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PART ONE - INTRODUCTION
1. Executive Summary
1.1 The purpose of this Consultation is to seek views on new Regulation-making powers to be introduced by section 15 of the Bankruptcy and Diligence etc. (Scotland) Act 2007 (2007 asp 3). The purpose of these Regulations is to address the currently unmet need, identified by the Working Group on Debt Relief, of people who require debt relief but cannot petition for their own bankruptcy under existing provisions because their creditors are unwilling to take Court action to establish apparent insolvency.
2. Background - Apparent Insolvency
2.1 Under current legislation, debtors can petition for their own bankruptcy on the following grounds:
- A creditor concurs in the petition;
- Creditors have refused to consent to a Protected Trust Deed; or
- The debtor is Apparently Insolvent.
2.2 These provisions are contained in section 5 of the Bankruptcy (Scotland) Act 1985 as amended. Apparent Insolvency as grounds for a debtor's petition was introduced in 1993 by section 3 of the Bankruptcy (Scotland) Act 1993. Apparent Insolvency was originally a tool for creditors to show that a debtor should be made bankrupt.
2.3 Apparent Insolvency is defined in section 7 of the Bankruptcy (Scotland) Act 1985. For details see Annex A.
2.4 Nowadays, Apparent Insolvency is the most common ground on which a debtor petitions for their own bankruptcy. For example, for the calendar year 2006 the Register of Insolvencies records 2,251 awards of bankruptcy on debtor's petitions. 98% of these petitions were based on Apparent Insolvency.
3. The Problem of Apparent Insolvency
3.1 The Scottish Executive is aware of concerns that some debtors are unable to petition for their own bankruptcy because they are unable to establish Apparent Insolvency. These people may be unable to pay their debts as they become due and have no prospect of ever repaying their debts in full. However, their creditors may be reluctant to pursue debts because there are no prospects of a dividend. If a creditor is unwilling to take Court action against a debt, a debtor is unable to establish Apparent Insolvency. As a consequence, we believe there is a pool of unmet need for debt relief among debtors with low income and low assets.
4. Previous Consultation
4.1 The Scottish Executive issued a consultation paper in November 2003 (Personal Bankruptcy Reform in Scotland: A Modern Approach). The results of the consultation and a draft Bill were published in June 2004 (Modernising Bankruptcy and Diligence in Scotland).
4.2 There were 64 responses to the question: "Do you think establishing Apparent Insolvency can be problematic?" 49 respondents answered yes.
4.3 There were 54 responses to a further question: "Do you think there are certain people for whom the range of current and planned debt management tools does not provide an effective solution to their problems?" 29 respondents answered yes.
5. Working Group on Debt Relief
5.1 Following this consultation the Scottish Executive set up a Working Group on Debt Relief to look further at this issue. The Working Group published its report in June 2005.
5.2 The Working Group considered a number of options for reform:
- Amend the definition of Apparent Insolvency;
- Replace Apparent Insolvency with a different test; and
- Introducing a "single gateway" procedure which would allow a debtor to apply for their own bankruptcy where this was shown to be appropriate.
5.3 The Working Group recommended that a form of single gateway procedure would be the best option.
5.4 The main features of the single gateway procedure proposed by the Working Group were:
- A separate application for debt relief for debtors with low income and low assets
- A Money Advice gateway into this procedure
- An independent assessment of the debtor's alternatives from a Money Advisor
- An immediate award of bankruptcy where the debtor is assessed as a "true" low income low asset debtor
- A moratorium of up to 12 months where the debtor is assessed as a "temporary" low income low asset debtor
- An award of bankruptcy at the end of the moratorium procedure where a "temporary" low income low asset debtor remains a low income low asset debtor.
5.5 The Executive considered these recommendations carefully and included some of them in the current proposals. At the present time, we are not in favour of creating a new money advice gateway for Low Income Low Asset debtors. We consider that we first need to ensure the success of the Money Advice Gateway for the Debt Arrangement Scheme.
5.6 The Working Group were unable to quantify accurately the size of the pool of unmet need but noted that the available information was consistent. We are working on the assumption, based on Citizen Advice Scotland figures, that there may be at least 5,000 people who would immediately benefit from a new route into bankruptcy.
6. Proposals for a Low Income Low Asset ( LILA) Scheme
6.1 Section 15 of the Bankruptcy and Diligence etc. (Scotland) Act 2007 amends the Bankruptcy (Scotland) Act 1985 to provide for a Low Income, Low Asset ( LILA) scheme. In particular it amends the existing grounds for a debtor's petition in section 5 of the 1985 Act and introduces a Regulation-making power in a new section 5A. Section 15 has not yet come into force. We anticipate, subject to Parliamentary approval, that it will come into force in December 2007. Regulations would be laid in order to commence at the same time.
6.2 The scheme provides a new route into bankruptcy. A debtor will be able to apply to the Accountant in Bankruptcy for an award of bankruptcy if they are unable to pay their debts and the following conditions apply:
- The debtor's weekly gross income is less than £100;
- The debtor does not own their own house or any other property; and
- The total value of the debtor's assets is less than £1000.
A summary of the new rules for debtor petitions is set out in Annex B. The wording of the new section 5A is set out in Annex C.
6.3 The Act also introduces a Regulation-making power to fill in the details of how such a scheme would actually operate. The power to make Regulations includes:
- Changing the income and asset thresholds;
- Rules for calculating income - this could include rules for averaging income or circumstances in which income should be disregarded;
- Excluding some kinds of income from the calculation;
- Rules for calculating the value of assets;
- Excluding some kinds of assets;
- Making different rules for different kinds of debtor;
- Adding new conditions before a debtor can apply for bankruptcy under the LILA scheme; and
- Changing the level of debt required before a debtor can apply for bankruptcy under the scheme.
6.4 We are seeking views on the content of these Regulations. The Scottish Executive welcome contributions to the development of this scheme in order to ensure that it meets the following aims:
- Addressing the identified unmet need for debt relief;
- Includes debtors who have low income from employment;
- Balancing the rights and responsibilities of creditors and debtors;
- A straightforward process that is simple to administer and where the costs to the public purse could be covered by a nominal fee;
- Minimise the intrusiveness of the process for determining the value of assets;
- Encourage applications on-line.
6.5 Our intention is to provide an alternative route into bankruptcy rather than a new debt relief scheme. In our view, this will allow us to provide debt relief to the most vulnerable debtors in a straightforward and non-intrusive way. We intend that these bankruptcies should be administered in a streamlined process because there will be no expectation of any dividend for creditors. However, because an award under this scheme will still be a full award of bankruptcy, we have the mechanisms in place to manage changes of circumstances and to address any abuses.
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