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SPICe Briefing Debt

15 July 2009

09/46Abigail Bremner

This briefing is intended to provide an introduction to the topic of personal debt. It looks specifically at:

• the different types of credit available and how they are regulated • the debt recovery process, from getting into arrears to formal court action to enforce

payment • the options available to those who find themselves in debt • sources of advice

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CONTENTS

EXECUTIVE SUMMARY..............................................................................................................................................4 DIFFERENT TYPES OF CREDIT ......................................................................................................................................4 THE DEBT RECOVERY PROCESS...................................................................................................................................5 OPTIONS FOR DEBTORS ...............................................................................................................................................6

INTRODUCTION ..........................................................................................................................................................9

DIFFERENT TYPES OF CREDIT ................................................................................................................................9 CONSUMER CREDIT ....................................................................................................................................................9

How consumer credit is regulated......................................................................................................................10 Hire Purchase ....................................................................................................................................................10

SUB-PRIME/NON-STATUS LENDING ...........................................................................................................................11 Doorstep Lending...............................................................................................................................................12 Payday Loans ....................................................................................................................................................12

SECURED CREDIT .....................................................................................................................................................12 How secured credit is regulated.........................................................................................................................13 Government support for those at risk of losing their homes ..............................................................................13

COUNCIL TAX DEBT ..................................................................................................................................................13 RENT ARREARS ........................................................................................................................................................14

Scottish secure tenancy .....................................................................................................................................15 Short assured tenancy .......................................................................................................................................15

UTILITIES DEBT.........................................................................................................................................................15 How utilities debts are regulated........................................................................................................................16

SOCIAL FUND DEBT ..................................................................................................................................................16 DEBT TO HER MAJESTY’S REVENUE AND CUSTOMS....................................................................................................17

How to challenge HMRC decisions....................................................................................................................17 STUDENT LOAN DEBT ................................................................................................................................................17

Loans prior to 1998 ............................................................................................................................................18 Loans since 1998 ...............................................................................................................................................18

THE DEBT RECOVERY PROCESS..........................................................................................................................18 GETTING “INTO ARREARS”.........................................................................................................................................19 BEING “IN DEFAULT” .................................................................................................................................................19 DEBT COLLECTION AGENCIES ...................................................................................................................................20 INFORMAL DEBT RECOVERY......................................................................................................................................20 COURT ACTION.........................................................................................................................................................20

The court process ..............................................................................................................................................20 Time to Pay ........................................................................................................................................................21

ENFORCEMENT OF COURT DECREES .........................................................................................................................22 Sheriff Officers ...................................................................................................................................................23

OPTIONS FOR DEBTORS ........................................................................................................................................23 NEGOTIATION WITH CREDITORS.................................................................................................................................25

How negotiated settlements operate .................................................................................................................25 Debt management plans....................................................................................................................................26 Calculating disposable income ..........................................................................................................................26 The common financial statement .......................................................................................................................27

DEBT PAYMENT PROGRAMME....................................................................................................................................27 How a debt payment programme operates........................................................................................................27 The consequences of entering a debt payment programme .............................................................................28 Tackling low take-up rates .................................................................................................................................28

PROTECTED TRUST DEEDS .......................................................................................................................................29 How protected trust deeds operate....................................................................................................................29 The consequences of entering a protected trust deed ......................................................................................30 Protected trust deed statistics............................................................................................................................30

SEQUESTRATION (BANKRUPTCY) ...............................................................................................................................30 How sequestration operates ..............................................................................................................................30 Apparent insolvency...........................................................................................................................................31

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The consequences of sequestration ..................................................................................................................31 Sequestration statistics ......................................................................................................................................32 Low Income Low Assets route into bankruptcy .................................................................................................32

SOURCES OF ADVICE .............................................................................................................................................32

SOURCES ..................................................................................................................................................................33

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EXECUTIVE SUMMARY This briefing is intended to provide an overview of the legal framework governing debt in Scotland. Its focus is on personal rather than business debt, although much of what it contains will also apply to sole traders.

DIFFERENT TYPES OF CREDIT There are different forms of credit, such as consumer credit and secured credit. There are often different rules governing how lenders must act depending on what sort of credit is being offered. • Consumer credit – the term consumer credit is used to describe any form of credit

regulated by the Consumer Credit Act 1974. Common exclusions include mortgages (ie loans taken out with the main purpose of buying land or a house), business loans for more than £25,000 and post-1997 student loans. The 1974 Act regulates the form and content of consumer credit agreements as well as providing consumers with additional protections. Any organisation offering consumer credit services must have a licence from the Office of Fair Trading. In addition to court-based remedies, consumers can raise a complaint about consumer credit services with the Financial Ombudsman Service

• Sub-prime/non-status lending – non-status lending targets those with impaired credit ratings who may not be able to access credit from mainstream sources. It can include mortgage lending but, in the UK, it more commonly covers secured lending (ie loans secured on property which do not have as their main purpose the purchase of land or a house) and personal loans. Non-status loans are generally offered at less advantageous terms to the consumer, reflecting their greater credit risk

• Secured credit – secured credit generally refers to a debt which is secured on a person’s home, although it can sometimes refer to debts secured in other ways, such as jewellery or other goods deposited with a pawn-broker. Mortgages (loans taken out for the purpose of buying land or a house) are the main form of secured lending. However, people also take out secured loans to pay for things like home improvements or to consolidate debts. Where a secured loan is the first or only loan secured on a house, it is regulated by the Financial Services Authority; otherwise, it may be regulated by the Consumer Credit Act 1974

• Council tax debt – where someone has failed to pay money they owe, local authorities are able to use a less administratively burdensome court procedure for enforcing council tax, rates and community charge debts known as “summary warrant procedure”. A summary warrant enables the local authority to take certain, limited forms of enforcement action against the debtor, such as an earnings arrestment or bank arrestment

• Rent arrears – where a tenant runs up rent arrears, the landlord has “security” in the form of the property the tenant is leasing. Where an arrangement to repay rent arrears cannot be reached, the landlord is able to ask a court to grant a decree for eviction and take possession of the property. The steps which must be taken to evict someone are strictly governed in law. The particular statutory regime which applies will depend on the tenancy agreement the tenant has

• Utilities debt – debtors may run up debts to suppliers of gas, electricity and telephone/internet/TV services. All these services can be cut off by the supplier if a customer fails to pay. However, because of the essential nature of fuel and, in certain circumstances, telephone services, there are special protections for the customer who falls into debt. While

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fuel disconnections have decreased in recent years, supply using a prepayment meter has increased. Prepayment customers pay more for their fuel and may be forced into “self-disconnecting” when they cannot afford to feed the meter

• Social Fund debt – the “Social Fund” is a scheme operated by the Department for Work and Pensions to help people on low incomes meet costs that are difficult to find from their normal income. Most payments are only available to people receiving income-based social security benefits. Loans are paid back through direct deductions from social security benefits

• Debts to Her Majesty’s Revenue and Customs (HMRC) – HMRC can use summary warrant procedure to pursue tax debts (see Council Tax debt above). HMRC also has specific powers to recover overpayments of working and child tax credits from ongoing entitlement to these benefits. Where there is no agreement between a claimant and HMRC on the issue of a tax credits overpayment, a complaint can be made to The Adjudicator’s Office or, with the help of a Member of Parliament, to the Parliamentary Ombudsman

• Student loan debt – student loans are administered by the Student Loans Company. Interest is charged at the rate of inflation. Students taking out a loan prior to 1998 were offered “fixed term” loans, paid off in monthly instalments. Students taking out a loan after this date are offered “income contingent loans”, with repayments being deducted directly from their salaries

THE DEBT RECOVERY PROCESS There is often confusion around what actions creditors can and cannot take to encourage debtors to pay. Where a debtor lives in Scotland, Scottish debt recovery processes must be followed, even if the creditor or debt collection agency is based elsewhere in the UK.

Getting “Into Arrears” A credit agreement is “in arrears” when one or more of the contractually agreed payments are not made by the debtor. Creditors differ in their approach to managing arrears, with some acting more quickly than others to chase payment with the debtor.

Being “In Default” Being “in default” technically means that a debtor has breached a term of their credit agreement. The phrase is more commonly used when a creditor considers that a credit agreement has been breached to the extent that it can no longer be easily fixed. Issuing a default notice is often a precursor to a creditor changing the way an account is administered – for example, by passing it to an in-house debt collection team or to an external debt collection agency.

Debt Collection Agencies Creditors adopt many different strategies for dealing with agreements which are in arrears or in default. Some creditors deal with the account themselves, others employ debt collection agencies to administer the account on their behalf and some sell the debts to debt collection agencies. Debt collection agencies which collect consumer debts must have a consumer credit licence from the Office of Fair Trading (OFT). In Scotland, only officers of the court (usually sheriff officers) can carry out formal, court-based debt enforcement activities such as seizing possessions or evicting people.

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Informal Debt Recovery Creditors generally prefer to pursue debts using informal debt collection techniques – such as letters, telephone contact and personal visits – rather than take court action. Concern has been raised about the tactics used by some organisations when pursuing debts informally. Both creditors and debt collection agencies which collect consumer debts need a consumer credit licence from the OFT. The OFT has issued debt collection guidance, outlining debt collection practices which it considers to be unfair.

Court Action Court action in relation to personal debt is generally pursued through the sheriff court, although different procedures are used depending on the type of claim. Creditors cannot take formal enforcement action (such as seizing possessions or money) against debtors unless they have the authority of the courts to do so. Where a creditor is successful, the court issues a “decree for payment” stating how much money the debtor owes. A debtor can use “time to pay” procedures to ask the court to make an order enabling them to pay the debt off in regular instalments, or make a one-off payment at a future date. This stops the creditor taking any further enforcement action as long as the debtor sticks to the arrangement. However, a creditor can still take action against any security, so “time to pay” can be ineffective in relation to, for example, mortgages and hire purchase agreements. “Time orders” under the Consumer Credit Act 1974 are similar to “time to pay”, and they have the additional advantage of being effective against the security for a loan (as long as the loan is regulated by the 1974 Act, for example, hire purchase agreements and most secured loans).

Enforcement of Court Decrees If a debtor does not pay money owed after the court has ordered them to do so, a creditor can instruct officers of the court to take enforcement action, also known as “diligence”. The most common forms of enforcement are earnings arrestment, bank arrestment, eviction/repossession, attachment (of moveable goods) and inhibition (which prevents a debtor selling land or a house). Sheriff officers are officers of the court responsible for debt enforcement work emanating from the sheriff court. Although not employed directly by the courts, they are subject to the supervision of the sheriff principal (a senior judge responsible for the administration of the court) in the sheriff court area in which they operate.

OPTIONS FOR DEBTORS A number of options are open to those who find themselves unable to pay their debts in whole or in part. These may be formal, in that they have the force of law, or informal.

Negotiation with Creditors It is often possible to negotiate reduced payments towards debts with creditors. This is the option most often pursued by money advisers on behalf of their clients, and it has the advantage of being flexible to accommodate different circumstances. However, such negotiated settlements are informal, meaning that they do not have the authority of a court or any basis in law. This means a creditor does not have to agree to a repayment proposal. Where they do

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agree to reduced payments, they reserve the right to start pursuing full payment at any point. This can make a negotiated agreement unstable.

Debt Payment Programme A “debt payment programme” enables people to make reduced payments to their creditors while being protected from court action, as part of the Debt Arrangement Scheme (DAS). It was introduced by the Debt Arrangement and Attachment (Scotland) Act 2002. DAS is administered by the Accountant in Bankruptcy. A debt payment programme is open to anyone who has more than one debt and surplus income with which to pay their creditors. In order to enter into a debt payment programme, a debtor must receive advice from a DAS-approved money adviser. A debt payment programme works in a similar way to a negotiated agreement. However, because it is a statutory scheme, it is possible to require creditors to accept reasonable payment offers. In addition, once a debt payment programme is applied for, debtors are protected from enforcement action in the courts. Interest and charges on the debt can also be frozen. Where sufficient creditors object to the setting up of a debt payment programme, the Accountant in Bankruptcy will consider the proposal and approve programmes which she considers to be “fair and reasonable”. A debt payment programme can be applied for by someone who owns their own home without any requirement that the property must be sold to meet the demands of creditors. However, there is no element of debt “write-off” in DAS. The number of people entering into debt payment programmes has been much lower than was initially expected. Citizens Advice Scotland has argued for the inclusion of an element of debt write-off to increase access. The Accountant in Bankruptcy does not support this approach and has instead proposed removing the requirement for money advice and taking on more of the administration of the scheme to improve access.

Protected Trust Deeds A trust deed is an agreement between a debtor and their creditors in which their income and assets are administered by an insolvency practitioner for the benefit of the creditors. It is regulated by the Bankruptcy (Scotland) Act 1985. When an insolvency practitioner sets up a trust deed, they will advertise this fact to creditors. If insufficient creditors object to the trust deed, it becomes protected. Once a debtor is the subject of a protected trust deed, creditors cannot take enforcement action against them. Protected trust deeds generally cover a period of three years. After the agreed period, any outstanding debt is written off. This makes the protected trust deed an attractive option for those who cannot pay their debts in full. However, the debtor may have to sell any non-essential assets they own, including their home (where there is equity).

Sequestration (Bankruptcy) Sequestration, which is also known as bankruptcy, involves a trustee (usually the Accountant in Bankruptcy in personal debt cases) collecting a debtor’s assets and income and administering them for the benefit of creditors. Assets of value, including a home (where there is equity), will usually be sold. The process can be forced on a debtor by creditors where the debtor owes more than £3,000 and has failed to respond to a court order to pay up. It is also possible for a debtor to petition for their own sequestration in certain circumstances. Sequestration is regulated by the Bankruptcy (Scotland) Act 1985.

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The Bankruptcy and Diligence (Scotland) Act 2007 reduced the normal period of bankruptcy from three to one year, although this can be extended where the debtor acts dishonestly in any way. Any debts not paid out of the estate in this time period are written off. A debtor who wants to petition for their own sequestration must demonstrate that they owe at least £1,500 and must have the agreement of one of their creditors, must show apparent insolvency, or must qualify for the “low income, low assets route”. Since April 2008, those with a low income, and with no non-essential assets worth more than £1,000 individually or £10,000 in total, can petition for their own sequestration without demonstrating apparent insolvency. This has provided a welcome escape for a number of low income debtors who were not previously able to access debt relief because their creditors had not taken court action to enforce their debts

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INTRODUCTION This briefing is intended to provide an overview of the legal framework governing debt in Scotland. Its focus is on personal rather than business debt, although much of what it contains will also apply to sole traders1. Legislative responsibility for debt is shared between the Scottish and UK Parliaments. The Scottish Parliament has responsibility for the way creditors can enforce debts – including statutory schemes to protect debtors from court action where appropriate – as well as certain types of debt, such as rent arrears. The UK Parliament sets the regulatory framework for other areas, such as consumer credit (which is the most common type of credit) or debts owed to utility companies. This briefing brings together information on how debt is regulated and enforced, regardless of whether it is reserved or devolved.

DIFFERENT TYPES OF CREDIT There are different forms of credit, such as consumer credit and secured credit. There are often different rules governing how lenders must act depending on what sort of credit is being offered. It should be noted that some terms, for example “consumer credit” and “sub-prime credit”, overlap. Below are explanations of the common terms used to describe different sorts of credit.

CONSUMER CREDIT Consumer credit is used to describe any form of credit which is regulated by the Consumer Credit Act 1974 as amended (c. 39). It is commonly understood to cover credit cards, bank loans and loans used to purchase household items such as electrical goods or furniture. However, it also covers a wide variety of other forms of lending. A key factor in determining whether the supply of credit is regulated by the 1974 Act is whether the debtor is an individual. Its provisions do, however, apply to credit obtained by some partnerships and other unincorporated bodies. If the debtor is an individual, then the 1974 Act applies to the transaction unless it is specifically excluded. Common exclusions include:

• most mortgages – although additional loans secured on a property (sometimes called “second mortgages”) are often covered

• agreements exceeding £25,000 in value for predominantly business-related purposes

• most buy-to-let agreements

• most loans from credit unions

• loans from the Student Loans Company offered from 1998 onwards (“income contingent” loans)

• most loans from employers to employees

1 A sole trader is someone who runs their own business and is personally liable in relation to the business finances (unlike a company or partnership, where financial liability is limited or shared).

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The 1974 Act covers credit agreements which can only be used for the purchase of goods or services from a third party (such as those commonly used to finance new kitchens) as well as hire purchase. It can also cover non-credit agreements, such as hire arrangements, insurance and shopping vouchers, where these are paid for using credit.

How consumer credit is regulated If a credit agreement is regulated by the Consumer Credit Act 1974, then the creditor has to have a consumer credit licence from the Office of Fair Trading (OFT). The OFT can refuse or revoke licences where there are concerns about the way a creditor operates. In addition, there are significant protections in relation to how the credit agreement is advertised, what information is included in the terms and conditions and how the creditor can enforce the agreement if payments are not made. The 1974 Act gives certain protection to consumers, including:

• Joint liability between creditor and supplier – where there is an agreement between a supplier of goods and a creditor to finance a purchase by a debtor, then section 75 of the 1974 Act allows the debtor to claim against the creditor as well as, in most circumstances, the supplier if there is a problem with the goods. This provision covers purchases made using a credit card or where there is a pre-existing arrangement between a creditor and a supplier. For more information, see the OFT publication “Equal liability”

• Time orders – section129 of the 1974 Act allows a debtor in arrears to request that a court agrees any repayment proposal which it considers reasonable given their financial situation. A creditor cannot do anything to alter or enforce the original agreement while a time order is in force. This makes time orders a particularly powerful tool in the case of secured loans and hire purchase agreements as the creditor cannot take action to repossess a home or other goods while it is in force

• Court power to vary agreements – section136 of the 1974 Act allows the court, when issuing a time order (see above), to alter the terms of the original agreement if it considers it just to do so

• “Unfair” relationships – sections 140A-C allow a court to intervene if it considers any aspect of the relationship between a debtor and a creditor to be unfair. In deciding whether a relationship is “unfair”, the court can consider issues such as the terms and conditions of the agreement, the way the creditor has enforced its rights or anything said or done by the creditor during the agreement or before it began. The court has wide ranging powers to, for example, alter the terms and conditions of the agreement, order money or security to be repaid or order the parties to do, or to stop doing, something in relation to the agreement.

It should also be noted that the Consumer Credit Act 2006 (c. 14) extended the jurisdiction of the Financial Ombudsman Service to consumer credit, so debtors can make a complaint if they are unhappy with the way they have been treated by a creditor.

Hire Purchase Hire purchase and conditional sale are arrangements whereby goods are bought over a period of time by making regular payments to the seller. In both cases, the debtor is able to use the

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goods from the beginning. In hire purchase, the debtor has the option to purchase the goods towards the end of the agreement. In conditional sale agreements, ownership passes automatically to the debtor at the end of the agreement. Although hire purchase/conditional sale agreements have much in common with rental agreements, the fact that the debtor can acquire ownership creates an important difference. Both arrangements are regulated by the 1974 Act. In hire purchase/conditional sale agreements, the goods act as security for the creditor – ie the creditor can repossess the goods if payments are not made. However, the 1974 Act provides some important protections:

• Repossession – where the debtor has paid one third of the total cost of goods, section 90 of the 1974 Act prevents a creditor repossessing them without a court order. In addition, section 92 states that, in all circumstances, a creditor is unable to enter a debtor’s property without a court order (or the debtor’s permission)

• Termination – a debtor is entitled to terminate an agreement at any point before ownership of the property has passed to them. Under section 100, assuming the debtor has taken reasonable care of the items, they are only liable to pay half the total cost of the goods. However, a debtor is not entitled to a refund if they have paid more than this

SUB-PRIME/NON-STATUS LENDING Sub-prime lending – more commonly called non-status lending in the UK – refers to creditors who target products at those with an impaired credit history, or no credit history. There has been much current discussion about sub-prime mortgage lending in the USA. However, while non-status lending in the UK does include mortgages, it more commonly covers personal loans and secured loans. Secured loans are additional loans secured on property and can be differentiated from mortgages (although they are often called “second mortgages”) because they are not taken out with the prime purpose of purchasing land or a house. Non-status lending includes “doorstep” or “home credit” loans and “payday” loans, which are discussed below. It can also cover credit cards and hire purchase agreements. Non-status loans are usually offered at higher rates of interest and on less advantageous terms than loans available from mainstream creditors. This reflects the fact that, because of previous problems with debt, or because of difficulty verifying identity,2 the customer would not score sufficiently well in a credit reference to access mainstream sources of finance. They are therefore considered to be a greater credit risk. People use non-status lending when other forms of borrowing are not available. They also use it out of convenience, or because they perceive that they would be unable to access mainstream credit (even where they have not actually been refused such credit). Non-status lending is usually regulated by the Consumer Credit Act 1974. The OFT has published guidance for non-status lenders offering secured loans, which sets out principles by which they are expected to abide, as well as highlighting unacceptable practices. Where the OFT considers that a creditor is not operating within the terms of the guidance, it can revoke its consumer credit licence. Debtors can also receive protection from some unfavourable practices under sections 140A-C of the Consumer Credit Act 1974, which deal with “unfair” relationships between creditors and debtors (see above). 2 In relation to verifying identity, issues such as moving frequently, not appearing on the electoral register or having no previous record of using financial services can adversely affect a credit rating.

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Doorstep Lending The practice of doorstep lending – also known as home credit – has caused considerable concern to those who work to tackle social exclusion (Citizens Advice Scotland 2002 and Palmer 2002). Doorstep lending refers to loans (which are often for small sums over short periods) whereby an agent of the creditor visits the debtor at home to arrange the loan and to collect regular repayments thereafter. The loans made usually have annual percentage rates3 (APRs) in excess of 150% and sometimes in excess of 1,000% (although, because APR represents the annual cost of credit, it is not a transparent method for comparing loans which run for less than a year). It is also alleged that some agents of doorstep lenders offer “roll-over” loans, where the money still owing, plus an additional sum on credit, are rolled up into a new loan, for which increased payments are made. This practice can increase indebtedness very quickly. It also means the debtor is paying interest on the interest of the original credit, making it very expensive. The Competition Commission carried out an investigation into the doorstep lending market in 2006, after a “supercomplaint”4 was lodged by the then National Consumer Council. Its report made several recommendations aimed at increasing competition, but it accepted that doorstep lending met the needs of a certain group of consumers.

Payday Loans Payday loans enable people to borrow on future wages to cover current costs. It should be noted that payday loans are offered by commercial organisations rather than by employers to their employees5. Typically, small amounts of money will be advanced during one month on the basis that the loan will be paid off by the salary payment due at the end of that month. APR rates are again high (often over 1,500%, partly due to the short duration of the loan) and, like doorstep lending, debt can mushroom when another payday loan is taken out to cover the previous month’s borrowing plus additional money needed for the current month.

SECURED CREDIT Secured credit generally refers to a debt which is secured on a person’s home, although it can sometimes refer to debts secured in other ways, such as jewellery deposited with a pawn-broker. Mortgages taken out for the purposes of buying land or a house are the main form of secured lending. However, people also take out loans secured on a house for other purposes, such as home improvements, or to consolidate other debts (often at a lower rate of interest but with more severe consequences if payments are not maintained). Throughout this briefing, the term “mortgage” is used to describe a secured loan taken out for the purposes of buying a house, and “secured loan” is used to describe other loans which use a house as security.

3 The annual percentage rate or APR describes the annual cost of credit, including interest and other charges. It can be used to compare the costs of different forms of borrowing. The way APR is calculated in the UK is regulated by the Consumer Credit Act 1974. 4 The “supercomplaint” process was created by the Enterprise Act 2002. It allows designated consumer bodies to lodge a complaint with official regulating bodies (such as the OFT) where they believe that aspects of a market are working to the detriment of consumers. Regulatory bodies must follow a statutory process in investigating the complaint. 5 Some employers do offer loans to their employees: however, these are unconnected with sub-prime lending and are generally offered at very low rates of interest.

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How secured credit is regulated Where the mortgage is a “first charge” – ie it is the first or only debt to be secured on a home – it is regulated by the Financial Services Authority (FSA). Where the mortgage is a second or subsequent charge – ie there are already one or more loans secured on the house when it is taken out – then it will not be regulated by the FSA, but is likely to be regulated by the Consumer Credit Act 1974 (see above). In most circumstances, a mortgage taken out for the purposes of buying a house will be a “first charge” and will therefore be regulated by the FSA. Firms regulated by the FSA have to meet set standards in the way they run their businesses and in the way that they deal with customers. Customers who are unhappy with the way they have been treated by their mortgage lender can take a complaint to the Financial Ombudsman Service. In addition to any protection provided by the FSA, the way mortgages are constituted and the steps creditors can take against debtors who default, are strictly regulated in law. The Conveyancing and Feudal Reform (Scotland) Act 1970 (c. 35) regulates how the particular form of security used in mortgages (known as a “standard security”) can be enforced. The Mortgage Rights (Scotland) Act 2001 (asp 11) gives additional rights to debtors and family members to prevent or delay action by a lender to repossess the home.

Government support for those at risk of losing their homes The Scottish Government has two schemes which help those who are struggling to pay their mortgages to stay in their own homes. Under the “mortgage to rent scheme”, a local authority or housing association buys the house, allowing the occupants to stay on as tenants. Under the “mortgage to shared equity scheme”, the Scottish Government purchases a stake in the property, reducing the amount which must be paid to the lender by the occupant. There are detailed criteria governing how both these schemes operate. More information is available from the Scottish Government’s leaflet “Are you in danger of losing your home?”. In addition, the UK Government is working on a number of initiatives to support people who are experiencing problems paying their mortgages. These include making it easier for people claiming income-based social security benefits to get help towards mortgage interest costs (DWP 2008) and agreeing a minimum three month delay in instituting repossession proceedings with some banks. More information on action taken by the UK Government is available in the SPICe briefing “Personal debt, bankruptcy and homes” (Harvie-Clark and Hough 2009).

COUNCIL TAX DEBT In order to enforce payment of a debt, creditors generally have to initiate court action against the debtor. During this process, the debtor will be given an opportunity to challenge the creditor’s position or come to an arrangement to pay the debt. However, local authorities are able to use a less administratively burdensome way of enforcing council tax, rates and community charge debts known as “summary warrant procedure”. This means that, instead of taking court action against debtors individually, local authorities are able to present a list of names to a sheriff court certifying that they have not made payments as required. The sheriff can then issue a summary

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warrant. This enables local authorities, after they have issued a “charge for payment”6, to take certain, limited forms of enforcement action against the debtors in question. All court-based enforcement action is carried out by sheriff officers7. The most common forms of enforcement8 are bank arrestment (where a debtor’s bank account is frozen until agreement is reached to release the funds in it) and earnings arrestment (where deductions are made from a debtor’s earnings and paid directly to the creditor). Local authorities are also able to pursue debtors through the normal court processes. They may choose to do this if they wish to use a different enforcement option, such as sequestration (bankruptcy). Summary warrant procedure has been criticised because it gives a debtor no opportunity to dispute that the money is owed (Justice and Home Affairs Committee 1999). However, changes designed to assist debtors have been made to the way that summary warrant procedure operates. Section 209 of the Bankruptcy and Diligence (Scotland) Act 2007 (asp 3) altered the law to enable debtors to put forward repayment proposals to the court in relation to summary warrant debts which, if accepted, prevent any further enforcement action by the local authority. It is possible to arrange to have Council Tax arrears paid through regular deductions from certain social security benefits under a scheme known as “third party deductions”. The money is deducted by the Department for Work and Pensions before a benefit payment is made and passed directly to the local authority. However, before a deduction can be made, the council must have obtained a summary warrant in relation to the debt. The fact that a summary warrant has been necessary to enforce the debt enables the local authority to add a 10% surcharge to the amount owed, thus increasing the sum which must be repaid by the debtor. It also means that those who may benefit from an automatic fortnightly payment method, but have not yet fallen behind with their council tax payments, cannot take advantage of the scheme.

RENT ARREARS Where a tenant runs up rent arrears, the landlord has “security” in the form of the property the tenant is leasing. Where an arrangement to repay rent arrears cannot be reached, the landlord is able to ask a court to grant a decree for eviction and take possession of the property. A landlord must have a court order before they can require the tenant to leave the property, and any physical eviction must be carried out by officers of the court (generally sheriff officers). The steps which must be taken to evict someone are strictly governed in law. The particular statutory regime which applies will depend on the tenancy agreement the tenant has – which can range from a crofting tenancy to a commercial lease to a residential lease. The most common forms of residential leases are the “Scottish secure tenancy”, for the majority of people with social landlords, and the “short assured tenancy”, for the majority of people renting in the private sector. People who have rent arrears can use the third party deduction scheme (see Council Tax Debt above) to make payments towards the debt directly from their social security benefits, at the

6 A charge for payment is a court document served on the debtor which states that they must pay the sum owed, usually within 14 days. In the case of summary warrant, a charge for payment alerts the debtor to the fact that a local authority has taken court action against them and allows them to apply for “time to pay”, in order to deal with the debt. A charge for payment may also be able to be used to demonstrate apparent insolvency to access sequestration. 7 The role of sheriff officers is discussed under “The debt recovery process” later in this briefing. 8 The formal methods which creditors can use to enforce payment of a debt are discussed in more detail under “The debt recovery process” later in this briefing.

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current rate of £3.25 per week. Either the tenant or the landlord can make a request to the Department for Work and Pensions to make the deduction.

Scottish secure tenancy Scottish secure tenancies are regulated by the Housing (Scotland) Act 2001 (asp 10). Landlords must issue a “notice of proceedings” at least four weeks before they start court action in relation to eviction. A notice of proceedings tells the tenant that the landlord intends to take them to court and also on what “ground” any eviction will be based. The grounds for eviction are listed in Schedule 2 to the 2001 Act. Ground one is used to evict someone for rent arrears. It can be used if there is any rent outstanding, although the sheriff will consider whether an eviction is reasonable before issuing an order allowing it to take place. Other options include continuing a case to a further hearing to allow more evidence to be produced, or “sisting” a case (putting it on hold) to see if a repayment proposal will be kept to. Research from Shelter Scotland (2008) highlights that, of the court actions raised by social landlords, 40% resulted in decree for eviction being granted, with 18% proceeding to actual eviction.

Short assured tenancy Short assured tenancies are governed by the Housing (Scotland) Act 1988 (c. 43). A landlord can evict a tenant of a short assured tenancy when the tenancy agreement comes to an end by giving them at least two months’ notice. Otherwise, in order to evict a tenant, a landlord must demonstrate one or more of the grounds listed at Schedule 5 to the 1988 Act. The landlord must also issue a notice of proceedings, which states the ground(s) on which the eviction is sought. Different grounds require different notice periods, but the minimum notice period is two weeks. There are several grounds relating to rent arrears. Ground eight requires the sheriff to issue a possession order where there are three months’ rent arrears both at the point notice of proceedings was issued and at the date of the court hearing. Ground 11 can be used where there is persistent delay in paying rent, and ground 12 can be applied where some rent is unpaid. In relation to grounds 11 and 12, the sheriff has discretion and can only issue an order for eviction if it is reasonable to do so. In all three cases, the sheriff can consider whether a delay in paying housing benefit has had a role in the rent arrears and, on this basis, refuse to grant an order for possession where it is reasonable to do so (subsections 18(3A) and (4A) of the 1988 Act).

UTILITIES DEBT Debtors may run up debts to suppliers of gas, electricity and telephone/internet/TV services. All these services can be cut off by the supplier if a customer fails to pay. However, because of the essential nature of fuel and, in certain circumstances, telephone services, there are special protections for the customer who falls into debt. Fuel companies have a licence obligation not to disconnect pensioner households during winter. They must also take all reasonable steps not to disconnect households containing elderly, disabled or chronically sick members during winter. In addition, they are obliged to consider a debtor’s ability to pay when setting up repayment plans (Gas and Electricity Markets Authority 2009a and 2009b). British Telecom’s universal service obligation requires it to offer a telephone

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service targeted at low income customers. The Energy Retail Association, representing the six major energy suppliers operating in the UK, has agreed additional protocols among its members to protect customers in financial difficulty. It states in its leaflet “Debt and disconnection of energy supplies” that no vulnerable customers have been knowingly cut off since 2004. However, there has been a significant increase in customers who are supplied using a prepayment meter (National Energy Association). Prepayment customers pay more for their fuel than those using other payment methods and may be forced into rationing their supply (effectively “self-disconnecting”) when they cannot afford to feed the meter. People who receive certain social security benefits can use the third party deduction scheme (see Council Tax Debt above) to pay fuel arrears and, in some cases, ongoing bills, directly from their benefits. Currently, the maximum amount which can be deducted to pay a fuel debt is £3.25 per week.

How utilities debts are regulated Ofgem (the Office of the Gas and Electricity Markets) is responsible for regulating fuel suppliers, including setting licence conditions. The Energy Ombudsman can deal with customer complaints about billing and supply issues as long as the supplier is a member of the scheme. In addition, Consumer Focus Scotland (which was formed from the merger of energywatch, Postwatch and the Scottish Consumer Council) can support customer complaints. Ofcom (the Office of Communications) is responsible for regulating telecommunications and broadcasting companies. It can assist customers with a complaint once they have exhausted the complaints options offered by their supplier. It should be noted that, in Scotland, charges for water are collected by local authorities as part of the council tax (see above). This means that summary warrant procedure can be used to enforce water debts.

SOCIAL FUND DEBT The “Social Fund” is a scheme operated by the Department for Work and Pensions to help people on low incomes meet costs that are difficult to find from their normal income. Payments can be made from the Social Fund to fulfil a number of functions. Some payments are made in the form of a grant and some in the form of a loan. Most payments are only available to people receiving income-based social security benefits. More information is available from the Department for Work and Pensions leaflet “The social fund”. “Budgeting loans” are available to meet the costs of things like furniture, electrical equipment, clothes, home maintenance and work-related items. Payments of between £100 and £1,500 can be made to people claiming certain benefits. However, the amount available is strictly limited on the basis of personal circumstances and previous loans. In addition, each local area is given a set budget for the year, which cannot be exceeded. This means that any award is actually discretionary on the basis of available funds, and has led to budgeting loans and other related payments being known as the “discretionary” social fund. Because funding is limited, it is common for the amount of money which people are offered to be smaller than the amount they have requested.

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Budgeting loans are paid back through direct deductions from social security benefits. Different repayment rates are offered depending on individual circumstances, and it is possible to request a reduction in the repayment rate where it is causing financial hardship.

DEBT TO HER MAJESTY’S REVENUE AND CUSTOMS Her Majesty’s Revenue and Customs (HMRC) can use summary warrant procedure to pursue tax debts (see Council Tax debt above) although, unlike council tax, there is no mechanism for debtors to put repayment proposals to the courts. HMRC also has specific powers to recover overpayments of working and child tax credits from ongoing entitlement to these benefits. This can create money management problems for those, such as single parents and low income workers, who rely on tax credits as an important part of their income. For those who are most reliant on tax credits, the amount HMRC can recoup is limited to 10% of ongoing entitlement. More information is available from the HMRC leaflet “What happens if we’ve paid you too much tax credit?”. There are certain circumstances where entitlement to tax credits ends altogether, for example, where hours worked are reduced to less than 16 or where a single parent starts living with a new partner (until a new claim is made). HMRC may pursue debtors using formal court processes in these circumstances. The UK Parliament’s Public Accounts Committee’s March 2009 report “HM Revenue and Customs: tax credits and income tax” was critical of HMRC’s administration of tax credits, stating that too much was expected of claimants when dealing with a complex system. The committee also noted that, despite recent changes to help make the system easier to understand and administer, there are still substantial over- and under-payments. This means that some vulnerable families are struggling to pay back overpayments while others are not getting money when they need it. Overpayments generated in 2006/07 mean that 1.3 million families across the UK will have to repay an average of £770 to HMRC (Public Accounts Committee 2009, p7). In addition, some families do not claim at all. In 2005/06, only 82% of families entitled to receive child tax credits, and 61% of those entitled to receive working tax credits actually claimed them (Public Accounts Committee 2009, p12).

How to challenge HMRC decisions In 2008, HMRC introduced a new, more objective test to decide whether an overpayment should be recovered. More information is available in the leaflet “What happens if we’ve paid you too much tax credit?”. Where there is no agreement between a claimant and HMRC on the issue of overpayment recovery, the matter can be taken to The Adjudicator’s Office or, with the help of a Member of Parliament, to the Parliamentary Ombudsman. The Adjudicator’s Office is an independent complaints resolution service for HMRC. The leaflet “The Adjudicator’s Office for complaints about HM Revenue and Customs and the Valuation Office Agency” provides more information about their role. The Parliamentary Ombudsman can look into the conduct of UK Government departments and agencies: however, the complaint must be raised by an MP.

STUDENT LOAN DEBT Most students who have attended a higher education course in the past 20 years have some form of student loan. These are administered by the Student Loans Company. The type of loan they have, and the arrangements for repayment, will depend on when the loan was taken out.

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Student loans are offered, broadly speaking, at the rate of inflation9. This is a low rate of interest and means that, technically, the amount repaid has the same value as the amount borrowed. Student loans which have not been repaid are written off when the ex-student reaches a certain age (depending on when the loan was taken out), dies or is prevented from working by illness or disability. Students living in Scotland who applied for a student loan for the first time in 2006 or after will have their loans written off after 35 years. Student loan debt is not written off where someone has been sequestrated (made bankrupt) or entered a protected trust deed10 in or after April 2008.

Loans prior to 1998 Students who started their higher education before 1998 were offered “fixed term loans”, to be paid off in monthly instalments after they graduated, generally over five years. Repayments can be deferred, on a year to year basis, where the ex-student earns 85% or less than average national earnings. Where a deferment form has not been received by the Student Loans Company, payments will automatically become due, regardless of whether the ex-student meets the criteria for deferring. Interest is also charged on loans while they are deferred. “Fixed term” style student loans are regulated by the Consumer Credit Act 1974. Complaints about the way loans are dealt with can be taken to the Financial Ombudsman Service. More information about the complaints system is available in the Student Loans Company leaflet “How to make a complaint” (2008).

Loans since 1998 Students who started their higher education in 1998 or after were offered loans for which repayments were “income contingent” – ie the amount repaid is a percentage of the income earned. Ex-students can defer repayments where they earn less than £15,000 per year11. Where they earn more than this, they are liable to make repayments at 9% of their income above this figure. As above, deferment is the responsibility of the ex-student, and interest is charged on loans while they are deferred. Where the ex-student is a UK taxpayer, payments are deducted from salary as part of the “Pay as you earn” (PAYE) tax system. This means that, for anyone in work, full payment of their student loan liability is made before they receive their salary, effectively giving the Student Loans Company priority over other creditors. Complaints about “income contingent” student loans can be made to an independent assessor. More information about the complaints system is available in the Student Loans Company leaflet “How to make a complaint” (2008).

THE DEBT RECOVERY PROCESS There is often confusion around what actions creditors can and cannot take to encourage debtors to pay. There are some important differences between the systems in England and Wales and in Scotland – notably around the powers of bailiffs in England and Wales – which adds to the confusion. The description below refers to the debt recovery process in Scotland.

9 Several different methods for calculating the rate of inflation are specified in legislation relating to student loans. 10 For more information on sequestration and protected trust deeds, see the section on “Options for debtors” below. 11 This figure will be reviewed in 2010.

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Where a debtor lives in Scotland, Scottish debt recovery processes must be followed, even if the creditor or debt collection agency is based elsewhere in the UK. Most debts are consumer debts. Research carried out by Citizens Advice Scotland (Gillespie, McKendrick et al 2009) shows that consumer debt accounted for three-quarters of the debts reported by Citizens Advice Bureau clients. Credit cards at 32%, personal loans at 16% and catalogue debt at 10% made up the majority of these (p39). Consumer debts are regulated by the Consumer Credit Act 1974. Council tax debt (5%), utilities arrears (6%) and rent arrears (2%) make up a much smaller proportion of overall debt.

GETTING “INTO ARREARS” A credit agreement is “in arrears” when one or more of the contractually agreed payments are not made by the debtor. In most circumstances, this can be remedied by the debtor making an additional payment to cover the sums owed, or by negotiating an arrangement whereby the arrears are paid off in instalments over the coming months. However, the situation becomes problematic when the debtor cannot afford to pay back the arrears or, indeed, cannot afford to make full ongoing payments in relation to the credit agreement. Creditors differ in their approach to managing arrears, with some acting more quickly than others to chase payment with the debtor. Where debts are “secured”, most commonly by a house in the case of a mortgage, or by goods in the case of a hire purchase/conditional sale agreement, creditors can ultimately take action to repossess the security if an arrangement cannot be reached to repay arrears. The Consumer Credit Act 1974 requires creditors in consumer credit agreements to give debtors notice that they are in arrears in most circumstances. Where the correct notice has not been provided, creditors are prevented from enforcing the agreement or charging interest on the sums owed.

BEING “IN DEFAULT” In relation to consumer credit agreements and mortgages, being “in default” technically means that a debtor has breached a term of their credit agreement. In this respect, it is similar to being in arrears. However, the phrase is more commonly used when a creditor considers that a credit agreement has been breached to the extent that it can no longer be easily fixed. This is usually because full ongoing payments are not being made or because no agreement can be reached to pay off arrears. The Consumer Credit Act 1974 regulates the circumstances in which a creditor in a consumer credit agreement must issue a default notice. Specifically, a creditor cannot take action to recover possession of goods or land, demand early payment or terminate the agreement without first having issued a default notice. Issuing a default notice is often a precursor to a creditor changing the way an account is administered – for example, by passing it to an in-house debt collection team or to an external debt collection agency. A default notice is also likely to be registered on a debtor’s credit reference file, adversely affecting their credit rating for six years. The threat of issuing a default notice is therefore used to encourage payment by the debtor.

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DEBT COLLECTION AGENCIES Creditors adopt many different strategies for dealing with agreements which are in arrears or in default. Some transfer the account to an in-house department dealing with debt recovery. In larger organisations, an account may be moved between several departments as the seriousness of a debt situation escalates. Some creditors employ debt collection agencies to administer the account on their behalf and some sell the debts to debt collection agencies. Occasionally, a mixture of these approaches is adopted so that a debtor may find themselves dealing with more than one debt collection agency in the course of resolving an individual debt situation. Debt collection agencies which collect consumer debts must have a consumer credit licence from the Office of Fair Trading (OFT). This can be revoked if there are concerns about an agency’s conduct. In addition, the Credit Services Agency, which is a national trade body representing some debt collection agencies, has a code of practice which members must follow. In Scotland, only officers of the court (usually sheriff officers) can carry out formal, court-based debt enforcement activities such as seizing possessions or evicting people. In England and Wales bailiffs, who are not necessarily monitored by the courts, are able to seize possessions.

INFORMAL DEBT RECOVERY Creditors generally prefer to pursue debts using informal debt collection techniques – such as letters, telephone contact and personal visits – rather than take court action. Citizens Advice Scotland research (Gillespie, McKendrick et al 2009, p71) found that formal court action had only been taken in relation to 13% of debts reported by Citizens Advice Bureau clients. The preference for informal action is likely to be at least in part because court action incurs expense which might be difficult to recover if the debtor is in a poor financial position. However, it is also likely to be because informal techniques have proved to be effective. The Citizens Advice Scotland report (Gillespie, McKendrick et al 2009, p73) also highlighted concerns about the tactics used in relation to informal debt recovery. Thirty-nine percent of debt clients stated that creditors had used behaviour or language that sought to pressurise them into payment and 17% reported that they had experienced pressure to borrow further to repay the debt. It should also be noted that 39% stated their creditors were in the process of negotiating a repayment agreement with the Citizens Advice Bureau, indicating a positive relationship. Both creditors and debt collection agencies which collect consumer debts need a consumer credit licence from the OFT. The OFT has issued debt collection guidance which outlines debt collection practices which it considers to be unfair and therefore to call into question an organisation’s fitness to hold a consumer credit licence.

COURT ACTION

The court process Court action to enforce personal debt is generally pursued through the sheriff court, although different procedures are used depending on the value of the claim. Actions for eviction, or repossession of a home in the case of a mortgage/secured loan lender, are also dealt with in

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slightly different ways. Full details of the different procedures used are available on the sheriff courts part of the Scottish Courts Service website. The Accountant in Bankruptcy’s leaflet “Debt and the consequences” (2008a) provides a user-friendly description of the court processes involved in debt enforcement. Creditors cannot take formal enforcement action (such as seizing possessions or money) against debtors unless they have the authority of the courts to do so, and attempts must be made to notify the debtor as soon as any court action is started. In most circumstances, the action will be initiated in the sheriff court which covers the debtor’s home address. When a creditor initiates court proceedings in the sheriff court, the alleged debtor will receive an official court document, called a “summons” or “initial writ” depending on the procedure being used. This document will contain details of the court hearing, the case put forward by the creditor and the alleged debt due. If the alleged debtor responds to the summons/initial writ giving notice to dispute any aspect of the debt, the court will arrange a date for a hearing, where both parties will be given the opportunity to present their case. If a debtor does not respond to notification that a court case has been raised against them, the court may issue a decree in favour of the creditor without holding a hearing. Where a creditor is successful, the court issues a “decree for payment” stating how much money the debtor owes. It is also usual for the reasonable costs of court action, as well as interest, to be added to the original debt. Where a decree has been issued in circumstances where the alleged debtor has not had the opportunity to respond to the claim, it may be possible to get it recalled. People in this situation should seek legal advice.

Time to Pay Provisions of the Debtors (Scotland) Act 1987 (c. 18) enable a debtor to accept that the debt is due and ask the court to make an order enabling them to pay the debt off in regular instalments, or make a one-off payment at a future date. This is known as a “time to pay direction” when it is applied for before the court has issued a decree for payment and a “time to pay order” when it is applied for after a decree has been issued and a “charge for payment”12 in relation to the debt has expired. Time to pay orders can be applied for even after a creditor has initiated formal, court-based enforcement procedures such as seizing possessions. Time to pay directions and orders can be used where the amount owed is £25,000 or less. Both procedures stop the creditor taking any further enforcement action as long as the debtor sticks to the arrangement. However, a creditor can still take action against any security in relation to the debt so “time to pay” can be ineffective in relation to secured loans, mortgages, hire purchase, rent arrears or utility debts. It is also not possible to use “time to pay” in relation to debts to HMRC. Where the debt is regulated by the Consumer Credit Act 1974, the debtor can apply for a “time order”, which is similar in effect to a time to pay order/direction (see “Consumer Credit above). However, the advantage of a time order is that it is effective against the security for a loan. It can therefore be used in relation to secured loans (where these are regulated by the 1974 Act) and hire purchase agreements. It can also be applied for as soon as a creditor has issued an arrears notice, enabling a more pro-active approach to debt management by a debtor.

12 A “charge for payment” is a court document which states that the debtor must pay the amount owed, usually within 14 days.

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The Consumer Credit Act 1974 enables the sheriff to alter the terms of a loan agreement when issuing a time order. They can, for example, extend the period over which the loan is to be repaid, making it easier for a debtor to meet their financial obligation. It is unlikely that an application for either time to pay or a time order will be accepted if there is not a realistic prospect of the debtor being able to repay the loan.

ENFORCEMENT OF COURT DECREES If the debtor does not pay the money owed after a “decree for payment” has been issued, the creditor can apply to the courts for a “charge for payment” which states that the debtor must pay the full amount, usually within 14 days. If payment still has not been received, the creditor can instruct officers of the court (sheriff officers in the case of sheriff court judgements) to take enforcement action, also known as “diligence”. The costs of effecting diligence are added to the overall debt. The Bankruptcy and Diligence (Scotland) Act 2007 requires that personal debtors are issued with a copy of the “Debt advice and information package” (Accountant in Bankruptcy, 2008b) before enforcement action is taken, in most circumstances. There has been a significant programme of reform in the Scottish Parliament in relation to diligence law. This means that several enforcement methods have been abolished while a number of new enforcement methods are in the process of being introduced. The discussion below therefore only highlights the more common forms of enforcement currently in use. All of the enforcement methods mentioned can only be carried out by officers of the court on instruction from the creditor. Some require specific court actions to be raised before they can be pursued.

• Earnings arrestment – an earnings arrestment requires an employer to deduct money from an employee’s wages, to be paid to the creditor, until the employee’s debt is paid off. The amount of money which must be deducted, based on net earnings, is laid out in Schedule 2 to the Debtors (Scotland) Act 1987. The figures are updated regularly using secondary legislation. This provides a degree of protection to debtors by ensuring that some money is left for their essential expenses

• Bank arrestment –a bank account is frozen until agreement is reached over releasing the money in it towards paying the debt. Where agreement cannot be reached, the funds can automatically be released to the creditor unless the debtor or the bank raises an objection in the sheriff court. New protections brought in by the Bankruptcy and Diligence (Scotland) Act 2007 mean that a minimum sum is protected in a bank account so that a debtor is not left penniless. In addition, a sheriff can order further funds to be released where the effect of the arrestment is “unduly harsh” on the debtor or their family

• Eviction/repossession – where the creditor is a landlord or mortgage/secured loan lender, they are able to evict debtors from their homes and gain possession of the property. In the case of mortgage/secured loan lenders, the property can be sold and the money released paid towards the outstanding debt. As described above, there are specific legal processes which landlords/creditors must go through before an eviction can take place

• Attachment and exceptional attachment13 – attachment can be used by a creditor to seize certain moveable goods belonging to a debtor, such as ornaments or trade stock. These can be sold at auction and the funds raised used to pay off the debt. Where the

13 Attachment and exceptional attachment are the diligences which replaced poindings and warrant sales. They are regulated by the Debt Arrangement and Attachment (Scotland) Act 2002.

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goods are kept in a debtor’s home, an exceptional attachment order must be issued by the court, and only non-essential items can be attached. The debtor can appear at the hearing and the sheriff must consider, among other things, whether the debtor has received money advice and what other arrangements have been made to pay off the debt

• Inhibition – an inhibition prevents a debtor selling or taking out further secured loans in relation to a house or land that they own. A creditor cannot take possession of or sell a house on the basis of an inhibition. Currently, further action to allow repossession is only possible where the creditor is a landlord, mortgage lender or other secured loan lender14. However, inhibition does preserve the value of a house by, for example, preventing it being used as security for further borrowing. It can also encourage a debtor to deal with their debt by preventing them from disposing of an important asset until they do

Sheriff Officers As officers of the court, sheriff officers are responsible for such duties as the service of court documents, as well as for formal, court-sanctioned debt enforcement work. Although not employed directly by the courts, they are subject to the supervision of the sheriff principal (a senior judge responsible for the administration of the court) in the sheriff court area in which they operate. In relation to debt enforcement, sheriff officers receive their instructions directly from creditors. Creditors pay standard fees for the work they request (the current rules regarding fees are laid out in the Act of Sederunt (Fees of Sheriff Officers) 2008, SSI 2008/430). These fees can be recovered from the debtor in addition to the original debt and the reasonable costs of court action. There are a number of sheriff officers’ firms in Scotland, with some working in a particular sheriff court area and some active across Scotland. More information is available from the website of the Society of Messengers at Arms and Sheriff Officers (SMASO), the professional body representing officers of court. In order to be appointed as a sheriff officer for a particular court area, the person must apply to the sheriff principal for the area in question. The sheriff principal also has powers under the Debtors (Scotland) Act 1987 to inspect the work of sheriff officers, respond to complaints and investigate potential misconduct. Under section 80 of the 1987 Act, the sheriff principal can suspend a sheriff officer or remove their commission to carry out work for the court area in question where the circumstances warrant it. The Public Services Reform (Scotland) Bill [as introduced] Session 3 2009 proposes amendments which will strengthen the role of a sheriff principal in investigating and disciplining sheriff officers.

OPTIONS FOR DEBTORS A number of options are open to those who find themselves unable to pay their debts (in whole or in part). Detailed below are the main options, with a description of the advantages and

14 It is also possible for a creditor to take possession of a property, and eventually sell it, through the legal process of “adjudication”, although this is very rare. The Bankruptcy and Diligence (Scotland) Act 2007 abolished adjudication: however, the section which deals with this issue has yet to be brought into force so it remains competent.

disadvantages of each. There are a number of serious consequences attached to pursuing any of these options, so a debtor should always speak to a money adviser before deciding which one is best for their personal circumstances. See the “Sources of Advice” section at the end of this briefing. Research from Citizens Advice Scotland (Dryburgh 2008, p11) asked Citizens Advice Bureaux money advisers what the next steps would be for their debt clients. The following graph details their responses:

31%

22%18%

6% 6%

1% 1% 1%3%

0%

5%

10%

15%

20%

25%

30%

35%

Negotiating with creditors

Assessing optionsAwaiting possible sequestration

Protected Trust DeedDebt Arrangement Scheme

Sell propertyMortgage to rentRe-mortgage houseOther

In 31% of cases, money advisers stated they would negotiate with creditors. The next most frequent response, at 22%, was to “assess options”, which indicates that a final decision had not been reached. Eighteen percent of clients were awaiting possible sequestration, with 6% opting for a protected trust deed and 6% opting for a debt payment programme. Further information about the effects of the credit crunch on debtor behaviour is available in the SPICe briefing “Personal debt, bankruptcy and homes” (Harvie-Clark and Hough, 2009). SPICe briefings on the “Bankruptcy and Diligence (Scotland) Bill: Bankruptcy” (Dewar 2005) and the “Debt Arrangement and Attachment (Scotland) Bill” (SPICe 2002) provide more information on the legislation in this area.

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OPTIONS FOR DEBTORS COMPARED The table below summarises the main features of the different debt options available in Scotland. The different options are discussed in more detail below.

Negotiated settlement

Debt payment programme

Protected trust deed

Sequestration

Number created in 07/08

Not known*

422 7,509 6,158

Dividend paid to creditors

Variable £1 in the £1 28p in the £1

18p in the £1**

Length of time to run

Variable Less than 10 years in most circumstances

Three years in most

circumstances

One year in most

circumstances

Can law require creditors to agree?

No Yes Yes Yes

Protection from court enforcement action?

No Yes Yes Yes

Debt write-off available?

No, except by creditor

agreement

No, except by creditor

agreement

Yes Yes

Can sale of family home be required?

No No Yes Yes

*Citizens Advice Scotland research (Dryburgh, K., 2008) indicates that this is the most common choice for Citizens Advice Bureau advisers and their clients. **From financial year 2004-05, which is the last year for which information is available (Scottish Executive, 2006)

NEGOTIATION WITH CREDITORS

How negotiated settlements operate It is often possible to negotiate reduced payments towards debts with creditors. As highlighted above, this is the option most often pursued by money advisers on behalf of their clients, and it has the advantage of being flexible to accommodate different circumstances. Where there is significant surplus income, debts may be paid off in full over a period which is only slightly longer than the original term of the debt. Where there is little or no surplus income, a creditor may accept “token payments” – which demonstrate a debtor’s willingness to pay but do not

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significantly reduce the debt – as a short-term option. Such negotiated settlements are informal, meaning that they do not have the authority of a court or any basis in law. This means a creditor does not have to agree to a proposal, no matter how reasonable it may be. Where a creditor does accept reduced payments under a negotiated settlement, they will make it clear that they do so on a temporary basis and do not waive their right to collect the debt in full. This means that a creditor can start pursuing full payment at any point. Some examples of why this may happen are because the creditor believes that the debtor’s circumstances have changed, or because the debt has been passed to a new debt collection agency with a different policy on repayment. This can create problems in multiple debt situations, where a small number of creditors continue to take action against a debtor while the majority have accepted reduced payments. It also embroils money advisers in significant administrative work as they write to creditors with initial offers, then revised offers, chase creditors who have not responded at all and continue to support debtors. At the end of the day, it may not be possible to get the agreement of all creditors, which exposes a debtor to ongoing debt recovery action. A further problem in relation to negotiating a repayment arrangement is the treatment of interest and charges by creditors. Many creditors will freeze interest and charges on the debts they are owed while a debtor continues to make payments as agreed. However, some continue to add these charges, or decide to reapply them at a later date, and there is no legal basis to prevent this from happening. The only way a debtor can ensure that interest and charges will not be added to their ongoing debt is to enter a “debt payment programme” under the Debt Arrangement Scheme (see below). Creditors often review their debt cases on a regular basis to see whether a debtor’s circumstances have changed, with a view to them being able to make larger repayments towards their debts. Where a creditor believes they have not received a satisfactory response to their enquiry, sometimes because a debtor has failed to respond to their letter or telephone call, they may revert to pursing full payment. This can make a negotiated agreement unstable.

Debt management plans Debt management plans are a version of the negotiated settlement, generally used by agencies which charge either the debtor or the creditor for their services. Some agencies charge the debtor a fee (usually a percentage of the monthly payment) for administering a debt payment plan. Other agencies charge the creditor a percentage of the money being collected on their behalf. Debt management plans suffer from the same weaknesses as negotiated settlements. They do not have the force of law, so creditors may not agree to a proposal or may decide to pursue full payment, even where a debtor has been keeping to an arrangement.

Calculating disposable income When negotiating payments, a money adviser will check a debtor’s income and expenditure to calculate disposable income. Disposable income is income which is left after essential expenditure, such as accommodation, food, fuel and payments to “priority debts” are taken into account. Priority debts are debts such as rent/mortgage and fuel, where failure to pay will result in the

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loss of something that is essential to the household. Hire purchase/conditional sale agreements may also be priority debts where they are paying for an essential item such as a cooker or a car needed to travel to work. Council tax is a priority debt in recognition of its role in paying for essential council services. Where there is disposable income, this is allocated to the payment of non-priority debts on a “pro rata” basis – ie proportionally reflecting the ratio between the particular debt and overall indebtedness.

The common financial statement Disagreements can occur between debtors/money advisers and creditors over what constitutes essential expenditure. In order to speed up the negotiation process, the British Bankers’ Association, the Finance and Leasing Association and the Money Advice Trust have created a “common financial statement”. This is a statement of income and expenditure under pre-agreed headings. As long as standard procedures have been followed and expenditure in each category is below a certain level (based on figures from the Office for National Statistics’ Family Expenditure Survey), creditors who are members of the sponsoring organisations will accept calculations of disposable income based on the statement. However, the statement is not accepted by all creditors (most notably local authorities and Government departments) or used by all agencies offering money advice.

DEBT PAYMENT PROGRAMME

How a debt payment programme operates A debt payment programme is the formal payment arrangement aspect of the “debt arrangement scheme” (DAS), a statutory scheme enabling people with multiple debts to make reduced payments to their creditors while being protected from court action. It was introduced by the Debt Arrangement and Attachment (Scotland) Act 2002 (asp 17). A debt payment programme is open to anyone who has more than one debt and disposable income with which to pay their creditors. However, in order to enter into a debt payment programme, a debtor must receive advice from a DAS-approved money adviser. Most DAS-approved money advisers work in organisations which provide free money advice. However, money advisers from organisations which charge for their services can also become approved. A debt payment programme works in a similar way to a negotiated agreement in that a money adviser calculates disposable income and puts forward repayment proposals to creditors. However, because it is a statutory scheme, it is possible to require creditors to accept reasonable payment offers and, once a debt payment programme is applied for, debtors are protected from enforcement action in the courts. The Accountant in Bankruptcy is responsible for approving both money advisers and debt payment programmes. Where sufficient creditors agree to a debt payment programme (or are deemed to agree because they have not responded to notification of the intention to set one up), the programme is approved automatically. Where sufficient creditors object, then the Accountant in Bankruptcy will look at the proposal and approve programmes which are considered to be “fair and reasonable”. This assessment will include consideration of such issues as: whether there is any equity available in the debtor’s property to repay creditors; the debtor’s performance in any previous debt payment programmes or time to pay arrangements under the Debtors (Scotland)

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Act 1987; and the length of time a programme will need to run in order for the debts to be repaid. Generally, the Accountant in Bankruptcy will approve programmes which will run for five years or less and refuse those which run for more than ten years (Accountant in Bankruptcy 2007). Because a debt payment programme has the force of law, it avoids the instability discussed in relation to negotiated agreements and ensures that debtors are protected from enforcement action while they are making payments as agreed. A secured creditor can still take action to repossess the security for a loan (for example, the family home or a car bought under a hire purchase agreement). However, they are unlikely to do so in situations where full payment is being made because the debt is considered a priority debt. In addition, for debt payment programmes entered into after June 2007, interest and charges accruing on the debt will be frozen for as long as the programme remains in operation. Where a debtor fails to make payments to a programme as agreed, full interest and charges become payable again.

The consequences of entering a debt payment programme A debt payment programme can be applied for by someone who owns their own home without any requirement that the property be sold to meet the demands of creditors. This gives it a significant advantage over most other formal options for debtors. However, as discussed above, the Accountant in Bankruptcy will consider any equity in property when reaching a decision on whether to approve a contested debt payment programme. Debtors usually need to have significant disposable income before they can participate in a debt payment programme because it is expected that they will be able to pay off their debts in full. There is no element of debt “write-off” in DAS. Debt write-off is where a debtor is released from their obligation to pay their debts in full on the basis of their financial circumstances. The process of debt write-off is formally known as “composition” of debts.

Tackling low take-up rates The number of people entering into debt payment programmes has been much lower than was initially expected. The Accountant in Bankruptcy highlights that 1,500 to 2,000 cases were expected in the first 16 months of operation. However, in reality, the number of cases over this period was only 150 (2008c, p3). Take-up has increased since then; however, it is still well below the numbers expected when the legislation was introduced. A Citizens Advice Scotland report (Dryburgh 2008, p9) highlighted that at least 71% of Citizens Advice Bureaux debt clients did not qualify for a debt payment programme because they had insufficient disposable income. Of the remainder, 19% did qualify for a programme and a further 7% would qualify if they could make repayments over a longer period than ten years. As highlighted above, only 6% of Citizens Advice Bureaux debt clients were actually planning to apply for a debt payment programme. This suggests that DAS is not a solution for many debtors and that, for those who do qualify, the majority prefer other options. Citizens Advice Scotland recommends changing DAS to require an element of debt write-off. The above report models scenarios where creditors would receive 70 pence and 80 pence for every £1 lent, to demonstrate how this would increase access. These levels of return for creditors are much higher than those currently available when debtors enter a protected trust deed or bankruptcy.

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The Accountant in Bankruptcy has also carried out research into the uptake of debt payment programmes (2008c). The report noted that the introduction of freezing of interest and charges in 2007 had resulted in an increase in the number of debt payment programmes applied for (p6). It also noted that other stakeholders did not support Citizens Advice Scotland’s call for composition (p17). The report concluded that a major factor affecting uptake was the lack of money advisers prepared to become approved and take on the work of administering debt payment programmes (p18). Among the options put forward in the report to increase access are introducing an online application (which would remove the current requirement for money advice) and moving administration of the scheme from approved money advisers to the Accountant in Bankruptcy. The Scottish Government laid regulations before the Scottish Parliament in June 2009 which would have significantly altered the Debt Arrangement Scheme. The main changes proposed were:

• Removal of the requirement to receive money advice before entering DAS • Introduction of an online application which could be accessed directly by members of the

public • No requirement for debtors to have more than one debt to enter the scheme • Removal of the provisions relating to deemed consent, instead requiring actual consent

from 50% of creditors by number or value of debt • Introduction of a minimum monthly payment of the greater of £100 or 1% of the debt to

enter into DAS Due to objections from the money advice sector, the Scottish Government revoked the regulations before they came into force. The Minister for Community Safety, at an appearance before the Justice Committee (2009), undertook to consult with DAS stakeholders over the summer, with a view to introducing revised regulations in autumn 2009.

PROTECTED TRUST DEEDS

How protected trust deeds operate A trust deed is an agreement between a debtor and their creditors in which their income and non-essential assets are administered by an insolvency practitioner for the benefit of the creditors. It is regulated by the Bankruptcy (Scotland) Act 1985 (c. 66). The Protected Trust Deed (Scotland) Regulations 2008 (SSI 2008/143) set out the circumstances in which a trust deed can become protected. When an insolvency practitioner sets up a trust deed, they will advertise this fact to creditors. If insufficient creditors object to the trust deed, it becomes protected. Creditors who do not respond to contact from the insolvency practitioner are deemed to have agreed to the trust deed becoming protected. Once a debtor is the subject of a protected trust deed, creditors cannot take enforcement action against them. It is unusual for a trust deed not to become protected. It is necessary for an insolvency practitioner (who must be a member of a recognised professional body) to administer a protected trust deed. They are known as a trustee. The fee which they charge is recovered from the estate of the debtor (thus reducing the money available to creditors). This means that a debtor must have some disposable income in order to enter into a protected trust deed, as the estate must at least cover the costs of the trustee. The

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Accountant in Bankruptcy can order an audit of an insolvency practitioner if there is any concern over the charges being made.

The consequences of entering a protected trust deed Protected trust deeds generally cover a period of three years, although it is possible for them to be extended. After the agreed period, any outstanding debt is written off, meaning that the debtor can become debt free in a relatively short period. This makes the protected trust deed an attractive option for those who cannot pay their debts in full. However, the debtor may have to sell assets which they own, including their home. Where there is equity in a home, it is likely that the trustee will insist that this has to be released, although it is possible for a third party, such as a spouse, to make contributions towards the trust deed to represent the sum tied up in equity. The Accountant in Bankruptcy’s guidance (2008d) in relation to trust deeds recommends that, in most circumstances, the equity in a debtor’s home should be dealt with as quickly as possible to remove uncertainty for the debtor. The guidance also suggests that there may be circumstances where it is in the debtor’s interests to hold on until the end of the trust deed term before dealing with a home, for example to make remortgaging easier. Although trust deeds are not registered in a manner available to the public (as sequestrations are), they are advertised. It is also likely that creditors in a trust deed will notify credit reference agencies of a default, which means that an individual’s credit rating will be affected. In addition, it may be a condition of someone’s employment that they are not the subject of a protected trust deed. Where a debtor does not co-operate with their trustee, the trustee can petition for their sequestration.

Protected trust deed statistics The annual report of the Accountant in Bankruptcy (2008e) highlights that there were 7,509 new protected trust deeds registered in 2007/08 in Scotland, making it the most commonly used of the formal debt options. The average dividend paid to creditors in relation to protected trust deeds was 28 pence in the £115 (ie for every £1 of debt the person entering the protected trust deed had, 28 pence was repaid to creditors). This is an increase on the dividends paid in previous years, although there has been concern in the past that protected trust deeds provided only a slightly better return for creditors than sequestration (Scottish Executive 2006).

SEQUESTRATION (BANKRUPTCY)

How sequestration operates Sequestration, which is also known as bankruptcy, involves a trustee collecting a debtor’s assets and income and administrating them for the benefit of creditors. Non-essential assets of value, including a home (where there is equity), will be sold unless an arrangement can be reached with a third party, for example, a spouse, to make equivalent contributions to the

15 This figure is calculated as an average of all the estates paying a dividend. A number of estates do not pay any dividend. If these were included in the calculation, the average dividend paid would decrease.

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debtor’s estate. The process can be forced on a debtor by a creditor, or a group of creditors. It is also possible for a debtor to petition for their own sequestration in certain circumstances. Sequestration is regulated by the Bankruptcy (Scotland) Act 1985 as amended. Significant changes to the framework in which sequestration operated were made by the Bankruptcy and Diligence (Scotland) Act 2007. The trustee in a sequestration is responsible for administering a debtor’s income and assets for the benefit of creditors. The trustee can be an insolvency practitioner but, in most personal bankruptcies, the Accountant in Bankruptcy takes on the role of the trustee (Accountant in Bankruptcy 2008a). The costs of administering the sequestration are met from the debtor’s estate and, where there is insufficient money, by the Accountant in Bankruptcy (from public funds) or by the trustee themselves. A creditor who wishes to sequestrate a debtor can apply to the sheriff court with evidence that the debtor owes £3,000 or more. In addition, the creditor must demonstrate that the debtor is “apparently insolvent” ie appears to not be able to pay their debts. This is usually done by showing that a court-authorised demand for payment (such as a “charge for payment” discussed under “Enforcement of debts” above) has not been responded to. A trustee in a protected trust deed can also petition for a debtor’s sequestration if they do not co-operate with the terms of the agreement. A debtor who wants to petition for their own sequestration must demonstrate that they owe at least £1,500 and must have the agreement of one of their creditors, must show apparent insolvency, or must qualify for the “low income, low assets route” (see below).

Apparent insolvency The requirement to show apparent insolvency has acted as a barrier to accessing bankruptcy for those debtors who might want to. This is because creditors often do not take court action to enforce outstanding debts, especially where a debtor has little in the way of income or assets. This has left some low to middle income debtors in the situation where they cannot meet creditors’ demands for payment but cannot access any form of debt relief because they are too poor for creditors to consider taking them to court. This can create a very stressful situation where debtors receive threatening letters or ongoing telephone/personal contact demanding they make payments which they cannot afford, yet can do nothing to resolve the situation. The Scottish Government has sought to remedy this problem by introducing a “Low income low assets” route into bankruptcy which is discussed below.

The consequences of sequestration The Bankruptcy and Diligence (Scotland) Act 2007 reduced the normal period of bankruptcy from three to one year, although this can be extended where the debtor acts dishonestly or fails to co-operate with the trustee. This means that the consequences of bankruptcy, such as restrictions in relation to holding public office or company directorships, last for a shorter period of time. Nevertheless, the fact of a sequestration is still advertised and recorded as public record. A debtor’s access to credit is likely to be severely restricted for a number of years, and banks may refuse to allow them to operate a bank account. Being bankrupt may breach terms and conditions of employment, especially in financial services. Where a debtor owns a home in which there is equity, this will usually be sold to pay their debts. The process can be upsetting and stressful, especially where the debtor has been forced into bankruptcy by their creditors.

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Sequestration statistics The Accountant in Bankruptcy’s annual report (2008a, p17) shows that 6,158 sequestrations were awarded in 2007/08 in Scotland. Of these, 53% were petitions by creditors, 41% were petitions by debtors and the remainder were petitions by trustees in protected trust deeds. The number of sequestrations has been increasing in recent years. For a more detailed discussion of the impact of the credit crunch on bankruptcy, see “Personal debt, bankruptcy and homes” (Harvie-Clark and Hough 2009).

Low Income Low Assets route into bankruptcy The Bankruptcy (Scotland) Act 1985 (Low Income Low Asset Debtors etc.) Regulations 2008 (SSI 2008/81) introduced a new route into bankruptcy. Since April 2008, those with a low income (earning less than the equivalent of the national minimum wage for a 40 hour week, currently £229), and with no non-essential assets worth more than £1,000 individually or £10,000 in total, can petition for their own sequestration without demonstrating apparent insolvency. Those receiving certain means-tested social security benefits, including working tax credit, can also access the scheme, even if their actual weekly income is greater than £229. Applicants cannot own their own home or any other land. This has provided a welcome escape for a number of low income debtors who were not previously able to access debt relief because their creditors had not taken court action to enforce their debts. The availability of the Low Income Low Assets route into bankruptcy has resulted in a sharp increase in the number of people petitioning for their own sequestration. Harvie-Clark and Hough (2009, p11) discuss this trend further.

SOURCES OF ADVICE Information and advice on debt issues can be accessed from a variety of organisations, some of which charge a fee for their services. The organisations listed below provide free money advice.

• Money Advice Scotland (www.moneyadvicescotland.org.uk) – the website allows people to search by council area to find a money adviser anywhere in Scotland

• Citizens Advice Scotland (www.cas.org.uk) – the website provides online advice and contact details for local Citizens Advice Bureaux

• Consumer Credit and Counselling Service (www.cccs.co.uk or telephone 0800 138 1111) – provides online and telephone advice

• National Debtline (www.nationaldebtline.co.uk or telephone 0808 808 4000) – provides online and telephone advice (supported by the Scottish Government)

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Related Briefings Personal Debt, Bankruptcy and Homes (2009) Bankruptcy and Diligence (Scotland) Bill: Bankruptcy (2005) Debt Arrangement and Attachment (Scotland) Bill (2002)

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