Debt: finding the right formula

The Scottish Debt Arrangement Scheme (DAS) now returns more money to creditors in Scotland than protected trust deeds and sequestration, with the latest annual report by the Accountant in Bankruptcy showing it repaid £37.6 million in 2017-18, up from £37.3 million in 2016-17.

However, despite the apparent success of the scheme it continues to be subject to changes, with the seventh round of regulatory amendments since 2004 due to commence on 29 October 2018.

The reasons behind these frequent changes can be broken down into three categories. First, there has always been a fear that if financially-distressed consumers are given too much protection, a cheats’ charter will be created, so initial reforms often do not go far enough. Secondly, there exists a tension between the rights of consumers and those of creditors, which means that attempts to make the scheme more effective as a debt recovery tool often lead to the impairing of its qualities as a debt management one. Thirdly, as changes are realised to have been to the detriment of the scheme, there is the necessary rolling back of amendments.

The primary motivation behind the Debt Arrangement Scheme (Scotland) Amendment Regulations 2018 is the last of these reasons, with the new regulations reversing changes introduced in April 2015.

Not all debts are equal

The first change will remove the requirement that all debts must be included in a debt payment programme under the scheme. Previously, when it came to loans secured by standard securities, or rent arrears, money advisers would omit these, preferring to negotiate separately with these creditors. This will now be possible again where there may be a risk of a secured lender or property owner raising an action for possession of the debtor’s home.

Debtors in the scheme will also no longer be required to offer all their disposable income towards their debts when proposing repayments to creditors, but may instead offer a portion of it. The logic is this will allow consumers more financial breathing space over the duration of a repayment programme and make plans more sustainable.

Other changes will allow debtors to request that their details are kept off the DAS register when they are at risk of violence, and allow debtors to offer the sale of their home at some point in the future as a discretionary condition, where the repayment plan on its own would take too long.

Debtors under the new regulations will have the same restrictions placed on them as already exist for bankrupts when they are obtaining new credit, only being required to inform creditors they are in a debt payment programme when they borrow more than £2,000 (or always where they already have £1,000 in debt, acquired after entering their repayment plan).

Debtors will also be required, when they are proposing plans, to disclose to creditors what fees they have paid to continuing money advisers when they are using a private sector provider.

Business DAS

The regulations also amend the Business Debt Arrangement Scheme, introduced in 2014 – arguably an example of the first reason given above, in that the initial regulations in 2014 were overly cautious.

The new provisions will allow bodies to apply where they only have one debt, and allow them to apply for payment breaks (therefore extending their plan) for up to six months, provided the money adviser can state that the plan will remain viable and will continue to have a reasonable prospect of completion.

More in the pipeline

However, any hopes of creditors and money advisers that the newly amended scheme will be allowed to bed in will be in vain. The Accountant in Bankruptcy is already working on a further consultation to be run later this year with a view to further regulatory reform of the DAS, commencing in June 2019.

This consultation will focus on a new framework for appointing payment distributors to the scheme that will be like the one that previously existed prior to the 2011 Regulations and will no longer require firms to tender to become approved distributors.

In addition, it will feature significant increases in the statutory fees that creditors have to pay when a debtor enters a plan, from the current maximum of 10% of all payments made by the debtor up to a possible 25% of all contributions. The reasoning behind such a change is that takeup will be increased by incentivising more providers to provide access. It will also allow private sector fees to be abolished, meaning all debtors should be able to access the scheme for free. It is hoped these changes will reverse the significant decline in takeup of the scheme that began in 2015, and is arguably an example both of rolling back previous changes and of initial reforms not going far enough.