A debt lifeline?

There is a common misconception that in times of economic hardship the use of formal debt remedies increases. This isn’t necessarily true. It is true to say that in such times there is a greater demand for such remedies, but what determines whether they are used or not is the legislative conditions that exist at the time.

For the Scottish Debt Arrangement Scheme the correct legislative conditions for increased use of this remedy were created with the introduction of the Debt Arrangement Scheme (Scotland) Regulations 2011. The Scheme has existed since 2004, but prior to the 2011 Regulations it had been plagued with problems such as not offering sufficient protection to debtors, and access to the Scheme being a postcode lottery.

The 2011 Regulations dealt with these problems by widening the gateway into the Scheme, and increasing protections for debtors. Since then, numbers have increased by 73%, from 1,910 programmes in 2010-11 to 3,319 in 2011-12.

How does the Scheme work?

The Debt Arrangement Scheme is a statutory repayment plan for debtors, not a type of personal insolvency. It was introduced with the Debt Arrangement and Attachment (Scotland) Act 2002 and provides a number of benefits for debtors who enter into debt payment programmes under the Scheme. These include not only protecting those in programmes from diligence and sequestration, but also freezing interest, fees and charges on the debts that are included.

Those creditors whose debts are included into programmes do have a say, much like they do in protected trust deeds, but where they fail to respond within the statutory notification period of three weeks, they are deemed to consent. Where they object, the proposals are then considered under a “fair and reasonable” test by the Accountant in Bankruptcy, in her role as the Debt Arrangement Scheme administrator. If she finds that a proposal is fair and reasonable she can set aside the objections and approve a programme.

Once in a programme, debtors are provided with a payment distribution service, which administers the payment and distribution of monies towards their debts for them. In addition to this, if during the programme a debtor suffers an income shock and loses over 50% of their income, they can obtain a payment break for up to six months whilst remaining in the programme.

Where a debtor has not applied to the Scheme, but fears they may be in imminent danger of enforcement action or someone raising a petition for their sequestration, they can intimate an intention to apply to the Scheme, in which case they receive up to six weeks’ interim protection.

The benefits of the Scheme do not stop there, however. Where a creditor’s petition for bankruptcy is being heard, it is possible for a sheriff to allow a continuation to allow an application to be considered, with sheriffs not being limited in the amount of time they allow for such continuations.

How is the Scheme being used?

As was intended, the Scheme is now primarily being used to deal with multiple consumer debt problems, and particularly to protect those debtors who have assets they wish to protect from sequestration and diligence, such as cars and family homes.

It is also increasingly being used by debtors trapped in the vicious cycle of payday loans, as a means of freezing interest and stopping the dangerous practice of having to continually roll over such loans.

However, it has also become an extremely useful tool for assisting debtors who have had petitions for their sequestration raised and are in court facing bankruptcy. How successful it has been in such cases is hard to quantify, but it can be said that the number of bankruptcies being awarded on the strength of creditor petitions was down in 2011-12 by 25% on the previous year, despite bankruptcies themselves only being down by 3%.

The Scheme is also increasingly being used to deal with business debts. In one recent case, we helped a large commercial property owner facing sequestration to protect not only his commercial assets, but also his personal assets from business creditors intent on sequestrating him. In another, we were able to put the owner of a small haulage firm into the Scheme, protecting not only his trucks, but his home and business and also the jobs of his six employees. Other programmes have been used to assist landlords and property developers where they have been sole traders.

Another emerging use for the Scheme is to provide protection to company directors who have provided personal guarantees for corporate debts. As was observed by Eric Baijal (“No guarantee of easy recovery”, Journal, April 2012, online exclusive), the use of such securities is on the increase by lenders, and correspondingly we are also seeing an increase in the number of debtors coming to us with liabilities they have acquired as a result of such guarantees.

What we find is crucial to such programmes being approved is ensuring that we work with both debtors and creditors to draw up plans that are credible and sustainable. We do have the benefit of being able to say to creditors that even in the longest running programmes, they will normally receive back within the first three years almost double what on average is received under a protected trust deed, with the prospect of more thereafter.

However, we are also finding that, through qualifying proposals by including discretionary conditions, access to the Scheme is being widened, especially where the repayment of debts would take longer than the maximum 10 years normally allowed.

Such qualifications can take the form of offering to increase payments at later dates where circumstances allow, and offering where other assets are available, to realise those assets within a timeframe that avoids distressed selling.

Future outlook

Going forward, the Scheme is now a key part of the Scottish Government’s strategy for dealing with the problem of personal overindebtedness, and has been heavily promoted with road shows and TV commercials, which is unprecedented in relation to other formal debt remedies.

The Government is also now committed to finding more ways to improve the Scheme and make it more effective, and in all likelihood it will become a remedy that will continue to grow in popularity, providing not only an alternative to personal insolvency for many debtors, but also a more measured and appropriate remedy in these difficult economic conditions.