for a LILA bankruptcy to be frozen. He has often spoken of his experiences as a solicitor and as a member of parliament assisting debtors with debt and insolvency problems and of the difficulties they face. He is strongly placed to understand the implications of such excessive price hikes.

It is likely a moratorium on such fee increases would only be necessary for a short period: the current Bankruptcy Law Reform is looking at creating more bankruptcy products, from no income to high value bankruptcies, which when introduced could allow more targeted fees. That way we could have the policies that people expect from a social democratic Government whose members often claim is left of centre. It also means we would no longer have a one size fits all application fees for bankruptcy and debtors would be treated fairly not equally.