Debt
Arrangement Scheme: Here today, gone tomorrow
In
mid 2004 the Scottish Executive expressed their wish to
launch a Debt Arrangement Scheme "DAS" in Scotland.
The purpose was highly laudable in that it sought to allow
individuals who wanted to pay their creditors what they
were due, but found themselves in financially difficulty.
It was envisaged that a DAS would allow someone to pay their
creditors over a period of up to 8/10 years. Further, the
DAS process anticipated that an individual could retain
his house and thus, one assumes, place less strain on the
state to re-house someone who had lost their house as a
result of debt problems.
Financial difficulties are not a new feature of life and
frameworks to deal with them such as a voluntary agreement
with creditors, trust deed and sequestration have been in
place for many years. A DAS was considered to be a route
that many individuals would follow but, the fact that there
are fewer than 10 DAS’s in Scotland since their launch
on 1 December 2004 suggests that something is wrong.
Further, the tried and tested routes of trust deed and sequestration
continue to be popular with approximately 3,000 trust deeds
and 2,500 sequestrations occurring in Scotland each year.
What
has gone wrong?
The key issues appear to be over-complication, excessive
bureaucracy and little financial reward for an approved
money adviser. The DAS process is regulated by the accountant
in bankruptcy who, for DAS purposes is referred to as the
administrator and it is the administrator who approves individuals
to be authorised money advisers and also regulates payment
distributors. When an individual attends the first debt
counselling meeting it is the money adviser who provides
advice and, if a DAS proceeds, a payments distributor is
appointed who deals with collection of money from the individual
and resultant payments to creditors. The money advice is
free, and the payments distributor is able to charge less
than the average bank charge for processing the payments.
Whilst an individual may not be concerned that the money
adviser and payment distributor receive little financial
reward for their efforts, the reality is that most money
advisers, such as debt counsellors who advertise in tabloids,
licensed insolvency practitioners and others do not wish
to become involved in the process.
Rules and regulations may create transparency and an audit
trail but they also incur costs. In the end, someone has
to pay. It is unrealistic to assume that an individual with
debt problems will be happy to pay a substantial sum for
assistance and, in general terms, debt counselling agencies
tend to focus upon voluntary arrangements whereby a person
pays them a specific sum each week/month which is distributed
on a pro-rata basis to creditors.
Another significant challenge is in obtaining agreement
from creditors to a DAS. The legislation anticipates that
it is the creditor rather than his agent who must respond
and anyone who has dealt with individuals in financial difficulty
will know that there are numerous debt collection agencies.
Trying to access the original creditor, and then find someone
there who can make a decision, is almost impossible. Further,
the DAS guidelines anticipate that creditors will waive
ongoing interest. Again, anyone who has dealt with loan
companies, credit card companies and other large financial
institutions will be aware that this is a fairly forlorn
hope.
The
DAS allows an individual to keep his house: or does it?
The guidelines incorporate a 21 day period in which to obtain
formal creditor consent and, if it is not received it is
possible to ask the sheriff to approve a DAS. Once approved
all creditors are bound by its terms. If an individual has
been using consumer credit e.g. credit cards and unsecured
loans, to fund normal spending and has been able to maintain
mortgage payments such that there is equity in the house,
it is illogical to assume that a creditor will be quite
happy with such arrangement. In other words the creditor
will want to share in whatever asset(s) the individual has,
including the house and hence, is unlikely to agree to a
DAS.
Those who deal regularly with individuals in financial difficulty
will be aware that the majority live in either private or
council rented accommodation. Thus, one of the key benefits
that the Scottish Executive seemed to believe would make
a DAS popular in terms of protecting one’s house,
has proved not to be the case.
Does the DAS allow a better return to
creditors?
Mathematics tells us that someone paying a regular contribution
from earned income over a 10 year period will provide a
larger sum for creditors to share than someone paying over
a lesser period. However, whilst that is good news for a
creditor, the fact that both trust deed or sequestration
proceedings limit the repayment period to 3 years means
that individuals have no particular reason to want to pay
for longer. Also, one must remember that individuals with
debt problems tend to be stressed and worried. Letters/telephone
calls are a regular and unwelcome feature of unpaid debts
and someone at the end of their tether is far more likely
to embrace a system which allows debts to be removed and
a contribution period limited to 3 years.
Further, the Scottish Executive are contemplating the introduction
of a 1 year sequestration period in order to fall into line
with that which has existed in England since 1 April 2004.
Should this occur, and an average trust deed follows the
same 1 year period in order to reflect consistency of purpose,
DAS will become even more undesirable.
A trust deed and a sequestration do not stop an individual
from working and retaining the essential items in a house.
In summary, if there is a process which allows a person
to be relieved of their debt obligations and pay a contribution
from earnings over a 3 year period, why would someone contemplate
making payments for a far longer period? As indicated above,
the fact that there are so many sequestrations and trust
deeds in Scotland compared to DAS’s tells its own
story.
DAS: an early demise?
What seemed to be a good idea by the Scottish Executive
lacked simplicity and had no discernible purpose which was
different from the other debt relief measures already available.
One could argue that lack of consultation prior to the introduction
of the DAS process and excessive bureaucracy in terms of
instituting/operating a DAS have created almost wholesale
rejection but the existence of valid and practical alternatives
is perhaps the main reason why DAS is unlikely to be with
us much longer.
This is article has been prepared by Michael J M Reid, insolvency
partner at Meston Reid & Co, chartered accountants,
12 Carden Place, Aberdeen. The views expressed in this article
are his own rather than those of the firm.
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