Increased protection for home owners required under DAS

By Alan McIntosh

Despite our #Repo2012  conferences being a huge success with over 150 attending, I have to make a confession.  On reflection, I think we missed an opportunity: an opportunity to discuss the thorny issue of the Debt Arrangement Scheme (DAS) and secured debts.

I am not going to beat myself up over it: there was only so much possible within the time available and when you are trying to accommodate a variety of issues and perspectives, something has to give.

However, picking it up now, I would argue addressing this issue is long overdue and would argue there is now a powerful case for the DAS being strengthened to provide more protection for home owners who have arrears on secured debts.

It has always been a feature of the DAS Regulations that the definition of debt in regulation 3 included arrears on secured debts and therefore, logically, these can be included into programmes.  This regulation has gone unchanged since 2004, when the original regulations were introduced and essentially was duplicated in the 2011 regulations.

However, the inclusion of such debts into programmes has never become established good practice and, as an aside, if anything, supports the argument that not all debts have to be included into a programme.

The main problem is neither the Debt Arrangement and Attachment (Scotland) Act 2002 or the Debt Arrangement Scheme (Scotland) Regulations 2011 prevent the holder of a standard security calling up a debt under S19(1) of the Conveyancing and Feudal Reform (Scotland ) Act 1970.

Therefore, if a debtor enters a programme and includes the arrears from a secured debt into the programme, the programme may be approved, either with the lenders consent (implied or expressed) or the DAS Administrator’s determination that it is fair and reasonable. The lender, however, is then at liberty to call up the debt, meaning the full amount becomes due.

Whether a lender doing this would be in compliance with other regulatory requirements is debateable. In relation to first charges they should comply with chapter 13 of the Financial Service Authority’s Mortgage Code of Business Handbook, which under paragraph 13.3.2A (6) requires them to not repossess a property unless all other reasonable attempts to resolve the position have failed; and in relation to second charges regulated by the Consumer Credit Act 1974, similar guidance is provided in paragraph 6.3 of the OFT’s Guidance for Second Charge Lenders.

The problem, however, is if a calling up notice is served the whole debt can becomes due and a variation of the programme may then become necessary meaning a programme that was previously deemed to be fair and reasonable, as it could be repaid in 6-7 years, could become unreasonable once a calling up notice is served if it would then take 15-20 years.

Also if a lender does call up a debt, either before or after a debt payment programme is established, the question needs to be asked whether it’s reasonable for a lender then to raise an action to obtain a warrant to exercise their rights under the standard security under S24(1B) of the Conveyancing and Feudal Reform (Scotland) Act 1970.

 Section 24(1C) requires them to satisfy the pre-action requirements and S24A (4) (a) states that the creditor must not make an application under S24 (1B) where a debtor is taking steps which are likely to result in the payment to the creditor within a reasonable time any arrears, or the whole amount, due to the creditor under the standard security.

 The problem is it is not clear what the effect an approved debt payment programme has on the rights of secured creditors. The DAS Administrator may find such a programme is fair and reasonable, but there is no guarantee that the Financial Service Ombudsman or the Office of Fair Trading will agree, or even a sheriff in deciding if the pre action requirements have been satisfied under S24(1C) under the 1970 Act.

 However, this problem is not insurmountable. It has been clear from the outset the Debt Arrangement Scheme was aimed at tackling the problem of multiple debts and creditors competing for a debtors’ attention or money. It is already well accepted that in order to provide debtors with a manageable solution to such problems the rights of the creditors to enforce or recover debts may be restricted, even where they have legally constituted debts.

 In principle there is no reason to argue that the rights of a secured creditor should not equally be restricted, particularly if the DAS Administrator was legally required to have regard to leading case law on what is reasonable for repaying secured debt arrears and the guidance that is provided by the Financial Service Authority and the Office of Fair Trading.

 There is no reason to believe legally that such amendments would prove too difficult either. Currently, S7(1)(c) of the Debt Arrangement and Attachment (Scotland) Act 2002 allows the Scottish Government to make regulations as to the effect the approval of a debt payment programme has, so arguable the provisions already exist which would allow them to make regulations that would prevent a calling up notice being served for arrears; also the existing Pre Action Requirement Order (Scotland) 2010 could be amended to prevent creditors raising an action where a debt payment programme has been approved.

 Is it so unreasonable to argue that where a decision is made that a programme is fair and reasonable that those creditors should have their rights restricted, possibly preventing them from serving a calling up notice or raising an action to obtain a warrant to exercise their rights under any security? Arguably secured creditors would not have their rights restricted any more than they currently are under FSA and OFT guidance and under the current pre-action requirements.

 However, greater clarity would be provided to advisers and home owners as to the effect including arrears on secured debts into debt payment programmes would have and arguably unnecessary expensive legal and court proceedings could be avoided.

The Debtors Imprisonment (Scotland) Act 2012

 By Alan McIntosh   

The decision of the Office of Fair Trading (OFT) to censure Wonga for aggressive and misleading debt collection practices is long overdue.

It was found in January 2010 to be using tactics of accusing customers of fraud and threatening to report them to the police. This was even when the customer had entered into debt management plans because of financial hardship.

But not wanting to disappoint, Wonga has decided to appeal the decision as the incidents were historic and didn’t occur after January 2010.

So there you have it, the proverbial dummy has been spat out and the OFT are not playing fair!

Since the practices were never denied, however,  you would have hoped Wonga would just have held up their hands and taken their punishment,  but what do you expect from a company that has no shame in charging over 4,000% APR on short term loans?

These shabby practices, however, don’t surprise me.  The level of compliance amongst some of the UK’s debt recovery firms is truly shocking. It’s not exactly a rogue’s gallery, but sometimes it feels like that.

My all time favourite would have to include the large credit card company who claimed Scots Law didn’t apply to them as their parent company was American; or the border raiders who come up from England, equipped with black leather jackets and bovver boots and forcibly try and steal sorry repossess cars, despite only officers of the court having such powers in Scotland; or the debt recovery agent who told me my client would be jailed under The Debtors  Imprisonment (Scotland) Act, which I never did find, but that was okay as I was able to inform him it had been repealed by the You’re Talking Rubbish (Scotland) Act.

But putting such extreme and entertaining examples aside, there are far more worrying practices being used widely by pay day lenders that are of more concern.  Take for example the Continuing Payment Authorities that they make their customer grant when they take out a loan. Perfectly legal, these allow the bank accounts of  borrowers to be accessed as if they are making a switch payment, with funds taken out when they are due. They are not direct debits or standing orders and are significantly more difficult to stop: which is of course the point.

Many customers have to “lose” their banks cards when they realise they cannot afford to make the payment, in order to be issued with a new card and a new three digit security number. Even many of the banks are telling customers that is what they must do as they are powerless to help.

But this is untrue. These types of agreements are governed by the Payment Service Regulations 2009 and Regulation 55 makes it quite clear that the consumer can cancel these agreements whenever they want with their bank. This is reinforced by the Financial Services Authority, which in their leaflet Bank Accounts: Know Your Rights, states:

In most cases, regular payments can be cancelled by telling the company taking the payments. However, you have the right to cancel them directly with your bank or card issuer by telling it that you have stopped permission for the payments. Your bank or card issuer must then stop them – it has no right to insist that you agree this first with the company taking the payments.

I have already drafted two template letters that a consumer can send to their lender and bank, where they need to stop such payments because of financial hardship and hopefully if more advisers like me start using them we will see an improvement in practice by both lenders and banks.

It is easy to believe sometimes that its futile doing anything and that nothing will change, but that isn’t the case. The bank charges campaign and the PPI mis-selling campaign have shown consumers can make a difference and consumer power, when informed and organised can stop even the worst of practices.

That failing, we could always resort to the We Will Name and Shame You (Scotland) Act.

If any advisers would like a copy of the draft letters, please do not hesitate to contact me at alanmcintosh@carringtondean.com.

…AND JESUS WEPT!

 By Alan McIntosh

The Accountant in Bankruptcy has laid before the Scottish Parliament The Bankruptcy Fees Etc (Scotland) Regulations 2012.

These regulations will double the cost of a debtor’s application for bankruptcy from the 1^st of June 2012 by 100% from £100 to £200.

This is the first indication the Scottish Government are intent on making the poorest pay more to obtain relief from their debts, which I warned of recently in  my article in the Scottish Law Journal The Firm.

With approximately 42% of all bankruptcies being low income low asset applications (LILA) and many living on as little as £56.25 per week, this will mean up to 4 weeks income.

That’s four weeks where the money received is required to buy food, toiletries and pay heating bills.

What’s worse the Accountant in Bankruptcy have justified the price hike by making a comparison with the cost of bankruptcy applications in the rest of the UK, where the total cost is £700.

This fails to highlight, however, the fact the equivalent of a LILA application in England and Wales is a Debt Relief Order and is only £90.

So Scotland’s poorest will now pay double what debtor’s in the rest of the UK do.

They ominously justify the change with reference to the rising unit cost of administering a bankruptcy, due to reducing numbers of applications each year.

With many less now able to apply, the numbers will continue to fall and the costs will rise, meaning coupled with the swingeing cuts to the AIB’s funding, future hikes in prices will be inevitable.

In the sterile, statistic filled language of the AIB, what is missing is the human impact of these changes.

Bankruptcy is now primarily a debt relief remedy for some of Scotland’s poorest, providing them with protection from daily harassment and incessant demands from creditors to borrow more to pay off debts.

The AIB fees will now mean access to relief will  be denied to many and more will turn to illegal money lenders and pay day loan companies to manage their debts.

The Scottish Government’s policy is not only reckless and uncompassionate; it’s incredibly harsh. It will force many into worse poverty.

The Regulations were laid before Parliament on the 20^th of April and are subject to negative procedure.

This means unless another member of the Scottish Parliament makes a motion that they be annulled, they will be implemented.

I will not only be lobbying for a MSP to make such a motion but I am urging Citizen Advice Scotland and Money Advice Scotland to do the same.

Recently, Money Advice Scotland issued a statement in response to another article I wrote for The Firm. In which they stated their funding from the AIB “has not and will not constrain …[them]…from challenging government…”.

I was encouraged to hear this and hope they and Citizen Advice Scotland can unite to lead the sector and ensure wisdom prevails...before we all weep!

Brighthouse: Will There Ever Be A Bright Future For Their Customers?

  By Alan McIntosh

Having recently read an article written by Richard Dyson of the Financial Mail on Sunday, which exposed the true extent of the rip off being perpetrated by Brighthouse, I have to say I am pretty gobsmacked.

I didn’t believe it was possible after dealing with them for years as an adviser in Paisley.

It wasn't unusual back then to hear the tragic stories of children’s TVs being repossessed within a month of Christmas, after hard up parents had desperately tried to ensure their kids weren’t left out.

Even more tragic were the stories of children's beds, taken out on hire purchase, being repossessed.

It’s a sad thing about people who live in poverty; often essential items are obtained using hire purchase.

The effect is the consumer doesn't own the goods until all payments are made and they can even be left with a debt when the goods are repossessed.

That's why, if possible, it’s best to buy such goods outright and judging from what Mr Dyson found, consumers who do are likely to save a lot of money.

In his investigation, he found Brighthouse used unique, non industry codes to make price comparison impossible and priced some electrical goods by more than a third more than other retailers.

He also found product insurance was often mis-sold when customers had their own contents insurance.

So What Can Consumers Do?

If they cannot afford to buy the goods outright and are on benefits,  they may get a community care grant (which doesn't need to be repaid) or a budgeting or crisis loan, which are interest free.

Alternatively they may get a credit union loan, where the interest is rarely more than 11-12%, compared to the normal 30% APR that Brighthouse charge.

The benefit of buying essential goods outright is even if you struggle to repay the loan, the goods belong to you.

Many essential items like TVs, beds, tables and computers are protected from diligence in Scots Law so even sheriff officers can’t take them. So the children's beds are safe as well as other items like cookers and fridges.

It may also be the mis-selling of insurance is also challengeable.

And goods in Scotland can never be repossessed without agreement or a court order.  If they are it may be possible to get all payments made under the agreement refunded and where someone tries to enter a home without a court order, the police can be called.

So as depressing as Mr Dyson’s article is, it is also inspiring.

Reading about the extent of the rip off is a strong driving force making me want to make sure more get good advice. Maybe that will make sure their future is bright.  

Credit Unions: A Special Case?

  By Alan McIntosh

One of the most controversial issues in the Scottish Government’s consultation on bankruptcy law reform is the issue of extending the type of debts that should be excluded from bankruptcies and protected trust deeds.

Two specific examples are suggested: debts owed to credit unions and child maintenance arrears.

The problem with excluding debts, however, is it dilutes the protections that personal insolvency offers and can be a slippery slope.

However, is there a case for extending the list?

Child Maintenance Arrears

There are clearly strongly moral reasons why child maintenance arrears should be excluded: others may suffer as a result and there are possibly few more deserving cases than innocent children who are the dependents of their parents.

However, life is rarely simple and often child maintenance isn’t paid because estranged parents are raising other families or relationships have broken down to the extent that access to children is being denied and maintenance is not paid.

Also it doesn’t take long for arrears to accrue to the extent where they cannot be repaid.

There is also no evidence from England, where they are excluded, to suggest giving them special status improves recovery rates.

It is also has to be borne in mind that other children in new families can also suffer where there are no effective methods of relief.

Credit Unions

In relation to Credit Unions, however, there may be a stronger case for special treatment. Other than a few large industrial and city wide credit unions, the vast majority of these organisations are small and particularly vulnerable to debts owed to them being included in insolvencies.

Few debtors will actually become personally insolvent because of a credit union debt and the amounts loaned are normally small. In actual fact, many debtors may prefer not to include credit union debts, feeling a strong responsibility to the other members, who may be neighbours or work colleagues.

Another reason for credit unions to be given special treatment is that, unlike other creditors, they are restricted in how much interest they can charge (which is effectively limited to 2% per month, although in reality most charge 1%). They are, therefore, restricted in what they can do, unlike other consumer creditors, who can just increase interest rates when they suffer significant losses due to insolvencies.

For example, if a Credit union suffers a bad debt of £7,000 they would have to lend £350,000 at 2% within a year to recover the loss.  For many small community and workplace based credit unions this is just not feasible.

However, other involuntary creditors, such as HMRC or local authorities can make similar arguments, especially when they use the summary warrant procedure to constitute debts and can only charge a 10% surcharge on the debt, instead of charging the judicial rate of interest at 8% per annum.

That is the slippery slope of excluding debts.

There are other arguments in favour of excluding credit unions, however. They could continue to offer small amounts of credit to debtors during their insolvencies for small emergencies, such as broken washing machines etc. This would remove the risk of debtors failing to make contributions to their bankruptcies and protected trust deeds.

They could also provide a vehicle for debtors to continue having modest savings, although this would possibly require legislative change, but most trustees do permit allowances in debtor’s financial statements for costs that have to be set aside; so logically should we not encourage debtors to set these aside for the purposes intended?

Education

The Accountant in Bankruptcy office is also keen to incorporate some form of education for debtors in Scotland’s debt relief and management remedies and generally support for this principle is supported across the board.

Credit unions could play a pivotal role in this education, by not just making any education a classroom exercise at the end of an insolvency, but by encouraging good practice, such as saving with and borrowing from socially responsible lenders during the operation of the bankruptcy or protected trust deed.

Arguably there is a case for allowing credit unions to have priority during a debt payment plan under the debt arrangement scheme if this approach is taken as most debtors in an 8 year DAS will require some form of credit during that programme.

Alternatives

Even if we don’t accept credit unions deserve to be excluded from bankruptcies and protected trust deeds, this does not mean we cannot give them some form of special treatment.

Changes could be made to the way claims are settled in personal insolvencies. Currently many involuntary and socially responsible lenders are disadvantaged with the current scheme of division, where dividends are paid to ordinary creditors on the basis of what is owed at the time of the insolvency, including interest.

This means the pay day lenders that might charge say 3000% APR and front load interest onto loans, proportionately  can claim more in relation to what they loaned than a credit union or a local authority can.

This could be avoided by introducing a system where dividends are initially paid on the original debt, with interest having a deferred ranking. This would mean our bankruptcy system would still treat all creditors equally but also more fairly. It would also mean we don’t reward predatory lending and would remove the requirement for trustees to challenge extortionate credit agreements, which rarely occurs anyway.

Conclusion

There is no clear answer to the question of what debts should be excluded and what should be included. Many creditors have strong cases, but the argument for excluding credit unions is particularly strong, especially in a society where we see the growing scourge of payday lenders.

They also have a strong case as institutions we would wish to encourage Debtors to use.

They are also arguably part of the solution for dealing with the recurring issue of over indebtedness amongst some of the poorest in Society and could help prevent Debtors repeatedly becoming insolvent.

Maybe it’s time to make one last exception.