Across the UK consumers have been on a long spending spree and Scotland like many other countries has seen the phenomenon of consumer bankruptcy increase. In response to this phenomenon in November 2003 the Scottish Executive issued a consultation paper on bankruptcy entitled Personal Bankruptcy Reform in Scotland: A Modern Approach.
Jim Wallace the Scottish Executive Minister advised:
There are those who may choose not to pay when they can and we need a flexible and efficient system of enforcement to realise their assets if necessary. Many people want to pay, but need to be given a bit of time. A fair system will help them to understand their options, take preventative action and get free
money advice on how to manage their repayments and in doing so help creditors as well.
Positive news for lenders or is it?
This can pay, should pay reflects a prevailing policy that debt relief, involving some element of debt write off, should come at a price which, in the case of salaried debtors, should include a contribution from future income. Though as we will see it is increasingly accepted that consumer debtors who have nothing to offer their creditors should not be denied access to
some form of bankruptcy relief.
Overview of the bankruptcy reform
The key proposals include:
- Reducing the bankruptcy period to one year
- Introduction of BRU (Bankruptcy Restriction Orders) and BRU (Bankruptcy Restriction Undertakings) placed on potentially fraudulent or culpable debtors
- Requiring debtors to contribute towards their bankruptcy debts where possible
- Increasing transparency and monitoring of trust deeds
- Consolidating bankruptcy proceedings in the Sheriff Court
- Reforming restrictions on bankrupt individuals.
In proposing these current reforms to Scottish bankruptcy law the Scottish Executive did identify as one of the drivers for change, the recent reforms to bankruptcy laws in England and Wales. One of the main policy considerations behind the proposed introductions of similar reforms in Scotland has been
the need to maintain a level playing field between the two countries. This is good news for lenders in that uniformity between the two countries assists collection teams in both countries.
Reducing Bankruptcy Law
By reducing the bankruptcy period to one year, the Scottish legislation will mirror the Enterprise Act 2002 reforms in England and Wales. This Act means, unless the court defers discharge, the debtor will be discharged automatically one year after the date of sequestration. In contrast to England and Wales there is no possibility of an earlier discharge.
Requiring debtors to contribute towards their bankruptcy debts where possible
The debtor will, however, be required to make income
contributions for up to three years from the date of
sequestration and formal provisions on income payment agreements are being introduced to complete the existing provisions for court orders. If these payment arrangements are voluntary then they will be called Income Payment Arrangements. Where the payment arrangement is imposed by the court it will be called an Income Payment Order.
Introduction of BRO (Bankruptcy Restriction Orders) and BRU (Bankruptcy Restriction Undertakings)
The public will be protected from culpable debtors by two new forms of restriction being Bankruptcy Restriction Orders (BRO) and Bankruptcy Restriction Undertakings (BRU) This again closely mirrors England and Wales. In Scotland the Accountant in Bankruptcy (AIB) will make applications for
BROS in Bankruptcy who can also accept BRUS
Whilst it will take some time to see how the Scottish Courts will deal with these applications we can obtain some guidance from South of the border colleagues.
Examples of recent cases in England include:
- A 4-year BRO for a man who mis-stated earnings on a credit card application; used the credit card to repay a loan shark and had insufficient earnings to repay even the minimum payment on the credit card, leaving the credit card company with an outstanding debt when he applied for his own bankruptcy.
- A 6-year BRO for a man who made preferential payments to certain creditors amounting to approximately £10,000 at a time when he had further debts of around £40,000 and the following day gambling and losing £5,000.
In many bankruptcies the debtor's interest in his home can be one of the most valuable assets in the sequestration. In practice, however it can be one of the most difficult assets to realise and the debtor often delays negotiations for sale. The trustee up to now has been able to take comfort from the fact
that any delay in selling or agreeing terms have not been prejudicial to the creditors. The act provides that unless a trustee takes steps to deal with the family home within 3 years it will cease to form part of the debtor's assets. It is therefore important for practitioners to review their procedures to ensure
adequate steps are taken to deal with family home.
Credit Limits and Payments for Essentials
The limit where debtors are not allowed to apply for credit without informing the creditor of their bankrupt status will increase from £250 to £500. There is a ceiling of £1,000 imposed in respect of all credit advanced. In both situations if the debtor does not advise the creditor of his bankrupt status an offence will have been committed.
Composition the entire process will be streamlined. The Accountant will administer it in Bankruptcy rather than the current process whereby initial approval is granted by the AIB who then requires approval of court.
Student Loans these will survive bankruptcy.
Protected Trust Deeds the idea behind the reforms is to provide greater transparency.
The Scotsman reported in November 2006 that bankruptcies have rocketed to record levels. The number of Scots declared bankrupt in the third quarter of 2006 was the highest since records were first released. The warnings are that this is expected to increase. As the new legislation mirrors some of
the Enterprise Act 2002, then we can also predict to see increases similar to those England faced when the reduction to one year came into force.
It is doubted whether the introduction of Enterprise Act 2002 style reforms in Scotland will in fact achieve their intended purpose of fostering entrepreneurship. The doubts remain about the suitability of a reformed procedure tailored to the minority of business debtors for the majority of consumer debtors. There are also fears of resourcing related to the AIB.
The possibility of North American style compulsory debtor counselling and education programmes was floated with the Scottish Executive but was not met with much enthusiasm. Instead it appears likely that the educational and budgeting skills will fall within the statutory remit of the FSA. The reality is that the lenders will need to consider the impact of increased
bankruptcy and profile this into their lending criteria.
The information we currently hold is that D day or is that B day is 3 December 2007 but we shall keep you posted in this regard.
tel: 0141 300 4300