Bankruptcy and debt advice review: consultation

5. Consultation

Statutory Moratorium on Diligence

The Moratorium on Diligence provides individuals struggling with debt with a period of breathing space within which creditors are prevented from instigating certain debt recovery procedures. The moratorium gives an individual six week protection from creditor enforcement action as soon as it is published on the Register of Insolvencies. Only one moratorium application is allowed in any 12 month period. An individual does not need to seek money advice to apply for this moratorium period and can apply themselves.

The moratorium is an extension of the previous intimation period under DAS where an individual was given this same breathing space prior to the formal application to join the scheme. The 2014 Act extended this to all insolvency and statutory debt management products administered by the Scottish Government.

Feedback received at 2018 AiB stakeholder sessions and other informal discussions suggests that many have welcomed the introduction of the moratorium. It has introduced a period of time to allow individuals struggling with debts to seek advice, establish their financial circumstances and seek advice as to the best solution and has been very useful. However, there has been some debate over the 6 week duration and whether this provides sufficient time to undertake all of the required information gathering and advice leading on to consideration of solutions.

This was discussed at stakeholder sessions and the views expressed have ranged from the six week period being sufficient to the recommendation it should be extended - with suggestions ranging from 8 weeks to 6 months. Relevant factors include the current pressures on the advice sector, specifically free to client advisers, which can result in appointment delays. Additionally, the evidence requirements necessitated by the Common Financial Tool could result in information being gathered over a period of time and this could impinge on the period of moratorium leaving clients exposed to creditor action. Alternative views have highlighted that a significant extension could increase misuse of the moratorium to delay rather than agree the solution, thereby preventing creditors pursuing legitimate recovery action. Money advisers have indicated that a more limited timescale would help encourage action and avoid the possibility that information already obtained as part of the advice process becoming outdated. It was noted that many creditors may automatically apply an eight week breathing space period for options to be considered where client representations have been made regarding inability to pay.

The moratorium provisions have been well received and utilised in Scotland. In recent months the UK Government has consulted on proposals for its Breathing Space and published proposals on how this mechanism will work in practice. Breathing Space will provide similar protection to the statutory moratorium. However, the proposed system includes some characteristics that can readily be included for consideration in in this consultation. On the period of protection, the UK Government has proposed 60 days which is 18 days longer than the current moratorium in Scotland. Access to Breathing Space will normally be facilitated through a money advice agency. Stakeholder feed-back in Scotland has suggested that the current access arrangements are working well and while many of those choosing to apply for a moratorium will do so with the support and guidance of a money adviser, the flexibility for the individual to apply should be retained. Similarly, Scottish stakeholders indicated that given the limited period of moratorium protection, there should be no requirement for a mid-way check to ensure that the individual has engaged with the advice process and is seeking a debt solution.

The Breathing Space proposals include some stronger protections for debtors than the existing moratorium arrangements. While the pause on creditor recovery and enforcement actions under both schemes are similar, the UK Government proposes that the Breathing Space will introduce a pause on additional interest, default fees and charges being levied by creditors during the protection period. The Scottish moratorium does not include this restriction and the consultation will seek views on equivalent protections being introduced for the moratorium.

The proposed arrangements for access to Breathing Space for those in mental health crisis have been discussed at Scottish Stakeholder events and the possibilities that may exists to introduce some alternative moratorium arrangements for those receiving mental health crisis care. The specific arrangements within Breathing Space that have been highlighted as useful additions to the current moratorium are:

• Access to a moratorium on the assessment of an Approved Mental Health Professional
• Removal of restriction to apply for one moratorium in 12 months where this is under the mental health crisis provisions
• Removal of a time limit for moratorium protections for those undergoing mental health crisis care - with continuing protections during the period of care

Q1. Do you consider the current six week period of protection afforded by the moratorium process to be sufficient?

Yes/No

Q1a. If you answered "no" to Q1 what do you consider the appropriate time for a moratorium in Scotland?

Less than 6 weeks
60 days
10 weeks
12 weeks
Other

Q1b. If you selected "less than 6 weeks" or "other" in Q1a how long do you think is appropriate and please explain the reasons why?

Answer:

Q2. Do you believe that interest, default fees and charges in respect of debts at the time of the moratorium application should be frozen during the moratorium period?

Yes/No

Q2a. Please provide a reason for your answer to Q2?

Answer:

Q3. Do you believe the Scottish Government should explore further provisions in the moratorium, similar to those in the UK Breathing Space scheme, which have a reserved competency?

Yes/No

Q3a. If you answered "yes" to Q3 which of the following areas should the Scottish Government explore?

Stopping creditor enforcement action (excluding a commenced earnings arrestment) during the moratorium period.
Preventing creditors from contacting debtors in relation to repayment of a debt during the moratorium period.
Preventing deductions from benefits during the moratorium period.
Preventing the forced installation of pre-payment meters, or the disconnecting of fuel supplies during the moratorium period.
Preventing the eviction of debtors for unpaid debts under section 19 of the Housing (Scotland) Act 1988 during the moratorium period.
All of the above.

Q4. Do you believe that the Scottish Government should consider further separate provisions in the moratorium, similar to those in the UK Breathing Space scheme, for those receiving mental health crisis care?

Yes/No

Q4a. If you answered "yes" to Q4, which of the following principals for those receiving mental health crisis care should be given consideration?

The removal of the restrictions on accessing the moratorium once within a 12 month period.
The period of moratorium protection being extended.
Both of the above options.

Q4b. If you ticked the box for extending the period of protection how long should the period of protection last?

Duration of mental health crisis care
Other

Q4c. If you answered "other" to Q4b what period of protection should apply?

Answer:

Common Financial Tool (CFT)

The CFT was introduced by the 2014 Act, supported by the Bankruptcy (Scotland) Regulations 2014. The intention of the CFT was to ensure greater consistency and transparency in relation to any determination of the contribution level a debtor might pay in respect of Scottish statutory debt solutions.

The 2014 Act made the use of the CFT mandatory in respect of all statutory debt relief and debt management solutions in Scotland. The tool is used for the assessment of an individual's income and expenditure, thereby determining the surplus income available for the DCO in bankruptcy, DPP under DAS or contribution in a PTD.

Part of the consultation conducted prior to the drafting of the 2014 Act sought views on the concept of the CFT and the preferred tool to be adopted. The majority of respondents indicated support for the introduction of the CFT and the adoption of the CFS, the tool operated by the Money Advice Trust and used by advisers through a licensing arrangement as the prescribed CFT.

In the main, feedback from AiB's stakeholder events has reflected that the introduction of a consistent approach to the calculation of contributions has been a positive development. It is recognised that these reforms have brought forward much of the work that was previously undertaken post award by the trustee in bankruptcy and that full details of an individual's circumstances must be obtained in order for appropriate advice to be provided. The general view is that the greater transparency and certainty afforded to the individual provides for advantages over the previous arrangements. Some of the concerns raised during these sessions have centred on the operational processes adopted by AiB about evidence requirements along with the approach to verifying essential expenditure and expenditure trigger figure breaches. While it is acknowledged that there does need to be sufficient information available to support the assessments provided, a commonly expressed view was that the approach taken has created onerous requirements for advisers and those anxious to secure access to statutory debt solutions.

During late 2017 and 2018, AiB issued a public consultation on the future of the CFT. In particular, this consultation sought views on future developments taking account of the development and inception of the SFS - a new tool operated by the Money and Pensions Service under the auspices of the SFS Governance Group - and planned to replace the CFS as the UK's foremost mechanism for determining income and expenditure for debt solutions. The Money Advice Trust had confirmed that they did not intend on continuing to routinely operate the CFS with effect from April 2020.

Draft Regulations brought forward following the consultation proposed the SFS replacing the CFS as the adopted CFT. The initial regulations were withdrawn to allow a longer implementation period between the laying of the regulations and their coming into force - this acknowledged feedback from stakeholders concerning the IT and training requirements that would need to be put in place. Revised Regulations were laid in September 2018. A number of concerns about the switch to the SFS were raised during the Parliamentary scrutiny of the Regulations. The Scottish Government therefore agreed that the CFS should continue for a further year while more in- depth analysis is undertaken comparing the CFS to the SFS. The expenditure guidelines for both the CFS and SFS have been uprated with effect from April 2019 and further statistical analysis showing comparative data is set out at Section 6, Chart 3.

AiB's operational procedures for the CFT and the guidance which supports these has been the focus of attention during 2018/19 and recent CFT working group meetings have aimed to address some of the concerns highlighted over onerous evidence requirements highlighted above. This consultation seeks to explore issues around the CFT and views on the most appropriate model to adopt. On the basis that a common methodology is still supported as the best way to achieve consistent outcomes for debtors, the options would involve the SFS, continuation of the CFS with arrangements put in place to continue its operation or an alternative model. Choosing an alternative model would require more detailed consideration and further consultation on its effect and impact including an assessment of its compatibility with existing primary legislation.

Q5. Do you think the provision of a CFT to provide a consistent approach to the assessment of contributions remains an appropriate feature within insolvency legislation?

Yes/No.

Q5a. If you answered "no" to Q5, what approach should be adopted to assess the contributions in statutory debt solutions?

Answer:

Q5b. If you have answered "yes" to Q5, should the CFT be an income and expenditure tool designed to assess individual circumstances?

Yes/No.

Q5c. If you answered "yes" to Q5b, which tool should be adopted as the CFT?

CFS
SFS
Other (Please explain below)
Answer:

Q5d. If you answered "no" to Q5b, what model should be adopted to assess the contributions in statutory debt solutions?

Answer:

Debtor Contribution Order (DCO)

The 2014 Act replaced the Income Payment Agreement and Income Payment Order with the DCO. The DCO is the formal document that confirms the contribution level a debtor should pay in their bankruptcy. The Accountant in Bankruptcy must fix a DCO in every case - including bankruptcies awarded following a debtor application and creditor petition to the court. The Common Financial Tool must be used to set the contribution in the DCO. A DCO is fixed in each bankruptcy, even if this has a nil value, with legislation providing for variation and the quashing of a DCO on a change of circumstances or where this action is appropriate. In debtor application cases, the DCO is fixed at the same time as the award of bankruptcy. In a creditor petition case, the trustee should submit their contribution proposal within 6 weeks of the award date and the AiB will make the DCO shortly after receipt of the contribution proposal.

At the stakeholder sessions, the operation of the DCO process was discussed and the general view from the money advice sector was that in debtor application cases, the switch to fixing a contribution at the award stage was a seen as a positive development that provided certainty and transparency for the client. Some concerns related to the onerous evidence requirements described under the CFT section of this consultation. Additionally, insolvency professionals highlighted issues associated with the statutory 6-week timescale to submit DCO proposals to AiB in creditor petition appointments. This was problematic - particularly in cases where there were challenges in making contact with bankrupt individuals. Consequently, the Scottish Government is keen to establish views on the DCO process as it relates to creditor petition awarded bankruptcy. AiB is also considering options for additional guidance to introduce some greater flexibility for trustees in making DCO proposals where they have been unable to establish all information due to the debtor not co-operating. This revised guidance has provided for DCO proposals to be submitted to AiB using all of the information that has been obtained - with the option to re-assess the circumstances where the debtor's co-operation has been obtained.

Q6. Do you believe 6 weeks is sufficient period of time for a trustee to submit a DCO proposal to AiB in a creditor petition bankruptcy?

Yes/No

Q6a. If you answered "no" to Q6 what would be a sufficient timescale?

8 weeks
10 weeks
12 weeks
No time limit (with requirement to report progress at regular intervals)
Other

Q6b. If you answered "other", what would be a sufficient timescale?

Answer:

Minimal Asset Process (MAP) Bankruptcy

MAP access to bankruptcy was introduced to provide a simplified and lower cost route into bankruptcy for people with unsustainable debt, few assets and no available surplus income to make a contribution. The process provides a list of qualifying conditions for an individual to be able to apply including, minimum and maximum debt threshold and financial limits applied on the value of assets owned. It also comes with a lower application fee of £90 compared to a full administration bankruptcy and the individual will normally be discharged after six months. Applications for MAP bankruptcy can only be made once in every 10 years. MAP bankruptcy replaced the previous Low Income Low Asset (LILA) bankruptcy and included some key differences. In particular, the entry criteria for MAP bankruptcy is designed to take account of specific household circumstances in assessing whether a contribution can be made - the LILA criteria applied an income limit based on the national minimum wage but did not take account of the expenditure and other circumstances of the household.

The general consensus of stakeholder feedback is that MAP is a welcome development and an improvement on the previous LILA process due to increased flexibility and lower application fee. However, it has been highlighted that the process could be improved in certain areas. The maximum and minimum debt levels were considered to be already outdated and stakeholders have questioned the inclusion of student loans in the calculation of the maximum debt levels given that these normally survive bankruptcy and come with their own arrangements for repayment based on salary threshold.

Maximum and minimum debt:

The minimum debt level for MAP entry is currently fixed at £1,500 and the question has been raised to whether this it still appropriate or if it is now too low. The minimum debt level of £1,500 was fixed on the introduction of the Bankruptcy (Scotland) Act 1985 for all bankruptcies - subsequently the minimum level was increased to £3,000 for creditor petitions and full administration bankruptcy debtor applications. Bankruptcy is the last resort for someone in financial difficulty so the question is whether it is now reasonable for someone with debts at this level to enter insolvency. The level is lower than the amount fixed for creditor petition and full administration bankruptcy (currently £3,000) or for a PTD (currently £5,000). Consequently, this consultation seeks your views on whether the minimum debt allowed in a MAP should be altered. It also seeks views on the current debt threshold for full administration and creditor petition bankruptcy which has been in force since 1 April 2008. The statistical data on the debt levels of MAP cases for each year since 2015 is presented in Section 6: Table 1.

Q7. Do you believe that the minimum debt allowed for MAP application should be increased?

Yes/No

Q7a. If you answered "yes" to Q7, what level should it be increased to?

£2,000
£2,500
£3,000
Other

Q7b. If you answered "other" to Q7a please specify the amount

Answer:

Q7c. Should the debt threshold for creditor petition or full administration debtor application bankruptcy be increased (currently £3,000)?

Yes/No

Q7d. If you answered "yes" to Q7c, what level should it be increased to?

Answer:
Creditor Petition Debt Level:
Full Administration Debtor Application Debt Level:

Stakeholders have raised questions about the maximum debt ceiling allowed to enable access to bankruptcy through MAP. This ceiling was set at introduction in 2015 at £17,000 and the consultation seeks views on whether this ceiling is still appropriate. It has been highlighted that the nearest equivalent process operating in England and Wales (Debt Relief Orders) has a maximum debt ceiling of £20,000 (increased from £17,000 in October 2015) and stakeholders have highlighted that it may be more appropriate to at least match this level. This consultation seeks your views on whether the maximum debt threshold in MAP debt threshold should be increased and if so at what level it should be fixed. Some stakeholders have questioned whether the ceiling should be removed. It is generally accepted that cases with a high level of debt require the more comprehensive investigation provided by a full administration bankruptcy.

Q8. Do you think that there should still be a maximum debt threshold in a MAP application?

Yes/No

Q8a. If you answered "yes" to Q8, at what level should the debt ceiling be set?

£17,000
£20,000
£25,000
Other

If you answer "no" to Q8 please explain why?

Answer:

Q8b If you answered "other" to Q8a what amount do you think it should be increased to?

Answer:

Student loans included in the calculation for maximum debt:

As highlighted above, student loans are not normally discharged in bankruptcy but are taken into account in calculating the maximum debt threshold level in MAP. At the 2018 stakeholder events, some stakeholders have questioned this as potentially unfair as the inclusion of a student loan debt may ultimately lead to ineligibility for MAP. This consultation seeks your views on whether a student loan debt should be taken into account in calculating the total debt owed by an individual when it comes to the maximum debt criteria in MAP.

Q9. Do you think student loan debt, that is not discharged in bankruptcy, should be excluded from the maximum debt criteria in MAP?

Yes/No

Q9a. If you answered "no" to Q9 please explain why?

Answer:

MAP Bankruptcy - Maximum Asset Threshold:

The MAP bankruptcy eligibility criteria includes limits on the assets held on the date of the application. The legislation prescribes that the total value of assets (leaving out of account any liabilities) must not exceed £2,000 with a further condition that no single asset has a value exceeding £1,000. Stakeholders have highlighted that these levels should be revised and this consultation seeks views on whether the current arrangements remain fit for purpose.

Q10. Do you think the total asset and individual asset limits should be increased?

Yes/No

Q10a. If you have answered "yes" to Q10, what limit should be applied?

Combined Assets

£3,000
£4,000
Other

Individual Asset

£2,000
£3,000
Other

Q10b. If you answered "other" to either part of Q10a what amount do you think the combined and individual asset limits should be increased to?

Answer:

Financial Education

The introduction of mandatory advice and targeted referral for financial education was introduced as part of the 2015 reform package. Financial education modules have been developed by Money Advice Scotland which are available both on-line and in paper form. The 2014 Act set out the criteria determining who would be required to complete the modules and further regulations defined the process and specified that the individual would require to complete the modules, if requested to, prior to receiving discharge from bankruptcy.

The modules cover the following topics:

• Budgeting and Financial Planning
• Saving
• Borrowing
• Insurances
• Understanding Tax
• Financial Life Stages (Setting up Home, Having a Baby and Redundancy)

The modules are available here: https://www.scotlandsfinancialhealthservice.gov.uk/financial-education

Stakeholder feedback obtained has highlighted that pre-bankruptcy advice is a welcome and important part of the process and that, in general, financial education referral was a useful mechanism in certain circumstances in helping to reduce the incidence of repeat bankruptcy. However, some concerns have been raised to how meaningful the content of the programmes is and whether they fulfil the initial policy intention of increasing financial and budgeting capability. A key intention of the modules is that they should create the opportunity for meaningful discussions between money adviser and client, especially where the client is willing to engage - helping build the skills to avoid falling back into unsustainable debt. International experience is that more demanding compulsory "debtor counselling" can lead to those unwilling to engage just going through the motions. Such intensive interventions are also hugely expensive. There was general consensus at the stakeholder discussions that it could be seen as too early to gain the level of user feedback and evaluation on which to propose changes to policy. However, AiB seeks your views on the current programme and the content of the modules based on current experience with clients.

Q11. Do you believe that the current content of the financial education modules is sufficient to meet the policy intention of promoting financial capability?

Yes/No

Q11a. If you answered "no" to Q11 what improvements would you suggest?

Answer:

Discharge of Child Maintenance Debts

The Scottish Government published a Consultation on Bankruptcy Law Reform in 2012, the results of which laid the foundations for the introduction of the 2014 Act. This consultation sought views on the treatment of child maintenance debts in Scottish bankruptcy. In Scotland, any obligation to pay child support maintenance within the meaning of the Child Support Act 1991 which remained unpaid in respect of any period before the date of bankruptcy can be included as a claim in the bankruptcy. However, any sums outstanding will be discharged on the conclusion of bankruptcy proceedings. This differs from the bankruptcy process in England and Wales where arrears of child support maintenance survive the discharge of bankruptcy with the debtor still liable for repayment. The 2012 consultation, in particular, picked up on concerns expressed by the then Child Maintenance and Enforcement Commission that children in Scotland were potentially disadvantaged. The consultation sought views on whether the existing provisions in Scottish legislation should subsist. Some respondents to the consultation thought it was important for the rehabilitation of the bankrupt individual to have a fresh start, allowing them to begin the process of paying again. They also believed in most cases it was highly improbable that the individual could afford to repay any undischarged arrears. As a result, there would be no beneficiaries to changing the current position. The majority view was that the position should remain unchanged and this is reflected in current legislation.

This issue is not straightforward and it is clear from stakeholder discussions and representations to Scottish Ministers that there are differing and strongly held views. Consequently, the matter has been included in this consultation for further consideration. Liabilities which are not currently discharged by bankruptcy in Scotland can be found in section 145 of the Bankruptcy (Scotland) Act 2016. The section of this act can be found at: http://www.legislation.gov.uk/asp/2016/21/section/145.

Q12. Should the remaining balance of any outstanding child maintenance arrears be discharged following the conclusion of bankruptcy and protected trust deed procedures in Scotland?

Yes/No

Q12a. Please explain the reason for your response at Q12.

Answer:

Prescribed Rate of Interest on Dividends in Bankruptcy

Bankruptcy legislation prescribes the interest rate that may be payable to creditors on the conclusion of proceedings in the event that sufficient estate remains following payment of relevant expenses and the full settlement of preferred and ordinary debts. In these circumstances interest is payable from the date of bankruptcy to the date of payment of the debt. The rate of interest applied is prescribed in regulations and at the present time is whichever is the greater of 8% and the rate applicable to the debt apart from the bankruptcy (i.e. the commercial rate of interest). The prescribed rate of interest has generated much discussion in recent years and a commitment was made to the Scottish Parliament to include this issue in the first available consultation on bankruptcy related matters. The concerns raised highlight that the 8% rate is unrealistic, given the low rates of interest that have prevailed since 2009. As with other judicial rates, it is seen as appropriate that there is some element of penalty to reflect the fact that there has been a default on debt and that creditors have often had to wait several years for any funds to be paid. However, the Bank of England (BoE) Rate has remained at 0.5% for the bulk of this period, dropping to 0.25% between August 2016 and October 2017 before rising to its current level of 0.75% in August 2018. Against this back-drop, the 8% interest rate has been viewed as unjust and in need of review. In terms of case volumes, figures for 2018-19 highlight that of the total number of bankruptcies concluded (5,615), a dividend to ordinary creditors was paid in 18.9% of cases, with statutory interest paid following full dividend in 18.4% of these cases. This means that statutory interest has been paid to creditors in approximately 3.5% of the total bankruptcy completions.

The consultation seeks your views on the rate of interest that should apply.

On a related but more general point, civil litigation frequently ends with the court ordering one party to pay money to another. This money is usually a debt, an award of damages or the legal costs of the litigation. If the money is not paid on time interest will be added. In Scotland, if no rate of interest has been specified by the parties and if there is no other statutory provision to set a rate of interest the Scottish Courts (Court of Session and Sheriff Courts) usually apply the 'judicial rate of interest' set for post-decree interest. In Scotland the judicial rate of interest is set by Rule 7.7 of the Rules of the Court of Session 1984 No 1443. In the Sheriff Courts the rate is prescribed by section 9 of the Sheriff Courts (Scotland) Extracts Act 1892 and may be amended by Act of Sederunt. The Lord President has the ability to change the level that the rate is set at, usually following a request to do so by the Scottish Ministers. Similarly this currently stands at 8%. In 1993, when the judgment rate was last amended across the UK to 8%, it was set at a level just over 2% above the base rate. As with the prescribed rate of interest on dividends in bankruptcy the differential is now substantially higher than has previously been experienced.

Q13. Do you consider that the currently prescribed 8% rate of interest for dividends in bankruptcy is appropriate?

Yes/No

Q13a. If you have answered "no" to Q13, what interest rate do you think should be applied?

BoE Rate
BoE Rate + 1%
BoE Rate + 2%
Other

Q13b. If you have answered "other" to Q13a, what alternative option would you suggest?

Answer:

Q14. Do you consider that the currently prescribed 8% judicial rate of interest remains appropriate?

Yes/No

Q14a. If you have answered "no" to Q14, what interest rate do you think should be applied?

BoE Rate
BoE Rate + 1%
BoE Rate + 2%
Other

Q14b. If you have answered "other" to Q14a, what alternative option would you suggest?

Answer:

Other Issues

Please feel free to include below any other matters that should be considered as part of this policy review.