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ARCHIE Mac'BADAS': THE STORY OF A DEBTOR IN SCOTLAND: THE SICK MAN OF EUROPE

 

On 1st April 2015, under the guise of the Scottish Government's shiny new Financial Health Service, life changing revisions were introduced to the way that personal insolvency (mainly Sequestration and protected trust deeds) is dealt with in Scotland under the Bankruptcy and Debt Advice (Scotland) Act 2014 (the "BADAS Act").

Here is a summary of the main changes and resource list (for those who want to read further - with a torch under the duvet):

  • A debtor can only apply for their own Sequestration (bankruptcy) once they have obtained financial advice from a Money Advisor;
  • Most bankrupt debtors will now be required to undertake a financial education course;
  • Except for 'minimal asset' debtors, a debtor cannot now seek Sequestration until their debts exceed £3000. 'Minimal asset' debtors can be discharged from their Sequestration after just 6 month from it being granted;
  • The AiB (Accountant in Bankruptcy), not the Courts, will use the Common Financial Tool to determine the proportion of the Debtor's income that they must contribute to their estate. The Scottish Government argues that the CFT is so generous to debtors that they are unlikely to 'appeal' against Debtor Contribution Orders;
  • The Debtor will only be able to reduce their contribution where dire circumstances, such as unemployment or divorce occurs;
  • Debtors can, in anticipation of Sequestration, seek a '6-week' Moratorium giving breathing space/protection against debt enforcement;
  • If a creditor doesn't submit a claim to the debtor's Trustee within 120 days of Sequestration, that creditor will not be entitled to payment of a dividend in the debtor's estate;
  • Except for legal appeals, ALL decision making powers (in Sequestration) have now been devolved to the, including the power to make and vary Debtor Contribution Orders, recall of Sequestration, Bankruptcy Restriction Orders and conversion of Protected Trust Deeds to Sequestration;
  • Under BADAS there is no longer automatic discharge after 12 months; the debtor's Trustee (commonly the AiB) will decide whether to discharge the debtor and report that finding to all known creditors. Separately, the Trustee will send a conduct report to the AiB 10 months after Sequestration.

Sequestration

Some of the provisions causing greatest concern relate to: 

  • the AiB being sole power-wielder in most aspects. The onus and cost of seeking review and appeal of an AiB decision will fall on the debtor; legal appeal to a court only being available once an internal AiB review is complete. One concern is that knowledge of this grim reality will lead to wide spread non-cooperation with Trustees;
  • Debtor Contribution Orders in Sequestration can be extended to 48 months, to fall in lien with similar provisions on Protected Trust Deeds (PTDs); potentially thereby putting debtors off PTDs. However, arguably such extended payment periods (as with '7 year' Debt Arrangement Schemes) will result in irreconcilable  defaults occurring around year 3; thereby negating the perceived benefit of the 48 month handcuff;
  • the vacuous and unworkable nature of payment breaks (only applicable where dire circumstances arise) which will not be open to a husband without kids upon suffering the death of his partner/spouse yet that event will still be taken into account when the Trustee assesses whether that debtor can still make a Contribution. Such payment break (usually 6 months) would necessarily increase the bankruptcy period. A more flexible holiday/reduction would be of greater relevance and help to those dealing with an emergency such as a roof or car repair under which the debtor could ask that some of their income be diverted to address the emergency as regards a particular sum and/or time frame.

Many of the changes introduced under BADAS have few supporters, apart from those who work for the AiB. Those changes have been denounced by numerous stakeholder organisations as, variously: unfair (to debtors), unworkable (48 month contributions), vacuous (payment breaks) and worrying (the devolution of decision making from courts to the AiB).

One has to wonder whether, the Scottish bankrupt (let’s call him Archie MacBadas), is to remain the face of the sick man of Europe: some may say the most put upon of European debtors. Forced to smoke an Stars Wars-esque 'E-cig' in public places, and only able to drink Brasso due to minimum alcohol pricing, yet pressed into the vortex of bankruptcy by a finger-wagging man in a brown suit from the AiB (although other suit colours are available).

As ever, only time will tell if Scottish bankruptcy can reach a middle position and how personal insolvency will fare over the coming years. Particularly being, for most intents and purposes, outwith the control of the courts.

If you need advice on an Insolvency issue, please fill in our online contact form, detailing your situation and query, and one of our insolvency lawyers will get in touch.

RESOURCES

ICAS Sequestration checklist (April 2015); ICAS Trust Deed checklist (April 2015); Sequestration Notes for Guidance (AiB); Protected Trust Deed Notes for Guidance (AiB)