Debt Arrangement Scheme Review 2008

Transcription

1 Debt Arrangement Scheme Review

2 Contents 1. Executive Summary Background The DAS Process Methodology Findings Level of Take Up Creditor Profile Approved Money Advisers Geographical Variation of DPPs Profile of Debt Payment Plans Profile of Debtors Stakeholder Feedback General Response to DAS Offers of composition DAS Administration Conclusions Options Next Steps The DAS Process Acknowledgements

3 1. Executive Summary The Debt Arrangement Scheme (DAS) is a debt management tool designed to allow the repayment of multiple debts over an extended period of time. Although introduced in November 2004 take up of the scheme was limited resulting in changes in June 2007 to encourage further interest in the scheme. This report examines whether the changes have been successful in encouraging participation and whether DAS in its present form meets the needs of those debtors it was designed to help. A review of the scheme carried out through engagement with stakeholders as well as statistical analysis of over 500 plans has shown that DAS can be effective. Results show that despite improved take up as a result of the 2007 changes, the number of people entering DAS is still not as high as anticipated and usage of the scheme varies greatly from area to area across Scotland. Many creditors are not fully aware of DAS and fail to engage with the process. The report presents five options for future development of DAS 1. Do Nothing 2. Abolish DAS 3. Mandatory Composition in DAS 4. Retain DAS gateway and move administration to the DAS Administrator 5. Remove DAS gateway and move administration to the DAS Administrator In 2009, the Accountant in Bankruptcy will assess the requirement for further consultation on these options. 2

4 2. Background The Debt Arrangement Scheme was introduced on 30 November 2004 as a debt management tool to allow debtors who are able to repay multiple debts in full over a reasonable period of time without the threat of legal action or diligence from their creditors. This means that as long as the debtor maintains payments under the scheme, their home and other assets are protected from action by unsecured creditors. DAS is usually free to debtors. As part of the introduction of DAS, a promise was made to review the scheme after the first year of operation to assess whether it was meeting its policy intention. The review found that the take up of DAS was not as high as expected and changes were recommended to improve access to the scheme. The original expectation for DAS take up was 1,500-2,000 cases by March Chart 1 clearly illustrates that results fall far short of these expectations. Chart 1 - Debt payment programmes by financial year Year 2004/05* 2005/ / / /09# No of DPPs * Year 2004/05 part year only from 30 November 2004 to 31 March 2005 # Year 2008/09 part year only from 1 April 2008 to 30 September 2008 Changes to DAS, included in the Bankruptcy and Diligence etc. (Scotland) Act 2007 and introduced in June 2007, froze interest and charges on debts included in a Debt Payment Plan (DPP). Interest and charges will be written off if the DPP is completed. Other changes were made to improve the administration of DAS. Chart 1 illustrates the increased interest in DAS since the changes were introduced. This report assesses the impact of the changes made in 2007 and also considers if further changes need to be made. 3

5 3. The DAS Process To access DAS, a debtor must first meet with an approved money adviser. This adviser is a debt advice specialist who has undergone accredited training to allow them to work with the scheme. The approved money adviser is responsible for providing financial advice to the debtor and assessing the debtor s suitability for a Debt Payment Plan (DPP) within DAS. If the debtor is suitable, the adviser proposes the DPP to creditors and arranges for it to be set up. The adviser then sends the DPP to the DAS Administrator who has responsibility for overseeing the scheme. The DAS Administrator may apply a fair and reasonable test to DPPs where creditors do not consent to the plan. Once the DPP is approved it is recorded in a public register. On approval of the DPP, the debtor will begin making a single payment, usually weekly or monthly, to a payments distributor, who apportions the funds and distributes them to creditors. The payments distributor can deduct up to 10% from payments received as a fee for their work. Creditors can expect to receive all the money they are owed minus the payment distributor s fee, i.e. they can expect to receive repayment of at least 90p per of debt. If the debtor does not make payments or does not keep to any other agreement they made when signing the DPP application, a creditor can apply to have the DPP revoked by the DAS administrator. If the DPP is revoked any interest, fees, penalties and other charges which were frozen become payable. A full explanation of the process can be found in the ANNEX. 4

6 4. Methodology In order to evaluate if the changes to DAS have increased take up, and consider whether further changes are required the following activities were undertaken:- 1. Records of all DPPs (536) approved between 1 July 2007 and 30 June 2008 were examined. 2. Analysis of the demographics of debtors in DAS and the variation in numbers of applications between approved money advisers was carried out. Such factors as amounts of debt, repayment amounts, length of DPPs and age of debtors were considered. 3. A workshop and other meetings with stakeholders were held and the feedback analysed. 4. A questionnaire was sent to all approved money advisers and the replies were collated. 5. Reports on DAS prepared by Citizens Advice Scotland and on behalf of Glasgow City Council were considered and compared to the findings in this review. 5

7 5. Findings 5.1 Level of Take Up Statistics show that take up of DAS has increased as a result of the changes made on 30 June There were nearly five times as many DPPs approved in the year following the changes compared to the year immediately preceding them. Chart 2 shows these results. Although the increase in take up is significant, some money advice organisations suggest it does not reflect the number of debtors who could still benefit from the scheme. Chart 2 - Number of DPPs pre and post legislative changes in June / / July Aug Sept Oct Nov Dec Jan Feb Mar Apr May June 6

8 5.2 Creditor Profile Participants at the stakeholder workshop felt that creditors were not actively engaging in the DAS process. Because creditors did not respond to proposals, a number of long DPPs have been automatically approved on deemed consent. More than 90% of payment plans approved in the review period were accepted in this way. Creditor representatives confirmed that often correspondence did not reach the relevant section within their organisation in time to make a response. They also voiced concerns that some plans were for too long a period. Chart 3 shows the ten creditors with the highest number of separate debts included in DPPs. Some creditors have more than one debt included in some plans. Chart 3 - Creditors in DPPs by number of debts owed Number of Debts HBOS Plc Royal Bank Of Scotland Lloyds TSB Capital One Barclays Banks Plc MBNA North Lanarkshire Council G E Capital Bank Clydesdale Bank Plc Egg Plc Creditors HBOS has the highest number of separate debts which is consistent with findings in the recent review of the Low Income Low Asset route into bankruptcy. This figure is based on the number of debts owed as opposed to the value of the debt owed. Note that debts included in DPPs exclude ongoing liabilities such as mortgage repayments or council tax payments. 7

9 Chart 4 shows a breakdown of creditors by the value of debts owed to them. The total debt owed in all DPPs approved during the review period was 13,068,449, two thirds which ( 8,674,405) was owed to the ten creditors shown above. All other creditors were collectively owed 4,394,044. The Royal Bank of Scotland was owed the most money in total ( 3,047,736-23% of the total of all debts in the period). Local authorities are owed 8% of the total number of debts but are due 0.65% of the total value of debt. Chart 4 - Creditors as a percentage of the total value of debt in all DPPs Percentage value of debt RBS HBOS LloydsTSB Capital One Barclays MBNA North Lan. Council GE Capital Clydesdale Bank EGG plc all other creditors Creditors 5.3 Approved Money Advisers There were variations in the volume of DPPs set up by approved money advisers across the country. 40% of approved money advisers did not submit any DPPs during the period under review. Feedback from a recent questionnaire sent to approved money advisers suggests that the on-going administration of cases has resulted in some advisers being reluctant to propose DPPs to their clients. 8

10 There are 107 approved money advisers in total. Of these, 68 are affiliated to Money Advice Scotland, 37 work within Citizens Advice Bureaux, 1 approved money adviser works in a non-affiliated money advice centre and 1 approved money adviser works in the private sector. Currently 14 approved money advisers are inactive for various reasons, such as maternity leave. Map 1 shows the distribution of approved money advisers in each local authority area. Map 1 Money advisers by local authority area Feedback from insolvency practitioners indicated that they have had clients who could have been suitable for DAS but where it was not possible to refer the debtor to a money adviser, either because no adviser was available, or because of delays in appointments with money advisers. 9

11 5.4 Geographical Variation of DPPs There are geographical variations in the take up of DAS. Out of a total of 32 local authority areas there were 7 areas in which no DPPs were approved. The areas where no plans were approved are Clackmannanshire, East Lothian, Moray, Orkney, Perth & Kinross, Shetland and South Ayrshire. Take up in the remaining 25 local authority areas varied from 2 plans (4 areas) to 81 plans (Fife). The geographical distribution is shown in map 2 below. Map 2 - DPPs set up by local authority area The local authority areas in which most DPPs were approved were Fife, North Lanarkshire, Glasgow City, Dumfries & Galloway, West Dunbartonshire and South Lanarkshire. Advisers in 19% of local authority areas set up and maintained 61% of all DPPs. The majority of the best performing local authorities have co-ordinated teams working with DAS cases. 10

12 5.5 Profile of Debt Payment Plans If creditors refuse to consent to a DPP, legislation requires the DAS Administrator to apply a fair and reasonable test. As a general rule DPPs under 5 years are considered acceptable, DPPs between 5 and 10 years are considered on an individual basis and DPPs over 10 years are unlikely to be accepted as fair and reasonable. If all creditors are deemed to consent because they do not respond to a proposal, the fair and reasonable test is not applied. Paragraph 5.2 notes creditor concerns. Some examples from actual DAS clients in the review period have been included below. Example 1: A 34 year old man with a DPP of just over one year paying per week for debts totalling 27,760 Example 2: A 52 year old man with a 40 year and 6 month DPP paying 18 per month for debts of 8,750. Example 3: A 36 year old woman with a 5 year DPP paying per month for debts totalling 31, Example 4: An 84 year old woman with a 10 year DPP paying 60 a month for debts totalling 7,560. The DAS Administrator has concerns about the cost effectiveness of those DPPs which provide very low monthly payments, such as in example 4. The DAS Administrator is also concerned about the reasonableness of some plans, particularly those with long payment periods, especially in view of the age of some debtors at entry and their ongoing ability to make payments over these long periods ( as demonstrated in examples 1-3). 11

13 Chart 5 shows that 23% of the 536 DPPs approved in this review period are scheduled to last for more than 10 years. Chart 5 - DPPs by duration years 5-10 years years years years 30+ years Chart 6 shows that the majority of DPPs include debts of less than 25,000. Debts range from just over 1,000 to just under 130,000. Chart 6 Number of DPPs by debt range Number of Plans Under 25K 25K- 50K 50K- 75K 75K- 100K K 125K+ Debt Range 12

14 5.6 Profile of Debtors Based on the 536 plans in the review, it was possible to establish that the average age of debtors entering DPPs is 43 years and four months. Chart 7A shows the average length of DPP against debtor s age at entry to DAS. Chart 7B shows the numbers of DPPs for each age group. Chart 7 - Average length of DPP by age at entry Average length of DPP (months) by age group Under Chart 7B Number of DPPs by age at entry number of DPPs by age at entry

15 Specific findings about DAS applicants DAS applicants are relatively evenly distributed between genders - 46% are male and 54% are female. On average, debtors owe 24,362 and DPPs are set up to run for 8 years and four months. The average monthly payment in a DPP is 246. Payments range from just under 10 to around 1,500 per month. 34% of all debtors are in the age range. A further 24.5% are between 46 and 55 years of age. 15% of debtors will still be paying their DPP after the state retirement age of 65. Six debtors (just over 1%) will be making payments into their late 80s and early 90s. There may have been other, more appropriate, debt solutions for some of these people. The DAS Administrator is concerned over the length of some DPPs and the lack of a discretionary power to apply the fair and reasonable test. Government actuarial statistics for 2007 show that a male s life expectancy at 65 is 16.3 years and a female s life expectancy at 65 is 19.0 years. This suggests that on average men live to 81 and women to 84. People from ethnic minority backgrounds account for under 2% of all DPPs. For context the 2007 Scottish Household Survey 2007 found that 94.2% of the population identified themselves as white Scottish or British. 15% of DPPs are made by married couples (i.e. two separate concurrent DPPs). This does not include partners or other family groups. Some examples of actual DPPs are shown below. Example 5: A 69 year old man with a 4.25 year plan paying a month. His total debts were 28,854 Example 6: A 60 year old woman with a 6 year DPP paying monthly. Her debts totalled 61,

16 Chart 8 shows the numbers of people making payments by the value of the monthly payment. 63% of DPPs are based on payments of less than 250 monthly. 18% of DPPs are based on payments of between 50 and 100. Chart 8 Numbers of payments by value No of plans Under Value of Monthly Payment

17 The review of the plans indicates that on average older debtors tend to owe more money and are more likely to make higher payments to their DPPs. Chart 9 illustrates this, showing that on average a person aged 65+ will repay over 40,000 of debt in instalments of more than 350 per month. This compares to a person under 25 who will on average repay less than 10,000 at 150 monthly. Chart 9 Average monthly payments by age Average Debt by Age Average Instalment by Age 45, ,000 35,000 30,000 25,000 20,000 15, , , Under Under Chart 10 shows that the majority of people in plans, accounting for 82% of all DPPs in the review period, are in employment, either full or part time. The other 18% of debtors have various income sources from state benefits to student loans and pension income. Chart 10 - DPPs by employment status Sick Disabled 6% Higher / further education 1% Employed 82% Retired 6% Unemployed and seeking work 1% Care reponsibilities 4% 16

18 6. Stakeholder Feedback 6.1 General Response to DAS Feedback from the workshop, questionnaires and discussions with individual stakeholders supports the view that DAS is working for the people who can access it. They acknowledge that changes could be made to improve access to DAS. There was no support for the option to abolish DAS when this was raised during the workshop. 6.2 Offers of composition Citizens Advice Scotland have provided a report entitled Restricted Access which examines their client base to identify clients who applied and could have applied for a DPP under DAS. They said that if changes were made to the DAS criteria more clients would be suitable. The main findings of their report were Only 19% of CAB clients were suitable for DAS Take up could be improved by 4% if DPPs included an element of mandatory composition 75% of CAB clients who could enter DAS do not do so. The report findings were based on a sample of 274 people. Other stakeholders are opposed to mandatory composition because it would change DAS from a debt management tool to a form of debt relief. Composition of debt is already available under regulation 24 of the Debt Arrangement Scheme (Scotland) Regulations Composition requires creditor agreement. No offers of composition were made during the review period. 6.3 DAS Administration At the workshop stakeholders were asked whether ongoing DAS administration should be removed from money advisers and carried out by the DAS Administrator. Some money advisers particularly supported this idea as it would allow them to focus their activity on the provision of advice for additional clients. The money advice sector generally were supportive of the suggestion but had concerns that it might impact on their funding. A number of approved money advisers who returned the questionnaire also supported this option as they believe that the ongoing maintenance of DPPs was time consuming. As the DAS Administrator would be a central point of contact, creditors were keen on this suggestion as they saw the benefits if they had a problem or wanted further information. 17

19 7. Conclusions A number of conclusions have been drawn from the findings: 1 There is a market for DAS within a range of methods to deal with debt e.g. Debt Management Plan, Time to Pay, Debt Arrangement Scheme, Protected Trust Deeds and Bankruptcy. 2 DAS is working for the people who have been able to access it. Stakeholders, including money advisers and creditors, want it to continue. 3 Access seems to be a major problem and needs to be resolved. 4 DAS works for debtors who have available funds and it protects the family home at the same time provided payments are continue to be made to secured creditors. 5 Take up of DAS is affected by a factors such as money adviser engagement and availability of advisers. 6 Geographical variations show that the take up of DAS is inconsistent across Scotland and some areas show better take up than others. 7 Ethnic minorities make little use of DAS. 8 Creditor awareness and engagement in DAS is low. A number of DPPs have been approved through deemed consent because creditors have not responded to proposals in time. 9. Because of deemed consent some excessively long DPPs have been approved which would have been unlikely to pass the fair and reasonable test had the DAS Administrator been able to apply the test. 18

20 8. Options This section sets out identified options for the future development of DAS in the light of the findings of this report. Option 1 Do nothing Do Nothing means leaving the current DAS rules alone. No changes would be made to the scheme and it would be left to settle in alongside other debt management solutions. Feedback from the workshops, questionnaires and talks with individual stakeholders supports the view that DAS is working for the people who can access it. Advantages No changes to DAS Administrator staffing, money advice sector or legislation; No change to clients currently paying a DPP; Creditors continue to receive 90% of money owed; Disadvantages Ongoing maintenance costs still required; Does not address low uptake of DAS; Does not address disparity of advice available between regions; Not all potential DAS clients are targeted. Option 2 - Abolish DAS In this option, no new DPPs would be approved but the administration of existing DPPs would continue until complete or revoked. Stakeholders did not want to abolish DAS when it was raised during the workshop. Advantages DAS Administrator would be freed up to do other work; Less work for money advisers; Minimal IT costs. Disadvantages The government may be accused of failure and wasting public funds; Leaves a gap in debt solutions for debtors who can repay their debts over an extended period of time; Potential reduction of funding for Advice sector. 19

21 Option 3 - Mandatory Composition in DAS This option was proposed by CAS in their report Restricted Access. Other stakeholders are opposed to mandatory composition because it would change DAS from a debt management tool to a form of debt relief. DAS already includes composition on a voluntary basis. Composition is available in debt solutions, such as protected trust deeds and bankruptcy. A mandatory composition process could provide that if a debtor has repaid 70% of the total included in a DPP within a ten year period, the outstanding balance would be written off. Advantages Increase in DPPs (at least 4% reported in CAS Report); Allows debtors to repay most of their debts over a reasonable period. Reduces the need for exceptionally long plans Disadvantages Less money to creditors; Need creditor consent to the plans; This option would make DAS a debt relief tool instead of a debt management tool; Prospective increase in DPPs may be too low. 20

22 Option 4 Retain DAS gateway and move administration to the DAS Administrator Removal of administration from approved money advisers and reallocation of work to the DAS Administrator. Advantages Ongoing administration more suited to DAS Administrator remit; Approved money advisers freed up assist more clients; Administration removed from adviser who would be more likely to propose a DPP if time constraints were removed. Creditors are more likely to engage with a central point of contact; DAS credibility improved Better understanding of DAS as a legitimate Government scheme Centralising knowledge Disadvantages Staffing implications for the DAS Administrator; New administration processes required; IT development costs; Does not address problem of too few approved money advisers to cover the whole of Scotland. Does not address restricted access to DAS. 21

23 Option 5 Remove DAS gateway and move administration to the DAS Administrator Amend the entry criteria and make radical changes to allow wider access to DAS via e-applications. Remove the mandatory money advice gateway Develop an on-line application process Define entry criteria to ensure applications provide an appropriate form of debt relief Simply the administrative process and transfer all administration to the DAS Administrator Under this option an on-line DAS gateway would be open 24 hours per day and the procedure would have set parameters to ensure that the process was simple, robust and fit for purpose. The following rules may apply: 90% of the debt would be paid off within 10 years, with a possible extension of 1 or 2 years to complete payment; A minimum contribution of 50 per month would be required, ensuring that only those with sufficient uncommitted income could enter the scheme; The requirement for debt advice would be removed, but links to the advice sector would be provided for those who require it; DAS Administrator would retain the power to apply a fair and reasonable test to cases requiring it; If a debtor missed more than 2 payments, they would lose protection from their creditors, and creditors would be notified at the same time as the debtor. Advantages Easily accessible at any time; Allows access where no approved money adviser is available; Reduces paperwork by using electronic process; The scheme would be self funding; Complete coverage across Scotland; Less administration for money advisers; Single point of contact for debtors and creditors; Money advisers free to take on more advice work; Less stressful for debtor due to quick turnaround; Instant protection for the debtor against legal action; Likely to increase take up of DAS. Disadvantages Significant IT and staffing costs for AiB to set up and run this option; Higher volume of failed DPPs due to wider access. No obligation for debtor to receive money advice prior to application Application process must be simplified to support on-line process. 22

24 9. Next Steps The Scottish Government will assess the requirement to consult on the options presented in section 8 of this report. Members of the public and other stakeholders may be invited to express a view on the options and submit relevant evidence. In order to support this, the DAS Administrator will evaluate the costs of the options, the resources required, the timetable and the funding implications. 23

25 ANNEX The DAS Process Funding Funding for the Money Advice Sector is provided through the local government finance settlement. The 2008/ /11 settlement includes an allocation of million in each year for money advice services. The allocation provides a minimum allocation of 85,000 to support 2 money advisers, one of whom is accredited to offer DAS. The Scottish Government, through the Social Inclusion Division, provides an annual budget of around 316,000 a year to MATRICS (Money Advice Training Resources Information and Consultancy Service), around 115,000 of this money is allocated to the DAS scheme. Amongst other things the funding is used to train DAS advisers, develop advice tools and build a support network of approved advisers. The DAS Administrator currently does not receive specific funding for DAS. The DAS Administrator is the Accountant in Bankruptcy (AiB). As such the resource for staffing and the operation of DAS are allocated from the Agency s annual budget. The DAS Administrator The Accountant in Bankruptcy (AiB), a Scottish Government official with responsibility for overseeing the DAS scheme. The DAS Administrator receives applications for DPPs electronically from approved money advisers and may apply a fair and reasonable test to those plans where creditors do not consent to the plan. The DAS Administrator maintains a register of DPPs under DAS. The DAS Approved Money Adviser DAS approved money advisers are usually specialists from the debt advice sector or from local authorities who have completed training to allow them to work with the scheme. The MATRICS is responsible for the training of money advisers for DAS. As well as providing training, MATRICS: certifies money advisers who meet the required standard of advice; has devised a code of practice approved money advisers must sign up to. 24

26 The initial process Upon meeting the debtor, the approved money adviser will: Explore all debt management options and discuss DAS with the debtor to assess their suitability for the scheme; Establish the debtor s level of debt; Examine the debtor s income and expenditure; Check how much money the client can spare each week/month to pay their debts. Setting up a Debt Payment Plan (DPP) If the client wishes to proceed with an application for a DPP, the approved money adviser makes a formal proposal to creditors who then have 21 days to respond. Creditors have three options. They can: 1. Consent The creditor replies within 21 days and agrees to the proposal; 2. Deemed consent The creditor fails to respond and is deemed to have agreed the proposal; 3. Non-consent The creditor writes back within the timescale to disagree with the proposal. This information is taken into account should the DAS Administrator require to make a decision whether the programme is fair and reasonable. The fair and reasonable test If a creditor refuses to consent to the DPP, they should provide evidence to allow the DAS Administrator to apply a fair and reasonable test to the DPP. The DAS Administrator will consider various factors when considering whether the DPP is fair and reasonable, including: The total amount of debt; The length of time over which the programme will operate; The method and frequency of payments; The extent to which creditors have consented; Comments made by the approved money adviser Assets the debtor may have which could be realised to pay debts included in the programme; Any other factor or considered appropriate. 25

27 Approval Upon approval of a DPP the following action is taken: The DPP is recorded on a public register. The debtor pays a pre-agreed sum to a payments distributor at intervals, usually weekly or monthly. The payments distributor distributes this money to creditors and can deduct a fee of up to 10% for making the payments. Effect of approval When a DPP is approved: Any interest, fees, penalties or other charges are frozen Creditors should not provide further credit to the debtor (except for specified exceptions such as funeral expenses) The debtor is protected against diligence for debt Variation and revocation Either the debtor or the creditor can apply to vary a DPP. A DPP can be varied by consent or by the DAS administrator if the variation is fair and reasonable. Grounds for variation can include: changes in the debtors circumstances reassessment of debts due at the date of approval the debtor needs to apply for credit for some essential requirement If the debtor does not make payments or does not keep to any other agreement they made when signing the DPP application, a creditor can apply to have the DPP revoked by the DAS administrator. If the DPP is revoked any interest, fees, penalties and other charges which were frozen are reinstated. Review of debtor s circumstances The approved money adviser maintains contact with the debtor periodically throughout the duration of the DPP. This allows the approved money adviser to review the debtors circumstances and to request a variation if appropriate. Completion A DPP is completed when all the payments due under the plan have been made or when the creditors give written consent to early completion. The approved money adviser sends written notice of completion to the debtor and the creditors. On completion of a DPP any interest, fees, penalties or other charges which were frozen when the programme was approved are written off. 26

28 Acknowledgements Money Advice Scotland Citizens Advice Scotland Institute of Chartered Accountants Scotland Institute of Revenues Rating and Valuation Glasgow City Council Argyll & Bute Council Wilson Andrews Ltd. HM Revenue & Customs Scottish Government Social Inclusion Division Money advisers throughout Scotland who responded to the questionnaire 27