Written down

by David McLaughlin

The likely detail of the regulations covering debt arrangement schemes

The Journal, September 2004, page 19

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The Debt Arrangement and Attachment (Scotland) Act 2002 was the Executive’s response to the Abolition of Poindings and Warrant Sales Act 2001. The Act introduced a new diligence known as attachment and provided for the creation of a statutory debt arrangement scheme (DAS). In relation to the DAS, the Act itself was bereft of detail and did little other than introduce the DAS into Scots law, provide a basic outline framework for the operation of the DAS and set out in very broad terms its effect on both the debtor and creditor.

The detail of the scheme is to be introduced by regulations made under the Act, the shape of which is now fairly certain following a lengthy consultation in draft. The stated purpose of the scheme is to allow individuals with multiple debts who are able to pay their creditors to do so with the assistance of money advisers in a regulated way over a period of time, during which enforcement and sequestration are prohibited. There has been much speculation about the impact of the DAS on creditors and debt recovery in general in Scotland but, before addressing some of these concerns, it may be helpful to discuss the likely form of the regulations.

Introducing the cast

The operation of the DAS involves a number of key players in addition to the debtor and creditors themselves. In particular, the scheme introduces accredited money advisers, accredited payment distributors and the DAS administrator. The provision of money advice permeates the Debt Arrangement and Attachment (Scotland) Act 2002 but it has perhaps its most important role under the regulations governing the debt arrangement scheme. The money adviser has a pivotal role and the regulations set out the rules for appointing money advisers and their main functions. It is a fundamental requirement of the scheme that the debtor be represented by an approved and accredited money adviser not only to make the initial application but also throughout the life of any approved scheme. Money advice is to be provided free of charge to the debtor unless the debtor has first of all been advised that the advice can be obtained free of charge within a 10km radius or further if there is no source within the 10km radius.

The money adviser will prepare and submit the application on the debtor’s behalf, liaise with creditors and review the operation of the DAS itself. The money adviser is therefore the person who will determine eligibility and the availability and amount of any surplus income for distribution amongst creditors. This determination will form the basis of the application and, if approved, ultimately establish the period over which the creditor’s debt will be satisfied. The money adviser must submit the application to the DAS administrator and notify all disclosed creditors of the application. Creditors have only 21 days to respond, otherwise they are deemed to have consented to the application.

The money adviser will nominate a payment distributor. The role of the payment distributor is to assist the money adviser, ingather and distribute to creditors sums due under the approved DAS. The payment distributor can charge creditors an administration fee up to a maximum of 5% of the sum payable to the creditor as part of the distribution. No fee is chargeable to the debtor.

The DAS administrator is responsible for the administration and approval of the application, the appointment of money advisers and payment distributors and applications to vary or revoke an approved scheme. The DAS administrator can, in certain circumstances, dispense with the consent of a creditor. Creditors may object to the application on the grounds that the debtor should be sequestrated or has heritable property with substantial unsecured value.

The DAS administrator will notify the money adviser of the approval or rejection of the application. Where the application is rejected, the money adviser will notify the debtor, known creditors and the payment distributor. If the application is approved, the money adviser will also notify the clerk of a court that has made a conjoined arrestment order, or a time to pay order or direction, and the debtor’s employer where payments are being made under an existing earnings arrestment.

When considering whether or not to approve a scheme, the DAS administrator will have regard to the information contained within the application prepared and submitted by the money adviser, and in particular the total value of the debt, the period over which the programme will operate, the payment method and frequency, the extent of creditors’ consent and details of any previously rejected plans. In practice, it is likely that great reliance will be placed on the money adviser’s assessment of the debtor’s ability to pay and financial position as the application form does not disclose sufficient detail for independent scrutiny by the DAS administrator.

The official record

Certain standard conditions will apply to every scheme. These include the requirement to make all payments under the scheme and continuing liabilities due, adhering to agreed credit restrictions and notifying the money adviser of address changes or other material changes in circumstances. In addition, approval may be subject to one or more of a number of discretionary conditions intended to secure the debtor’s completion of the programme.

Approved arrangements will be recorded in a DAS register administered by the DAS administrator. The register entry will contain limited information on the debtor and the money adviser and may be inspected by current and prospective creditors, payment distributors and any person with reasonable cause. Only the money adviser is granted free access to the register. All other inspections are charged according to usage. It is anticipated that the register will be used to promote responsible lending and to prevent the commencement of enforcement against those in the scheme.

Regulations exist to allow the DAS to be varied or revoked. The DAS may be revoked on an award of sequestration under a debtor-led petition, or application by the money adviser or a creditor taking part in the programme. The prescribed grounds for revocation are that the debtor does not have a money adviser, fails without reasonable cause to satisfy any of the conditions of the DAS, makes a false statement in an application, or at least two payments under the arrangement are outstanding on the next payment date.

Curbs for creditors

The effect of an approved application on the creditor is perhaps more restrictive than was originally envisaged by many commentators. It has always been recognised that a statutory debt arrangement scheme would act as a stay on diligence, resulting in improved debtor protection for those eligible to enter the scheme. In particular, it would not be competent to commence or execute diligence to enforce for payment of any debt due by a debtor, or to petition for the sequestration of a debtor who is paying under an approved debt repayment programme. The regulations are expected, however, to widen the impact on creditors to include the recall of earnings arrestments already in force and any arrestments on the debtor’s property where a decree of furthcoming has not been obtained. The creditor will be permitted to conclude certain diligence by auctioning attached articles where articles have been removed or notice of removal has been given, implementing a decree of furthcoming or selling the effects of a debtor to satisfy a decree obtained in an action of sequestration for rent.

In general, creditors are not permitted to advance credit to debtors in a DAS and, if they do, the enforcement restrictions apply. There are exceptions to this, to allow the debtor to obtain credit as part of a cyclical loan arrangement already in operation at the date of approval, for emergency repairs, reasonable funeral expenses in respect of an immediate family member, social fund awards or credit approved under a formal variation to the DAS. In such circumstances, the enforcement restrictions do not apply.

The impact of the introduction of the DAS on creditors and debt recovery in Scotland will depend upon how it is promoted to debtors in the main by the advice sector and the ultimate takeup. If there were to be significant interest in the DAS by debtors, then it is inevitable that there will be resource implications and pressures on the advice sector and all those involved in the administration of the DAS if applications are to be completed, processed and approved timeously and disbursements made to creditors without undue delay. Creditors seeking to embrace the DAS will need to be aware of the regulations, monitor compliance, amend their internal debt recovery processes to comply with the regulations and maintain recovery performance, and either incorporate the searching of the register into their in-house credit checking procedures or amend existing risk models.

In the final analysis, it will be the debtor who decides if the DAS is an attractive option. The decision by a debtor to enter the DAS will surely be influenced by the amount of their surplus income and their ability to repay creditors over a short period of time to reduce the impact of the imposed credit restrictions. The credit restrictions are a standard condition of any DAS and apply throughout the lifetime of the scheme unless varied. This may be sufficient to persuade debtors to pursue alternative ways of managing their debt problems, including dealing directly with their creditors or debtor-led sequestrations.

It is perhaps worth noting one final point: to enter the DAS and therefore enjoy the protection from creditors it affords, the debtor must have surplus income or, in other words, an ability to pay. Similar protection is not available to those who cannot demonstrate a surplus income.

David McLaughlin is Managing Partner of Scott & Co, Messengers-at-Arms and Sheriff Officers

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