Bankruptcy Policies Unravelling
Fergus Ewing has acknowledged that he got his decision to increase the application fee for bankruptcy wrong. Speaking in response to the third quarter insolvency statistics for 2013-14, he has said “Scotland’s bankruptcy legislation has to do more to provide a safety net for vulnerable, low-income debtors and their families.”
However, despite this, with the new Bankruptcy and Debt Advice (Scotland) Bill 2013, lessons are still not being learned.
Fergus Ewing, Accountant in Bankruptcy, Bankruptcy and Debt Advice (Scotland) Bill 2013, Debt, Bankruptcy, Protected Trust Deeds, Sequestration
For the fourth quarter in a row, Low Income, Low Asset bankruptcies (LILA) in Scotland have increased as an overall percentage of all bankruptcies, now representing 39.6% of all bankruptcy awards in Scotland.
The increase, reported in the Accountant in Bankruptcy’s (AIB) third quarter insolvency statistics for 2013-14, show that LILA bankruptcies as a total percentage of all sequestrations are now returning to their pre-first quarter levels for 2012-13, when the application fee was increased by 100% from £100 to £200, which reduced LILA awards by 60%.
However, although as a proportion of all bankruptcies the numbers of LILA awards continue to increase, LILA numbers themselves remain significantly reduced from their pre-fee increase levels, with many organisations such as Citizen Advice Scotland and Money Advice Scotland, claiming many debtors are still being priced out of any formal remedy for dealing with their debts.
In acknowledgement that they got it wrong, the Scottish Government in the Bankruptcy and Debt Advice (Scotland) Bill 2013 are now proposing a new Minimum Asset Procedure (MAP) to replace the LILA route into bankruptcy.
This new type of bankruptcy it is anticipated will reduce fees to £100 or less, but it is anticipated will only be available to 75% of all current LILA applicants with debtors only being able to apply if they have debts of less than £17,000, whereas under the current LILA route, there is no debt level cap.
For those debtors unable to apply using the new route, they will have to apply for normal bankruptcy and pay the full application fee, which is likely to be significantly more.
Although it is to be welcomed that the Scottish Government are now beginning to accept that for most bankrupts the purpose of bankruptcy legislation is to provide a social safety net, with more than eighty percent of all applications being debtor applications, and more than three quarters being unable to make a contribution from their income to their bankruptcy, more needs to be done.
This includes looking again at their decision in the new bill to increase contribution periods from 36 to 48 months against overwhelming evidence from debt charity NGOs, regulatory professional bodies and even creditor organisations that such a policy is wrong. They also need to reconsider their decision to replace the Low Income, Low Asset route into bankruptcy with a more restrictive type of bankruptcy which will exclude rather than include more debtors.
They also need to ask themselves, although it is commendable that they have accepted in sequestration and protected trust deeds it is wrong (and illegal) for debtors to make contributions from social security benefits, why is it correct for those debtors to have to use those same social security benefits to apply for bankruptcy, when prior to 2008 (and the SNP minority Government) they would have been covered by a fee waiver.
Debt Arrangement Scheme
The other revealing figures from the third quarter statistics relate to the Scottish Debt Arrangement Scheme.
Although still very much the little brother of all Scotland’s formal statutory debt remedies (representing 26.1% of all remedies used), the Scottish Government have wrongly reported in their press statements that applications have increase by 20.9% on the same period last year.
The actual increase is only 10.7% (applications 3rd quarter 2012-13: 1,067; applications 3rdquarter 2013-14: 1,181).
On the last quarter, the increase is less than 1%, confirming the view of many that, allowing for occasional seasonal variations, take up of the Scheme has now plateaued.
What is increasingly of concern, however, is the number of Schemes being revoked. Although the Minister has claimed only 3% of Debt Payment Programmes under administration are being revoked quarterly, some research by others in the insolvency industry suggests this amounts to 13.9% per annum and the cumulative effect of which will mean over 50% of all average length programmes (6.8 years) will fail.
Evidence of this can be seen in the figures for 2013-14, which show although 3,551 programmes were approved by the end of the third quarter, 1,064 have been revoked.
There are clearly a significant number of debtors entering the Debt Arrangement Scheme for whom the Scheme is not suitable and for whom it is failing to provide a sustainable, lasting solution.
There was always a danger with the Debt Arrangement Scheme that it would be seen, for political reasons, as a panacea for all debtor’s debt problems, but it has never been more than just another tool in the toolbox: suitable for some, but not others.
As the fee increase for bankruptcy has shown, policy decisions in this area without supporting evidence from those at the coal face or other empirical evidence risks unintended consequences. The danger now is we will see more of those unintended consequences if the Scottish Government continues with its policy of trying to make bankrupts pay more in sequestration, whilst hailing the Debt Arrangement Scheme as a one size fits all solution for all debtors, whilst failing to research why, for so many debtors, it continues to fail to provide solutions for their problems.