Bankruptcy and debt advice review: consultation

4. Reforms introduced by the Bankruptcy and Debt Advice (Scotland) Act 2014 - Overview

The 2014 Act introduced the following principle reforms to the bankruptcy process in Scotland:

Statutory Moratorium on Diligence - this moratorium period applies on the giving of notice of the intention to apply in relation to sequestration, a Protected Trust Deed (PTD) or a debt payment programme under the Debt Arrangement Scheme (DAS). It applies to individuals and other bodies such as trusts and partnerships that can be made bankrupt. Following the application and the publication of the individual's name on the Register of Insolvency or DAS register they will be protected by a moratorium on diligence for a period initially of 6 weeks, after which it may be extended if they apply for a statutory debt solution. The moratorium on diligence means diligence including arrestment, money attachment, interim attachment or attachment of the individual's estate cannot have effect during the period the moratorium is in place. In certain circumstances the moratorium does not protect the debtor from diligence action that is already in place. Only one intimation can be given and, therefore, only one moratorium period applied for within a 12 month period.

Money Advice - this provision specifies that an application for bankruptcy by a debtor can only be made if the debtor had been given advice on their financial circumstances, the effect of the proposed sequestration and the process involved by a 'money adviser'. Categories of approved money advisers are stipulated in regulations. This change introduced consistency with DAS where similar processes are in place and ensure that individuals are well informed prior to the instigation of self-nominated bankruptcy proceedings. This built on the earlier introduction of the Certificate for Sequestration to be completed by a money adviser as one of the means by which bankruptcy could be accessed.

Financial Education - this introduced, by regulations covering appropriate financial education modules, provision for debtors whose financial history and circumstances identify them as particularly vulnerable to problems as a result of recurring debts to be required to receive a course of targeted financial education. The trustee in bankruptcy must decide whether a debtor should undertake a course of targeted financial education within 6 months of the date of award of bankruptcy (or as soon as practicable thereafter in the case that the trustee makes contact with an individual whose previous whereabouts were unknown).

Debtor application - Executor - this change removed the previous requirement for an executor of a deceased debtor's estate to petition the Sheriff Court for the bankruptcy of that estate where the estate is insolvent. It transfers the process to AiB allowing for the bankruptcy to be awarded following a debtor application.

Debtor application Minimal Asset Process (MAP) bankruptcy - this created a new route into bankruptcy allowing a debtor who has limited assets and income access to debt relief quickly and at lower cost. MAP bankruptcy replaced the previous low income low asset route to bankruptcy by introducing new eligibility criteria in relation to surplus income and assets. It also introduced streamlined administrative processes including debtor discharge after 6 months - albeit with the application of continuing obligations with regard to future borrowing for a further 6 months. The Accountant is the default trustee in MAP bankruptcy.

Debtor contribution - Common Financial Tool (CFT) - this introduced a single tool to assess household income and expenditure with a view to set the level of contribution (if any) that a debtor can afford to make towards their debts in any of the Scottish statutory debt solutions. Currently the tool prescribed by regulations as the CFT is the Common Financial Statement (CFS) which is published by and available for use under licence from the Money Advice Trust (MAT). Since the development and implementation of the Standard Financial Statement, MAT has withdrawn wider use of the CFS.

Debtor Contribution Order (DCO) - replacement of the previous Income Payment Agreement/Order arrangements. This introduced a standard period of 48 months for most contributions taken from a debtor's income following sequestration, subject to the ability to seek a variation to reduce or increase the amount of contributions. The DCO is fixed in every bankruptcy, including nil values where there is no excess income. The introduction of the DCO includes a provision for AiB to review the DCO and for appeal to the Sheriff Court against AiB's decision to confirm, amend or revoke the order.

Vesting of estate after sequestration - this extended the period for which acquirenda (i.e. property or rights acquired or received by the debtor after the date of sequestration which would vest in the trustee had it been part of the estate at the date of sequestration) up to 4 years from the date of sequestration. Previously this period expired on the discharge of the debtor. The same change was introduced for non-vesting contingent interests, such as a legacy under a will, the right to which reinvests with the debtor at the end of the equivalent 4 year period.

Submission of creditor claims - this change aimed to create greater certainty about a debtor's financial position by introducing a 120 day time limit after notification for creditors to submit claims in a bankruptcy. Provision is made for claims to be submitted beyond this timescale where exceptional circumstances can be shown.

Discharge of debtor - this introduced a link between the debtor's discharge from bankruptcy and the extent to which they have cooperated with the trustee and complied with the statement of undertakings. Under the revised process, the trustee (for cases where AiB is not the trustee) must prepare and send a report to AiB without delay after 10 months from when sequestration was awarded. The report includes information on the debtor's assets, liabilities, financial and business affairs. Decisions by AiB to grant or refuse to grant discharge will be able to be reviewed by AiB and then appealed by the trustee or any creditor to the Sheriff Court. The previous system required the trustee to make an application to the Sheriff Court for the deferral of automatic discharge of a debtor.

Deferral of discharge where debtor cannot be traced - this made arrangements where the debtor's whereabouts cannot be ascertained and the trustee is, therefore, unable to carry out their usual functions. If the trustee is unable to ascertain the debtor's whereabouts, the trustee must submit to AiB, no sooner than 8 months and no later than 10 months after the date of award of sequestration, a notice to the effect that, despite investigation into the debtor's whereabouts, the trustee has been unable to locate the debtor. If AiB is satisfied that it would not be reasonably practicable for the trustee to continue to search for the debtor, then AiB will issue a certificate deferring the debtor's discharge indefinitely. This also provides scope for the trustee to resign office and in these circumstances AiB can be appointed trustee and makes arrangements for the continuing administration of the case in the event that the whereabouts of the debtor are established.

Transfer of certain Sheriff Court functions to AiB - the reforms transferred some Sheriff Court functions to AiB. These include the following:

• Applications for direction - this created the ability for a trustee (except for AiB) to be able to apply directly to AiB for directions with additional provisions for complex matters to be referred to the sheriff. The provision includes rights to challenge the directive through AiB review and appeal to the Sheriff Court.
• Recall of bankruptcy - these changes enable AiB to consider and grant the recall of a bankruptcy in a specific set of circumstances where previously only a sheriff could make such a decision. Where the only ground for recall is that the debtor can pay the debtor's debt in full, except following a petition by a creditor where the debtor is claiming that the debtor was not apparently insolvent at the date of sequestration, application must be made to AiB and not the sheriff. The changes also removed the option to obtain recall from the sheriff by giving sufficient security. Where appropriate, the final order is withheld until all funds have been distributed to creditors.
• Appointment, replacement and removal of trustee - the reforms introduced the ability for AiB to consider applications and make decisions on the appointment, replacement and removal of trustees with appropriate rights of review and subsequent appeal to the Sheriff Court where interested persons have an objection to the decision. These reforms include the replacement of trustees acting in more than one sequestration, replacing the previous requirement for a petition to be lodged at the Court of Session.
• Bankruptcy Restriction Orders (BROs) - the reforms removed the Bankruptcy Restrictions Undertaking (BRU) and AiB gained the authority to grant certain BROs spanning between 2 and 5 years, with existing court provisions retained for applications made for the award of a BRO for a period of 5 years or more. The provisions allow for a debtor to object to a BRO awarded by AiB by seeking an annulment and there are onward appeal rights to the Sheriff Court once AiB has reached a decision on the annulment application.
• Power to cure defects in procedure - changes were introduced to allow applications to AiB to cure certain defects that could only be remedied following an application to a sheriff under the previous provisions. The defects that fall into this category are limited to any clerical or incidental error in a document required by legislation or the waiver of a failure to comply with a specified timescale where there is no separate provision on how to deal with the failure.
• Decision Review process - the legislation introduced the ability for review of decisions taken by AiB with onward rights of appeal to the Sheriff Court. These review applications can be made subsequent to AiB decisions:
  • on the appointment of a trustee where an interim trustee has been in post.
  • not to award bankruptcy following a debtor application.
  • to discharge AiB in relation to acting as trustee in bankruptcy.
  • a decision on AiB's adjudication of creditor's claim in bankruptcy.
  • a decision to grant or refuse the discharge of a trustee.