The Debt Arrangement Scheme and Recent Reforms
Debt Arrangement Scheme (Scotland) Amendment Regulations 2007
Overview
The Debt Arrangement Scheme (DAS) is a debt relief tool that allows a debtor to agree a single monthly payment to a Payments Distributor to repay multiple debts over a set period of time. Unlike other types of debt relief, the Debt Arrangement Scheme protects the debtor’s family home. It is free, unlike commercial debt adviseors, and is not ordinarily subject to court approval.
It operates as follows:
Debtors apply for approval of a DAS debt payment programme. A programme will be approved by the Accountant in Bankruptcy (on behalf of the Scottish Ministers) if all the creditors agree or the programme is otherwise fair and reasonable.
If the programme is approved then the debtor no longer needs to make individual payments to each creditor. Instead, a single payment is made to an approved payments distributor who divides that payment up amongst the several creditors in a fair way.
While an approved programme is in place, creditors are unable to bankrupt the debtor or seize and sell assets against them.
Reform
The Debt Arrangement Scheme was amended on 30 June 2007 by the Debt Arrangement Scheme (Scotland) Amendment Regulations 2007.
The rationale for reform stems from a general concern that DAS offers too small a reward for the efforts made by the debtor, and a particular concern about the effect of interest and charges continuing to accrue during the period of a debt payment programme.
For example, the debtor in a programme is given more time to repay his or her debts and may not therefore be making their full contractual payments. Currently, the creditor may be entitled to apply charges, including penalty interest and administration fees. The payments agreed at the start of the programme will not take account of these additional charges, with the result that the debtor may complete a programme and still have outstanding debts.
The Debt Arrangement Scheme (Scotland) Amendment Regulations 2007 remedy this perceived discrepancy by providing that interest and debt charges (fees, penalties or other charges) are suspended on approval of a debt payment programme, and cancelled on completion of a programme. This has the effect that a debtor entering into a debt payment programme will be clear of their recognised debts provided they complete the programme.
However, if the programme is not completed for whatever reason, whether that be inability to pay or the programme being revoked by the administrator or the courts, the full amount that would have been payable to that date, including accrued interest and charges, becomes immediately payable.
Creditor’s Objection to a Proposed Programme
The second major reform relates to a creditor’s capacity to object to a scheme programme entering into force. Previously, and provided the scheme was considered fair and reasonable, the DAS administrator could dispense with the consent of a creditor where the amount due by a debtor to the objecting creditor is 50% or less of the total debt included in a programme and the amount due to all creditors who refuse to consent does not exceed 60% of the total debt included in a programme.
These percentage requirements have now been removed. From 30 June, if full consent by all creditors is not achieved and regardless of the percentage division of the total debt, the DAS administrator will approve the scheme provided it is fair and reasonable. For example, if a single creditor was the creditor for 95% of the total recognised debt and they objected to the programme, they would be unable to stop it entering into force provided the administrator considered it fair and reasonable. This is subject to a right of appeal to the Sheriff Court.
Summary
In summary, the key changes affecting creditors are as follows –
Interest and charges will be frozen automatically for all new Debt Payment Programmes from the date they are approved and will be cancelled upon completion of the programme. This means that the current balance when the programme is approved is the maximum the creditor will recover provided the programme is completed.
Creditors will be prevented from enforcing diligence to recover debts for up to 6 weeks from the date a debtor intimates they are going to apply for a Debt Payment Programme
The DAS Administrator will no longer refer proposed Debt Payment Programmes to the Sheriff if a majority of creditors do not consent. Instead, the DAS Administrator will consider all proposals where there is less than full creditor consent and apply a “fair and reasonable” test to the application. This will be subject to a right of appeal to the Sheriff.
Timing
The provisions relating to freezing interest and charges will not apply to any application to enter the scheme where the form requesting the consent of creditors was posted to the creditors before the 30 June 2007.
The only exception to this is where a debtor in an existing programme applies for a variation of that programme in order to take advantage of the new provisions for freezing interest and charges.
For further information please contact Andrew Foyle.
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