Time for due diligence on debt recovery

The Scottish Government has announced the launch of a new independent review of Scotland’s debt solutions and the law of diligence. This follows on from a review of the Bankruptcy (Scotland) Act 2016, launched in November 2019, which has now
led to the Bankruptcy and Diligence (Scotland) Bill 2023, currently before the Scottish Parliament.

Speaking about the latest review, Minister for Community Wealth and Public Finance, Tom Arthur MSP said: “In recent years, the Scottish Government has been sponsoring a rolling programme of review and reform in relation to debt solutions and diligence. The changes that we have made and propose to make through the current Bankruptcy and Diligence (Scotland) Bill, are helping to strengthen, update and humanise the existing regime.”

However, the current bill is “lite” in relation to reforms. It only contains 13 sections, most of which are provisions tidying up previous drafting. The most significant provisions relate to a mental health moratorium for people in debt, which it is anticipated will offer additional protections over and above those currently provided by statutory moratorium, but only for those who are experiencing a mental health crisis. The provisions in the bill contain very little detail, however, and consist mostly of enabling powers for ministers to make future regulations, with the Scottish Government not anticipating the measure to commence until 2024-25.

Diligence trends

Disappointingly, what the bill also remains “lite” on is reform of the law of diligence, the use of which has significantly changed over the last 15 years, when the last significant reforms were introduced with the Bankruptcy and Diligence Etc (Scotland) Act 2007.

Since 2011-12 the number of diligences being executed in Scotland has increased from 481,565 to 533,690 in 2022-23 (if you include charges for payment), which represents a 10.82% increase. However, in relation to those diligences executed for summary warrants for council tax debt, the increase has been greater, with the overall number executed rising from 351,995 in 2011-12 to 454,390 in 2022-23: a 29.09% increase.

This increase has also largely been driven by the increased use of charges for payment, which prior to 2008 were not required for council tax debt. The requirement to serve a charge was introduced in 2008 to increase protections for debtors, but has now seen the number served rising from 164,630 in 2011-12 to 213,900 in 2022-23, representing a 30% increase.

In relation to the number of diligences being executed for non-council tax summary warrants over the same period, the numbers have significantly fallen. For summary warrants for HMRC debt, the number of diligences was 6,145 in 2011-12 but 5,150 in 2022-23, a 16.19% reduction; for all other non-summary warrant diligences, the number was 110,995 in 2011-12, falling to 66,750 in 2022-23, a 39.54% reduction.

In other words, the increase overall in diligences has been driven by the rise in those being executed for council tax.

Even the types of diligences that have been used has changed, with the number of attachments being executed over moveable property kept outside a dwellinghouse reducing from 2,675 in 2011-12 to only 550 in 2022-23. Over the same 12-year period, only 980 exceptional attachment orders were executed, significantly less than the number of poindings and warrant sales used before these were abolished and replaced with attachments and exceptional attachment orders. No exceptional attachment orders were executed in 2022-23.

Impact of council tax debt

This reflects several things. First, many consumer credit creditors are less likely to take court action to recover debts using diligence. This possibly reflects a change in practice as they work to treat customers more fairly, something that the Financial Conduct Authority has made clear it expects of them; and possibly a commercial realism that has made them recognise that many of their customers who fail to pay their debts eventually end up in some formal debt solution, which often results in the creditors realising less than they are owed. Also, it possibly reflects the growth of the debt purchasing industry for consumer credit debts, which arguably attracts many original lenders to just sell on their bad debts and concentrate on new lending.

In addition, the way we buy things has now changed. So, with over 90% of all new cars now being purchased using finance agreements, most of us no longer own a car or other assets that can be attached to pay our debts.

However, the Scottish Diligence Statistics also reveal another growing trend, and that is that the business model of sheriff officers and messengers at arms, who enforce civil court orders in Scotland, is increasingly becoming dependent on council tax arrears to survive.

In 2022-23, for example, 85% of all diligences executed in Scotland were for council tax arrears, up from 73% in 2011-12, with the number of charges for payments served for council tax making up 79% of the total served in 2022-23, compared with 68% in 2011-12. The numbers are similar for earnings arrestments: 78% in 2011-12 were for council tax, whereas 91% were for council tax in 2022-23.

Cost to the poorest

With council tax becoming less popular and with increasing demands for the Scottish Government to replace it with a fairer form of taxation, it seems inevitable that this will also necessitate a fuller discussion on how debts are to be recovered in future, especially if any replacement tax leads to fewer people falling into arrears. The consequence of that would inevitably mean less fee revenue for sheriff officers and the cost of diligence rising further for creditors, with the cost of that rise being passed on to those already struggling to pay their debts.

Arguably this problem already exists in relation to council tax arrears, where most local authorities, after 13 years of austerity, have had to make cuts to their own services, including their own council tax debt recovery teams (partly driven by council tax freezes, ironically). This has led to them becoming increasingly dependent on the services of sheriff officers, as evidenced by the rising number of diligences being executed for council tax debt, and has reduced their ability to deal with customers on a case-by-case basis, something that has contributed to making council tax debt and its recovery less palatable in the eyes of the public.

This can also be seen with charges for payment for council tax: with 213,900 being served in 2022-23, this led to £18.4 million being added to the debt of consumers. If you add on the fee costs of wage arrestments and bank account arrestments for council tax in the same financial year, this figure increases to £28.5 million.

Don’t duck basic questions

It must be asked, how is this helping people who are struggling with debts? If you can be cited by the sheriff court for a criminal trial by recorded delivery, then why as a debtor must you be charged to pay your council tax debt, by a hand delivered charge served by a sheriff officer, adding another £86.03 in fees to your debt? The question must be asked why, when local authorities, who are executive government agencies, can send out their own council tax bills and summary warrants by normal mail, they cannot send out charges for payment by normal mail? This would significantly reduce the level of fees being added to the debts of those who are already struggling.

Equally, it must be asked why, when the UK Child Maintenance Service can serve a deduction of earnings order on a parent’s employer to deduct sums from their earnings, and the Department of Work & Pensions can do the same with direct earning attachments for overpaid benefits, local authorities cannot do the same with earnings arrestments? This would allow them to avoid having to use sheriff officers. The contradictions become even more apparent when you realise that local authorities can use direct earning attachments for housing benefit overpayments under the Welfare Reform Act 2012.

At present the Scottish Government appears to be suggesting its next review will focus on, among other things, introducing disclosure orders, which sheriff officers can serve on debtors as a way of increasing the effectiveness of the law of diligence. These would compel debtors to provide information about their bank accounts, employers and assets that may make recovering debts easier. However, one must also wonder, will they be that effective and could they just become another product that sheriff officers use to generate further income?

The current system of enforcing debts in Scotland needs a more fundamental review. Questions need to be asked whether a wholly private sector business model of enforcing civil court orders is sustainable, or whether a similar model to that used in Northern Ireland, where enforcement is carried out by court employees, would be more sustainable and fairer? We also need to ask ourselves, how the Scottish Government intends to “humanise” this system with its ongoing programme of review and reform if it is not first willing to tackle the fact that the system has become so dependent on generating fees from the poorest in our society?