A new lifeline
to help you get out of debt
Continued consumer
spending fuelled by low interest rates, easy availability
of credit, a society in which more people wish to satisfy
material needs today rather than tomorrow, and a more relaxed
approach to debt have all helped to create the spectacular
increase in personal debt in recent years. Recent
estimates suggest that personal borrowing exceeds £1
trillion in the UK and it is a fact of life that not everyone
is able to service the debt that they accumulate.
For example; illness, redundancy, the loss of a partner's
income, loss of regular overtime/bonuses, and maternity
absence can result in an inability to service one's obligations.
There are various
debt counselling/advisory businesses who specialise in providing
advice to individuals under financial pressure. Given
the rise in the number of sequestrations and trust deeds
in Scotland , it is apparent that many individuals are unable
to cope and are drowning in the tide of consumer debt.
Debt
Arrangement Scheme
In December 2004
the Scottish Executive are launching another option for
individuals with financial problems. This government
initiative seeks to provide another option for those who
are struggling under a mountain of debt. The new
procedure will be referred to as the Debt Arrangement Scheme
and, although the final rules and regulations have yet to
be issued, it is understood that the intention is to offer
individuals an opportunity of providing a framework to agree
repayment of debts in a manner in which the individual can
afford i.e. based on the ability to pay, not on the level
of debt.
Currently, one can
apply to court for a time to pay order but this option does
not appear to have been particularly popular: perhaps because
individuals prefer to avoid the formality, expense and mystique
of court proceedings.
Money
Adviser to be Certificated
The Debt Arrangement
Scheme will require an individual to consult with a certificated
money adviser. Certification will be provided under
Scottish Executive procedures. It is anticipated
that money advice centres, citizen advice bureaux, selected
individuals and others currently involved in debt advice
e.g. insolvency practitioners, will be able to apply for
certification. A money adviser will meet with the
individual, at no cost to the individual, and try to determine
a suitable debt management plan for repayment of the person's
liabilities. The draft rules allow for an offer of
composition either at the start of the payment programme
or whilst it is running. There are some rules about
the payment profile but the general thrust is to be fair
and reasonable to all parties. A sensible and practical
approach from a responsible debtor should be capable of
acceptance. After all, from a creditor's point of
view, if there is little or no prospect of payment, something
is better than nothing.
It should be noted
that the Debt Arrangement Scheme is a debt management scheme
rather than a debt relief scheme which is what sequestration
and trust deed proceedings achieve. In other words,
the Debt Arrangement Scheme anticipates that an individual
will agree to pay creditors over a period of time: perhaps
as much as 10 years, whereas sequestration and trust deed
proceedings provide a process which gives the individual
a shorter period of time (current maximum is three years)
in which to deal with the liability position.
Objections
from Creditors
As long as creditors
have been advised of the proposed arrangement, under the
new rules, they have 21 days to decide what to do e.g. consent
or object. There are only two grounds for objection:
the debtor should be sequestrated or the debtor has substantial
equity in heritable property which is not his/her main place
of residence. If a creditor does not object on these
grounds, it is likely that the Debt Arrangement Scheme will
proceed, albeit with some minor variations in order to secure
approval. The sheriff will have an opportunity to
issue a determination in cases of doubt over a debtor's
proposal to creditors, in order to allow the process to
continue.
Interest
continues to accrue
Also, the draft rules
allow interest to continue to accrue on debts unless creditors
specifically agree to freeze or waive interest. This
may mean that a debt repayment proposal will be difficult
to establish if the individual has substantial credit card
and personal loan debts where interest rates are high e.g.
20%-30%. If interest is not waived or frozen by a
creditor, it will continue to accrue until the end of the
repayment period at which time the creditor can take steps
to collect it. Thus, if interest is neither frozen
nor waived by all creditors the benefit of a Debt Arrangement
Scheme may be highly questionable.
Once an individual
has spoken with a certificated money adviser and agreed
that there is a potential to repay debts, in whole or in
part, creditors are contacted with a view to agreeing the
position. It is anticipated that an individual will
need to pay no less than £50 and £100 each month
by way of a payment proposal: such monies being shared amongst
all creditors either on a pro-rata basis in relation to
the debts or in equal sums to each creditor. A sum
of between £50 and £100 may be insufficient
to service any interest which accumulates if it has not
been waived of frozen, never mind pay off some of the capital
value. Also, the payment distributor can charge
up to 5% of monies distributed.
A payment distributor
may be a different person from a certificated money adviser
and, subject to the individual's position, will be able
to organise a monthly standing order from such individual's
employer.
Losing
your house and other assets
The Debt Arrangement
Scheme is intended to run in tandem with existing personal
debt options. The new Scheme assumes that some individuals
will be content to pay creditors over, say, a ten year period
rather than limit payments to a trustee over a three year
period, as is currently the case either in sequestration
or trust deed proceedings. Whilst there will be rules
to try and obtain creditor agreement to a Debt Arrangement
Scheme, it is suggested that if creditors are aware that
an individual owns a house with substantial equity they
may not be willing to accept small payments if the individual
is not prepared to release any equity.
The new regulations
state that a dwellinghouse is exempt from a Debt Arrangement
Scheme and thus,
if a debtor lives
in a house with equity, it may be that the majority of creditors
object to the proposed
Scheme and prefer
that the debtor is sequestrated in order that the house
is brought into the equation.
In such cases, the
debtor could consider an alternative offer to creditors
which will allow the Scheme
to continue.
Bankruptcy
Bill
Whilst the Bankruptcy
Bill is under consultation with the Scottish Executive it
is understood that there is no immediate place in the 2004/05
Hollyrood timetable for detailed discussion and hence, the
introduction of a new bankruptcy structure, including a
one year bankruptcy term as has been the case in England
since April 2004, is likely to mean that the only new debt
option on the horizon is the Debt Arrangement Scheme.
Users
of the Scheme
The Scottish Executive
have indicated estimates of between 1,000 and 50,000 individuals
each year who may avail themselves of the Debt Arrangement
Scheme . This makes staffing difficult as far as
the accountant in bankruptcy is concerned because it is
the accountant in bankruptcy's office who will oversee the
process. A number of informal commentators indicate
that the process may be seen by individuals as complex and
unworkable: particularly if the debt relief options of sequestration
and trust deed are readily available.
In order to help
increase awareness of the Debt Arrangement Scheme it is
understood that the Scottish Executive will mount an advertising
campaign in early 2005: at approximately the time when the
financial effects of Christmas credit card spending becomes
a reality.
Conclusion
There are many methods
of dealing with one's debt problems and time will tell whether
the Debt Arrangement Scheme takes its place as a popular
option or whether the imposition on the individual to pay
money for much longer than other schemes available makes
it undesirable.
This article is written
by Michelle Byrne , insolvency manager of Meston Reid &
Co, chartered accountants, Aberdeen . The views expressed
in this article are her own. For further information
please contact her at (01224) 625554 or brynem@mestonreid.co.uk
.
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