The Scottish government has once again trumpeted the success of its Debt Arrangement Scheme (DAS) in a press release earlier this week. The Minister for Business, Innovation and Energy, Paul Wheelhouse, states that it ‘is the only statutory debt management programme in the UK and we are rightly proud of its success in providing a viable option for those seeking to pay their debts without plunging into insolvency’. Lord Wilf Stevenson, chair of Step Change Debt Charity also lauds the Scottish scheme as an example of how things work better in debt management North of the Border (see here) and the Treasury recently completed a consultation on the possible introduction of a similar scheme in England and Wales.
But what evidence exists to support these optimistic views on the Scottish scheme?
The Scottish Debt Arrangement Scheme (DAS) is a statutory debt management plan. Its benefits include a stay on individual enforcement action by creditors, the freezing of interest and penalty fees and the possibility of a debtor retaining a home. Plans can be imposed on creditors by the administrator (the AIB) if creditors do not consent, provided the plan is fair and reasonable. Individuals make a single payment through a payments distributor (one of four private sector organisations awarded the contract by the government) who can charge a fee of 8 percent. An individual must consult an approved money advisor before commencing a DAS. Both public and private advisers now act as intermediaries with the majority of applications now handled by private advisors (dominated by a few specialists) who can charge a fee. Debts can only be written off after 12 years, if seventy percent of outstanding debts have been paid. Data from 2012 indicate that they last on average 6 years 8 months. Fifty-four percent of users are female with an average age of 44 a median level of debt of £12, 913, making an average monthly payment of £238.
The Scottish government highlights the benefits of the plans for creditors, claiming a 90 percent return rate. However, this is misleading since it assumes that all plans are completed. Data (see Table below ) which I obtained from the Scottish Accountant in Bankruptcy suggest that at least 25-30 percent of files are revoked and the dominant reason for revocation is failure to pay when due. Thus of the 3,939 cases commenced in 2012-13, 1139 had been revoked by 2017. In addition, given the long time scale of these plans the amount recovered should be discounted and it is possible that some of these debts have already been written off by creditors and bought by debt buyers who will profit from any recovery.
These long term debt plans may be producing modest income for individual creditors but one must question whether it is socially beneficial to have individuals shackled to a repayment plan for so long. The Scottish government is committed to the principle of ‘can pay should pay’ and Fergus Ewing (then the relevant Minister) celebrated the fact that many individuals were choosing the longer road of the DAS because it demonstrated that ‘most people want to pay off their debts when they can’ (at 25929) and that ‘bankruptcy should not be an easy option’ (same). However these comments neglect the growing international literature (see discussion here and here ) on the economic and social benefits of bankruptcy providing a swift fresh start for debtors. There is a danger of increasing the already significant social stigma associated with bankruptcy when there should be greater recognition of its value as a safety net in contemporary economies with high levels of household debt.
Individuals generally do want to repay their debts but many individuals who are in debt trouble suffer from continuing problems in terms of unstable employment. Long term debt problems have effects on the health of individuals. Behavioural studies suggest that individuals are often over-optimistic and will underestimate the difficulties of maintaining repayments over a long period. Their credit rating will continue to be low after they complete the plan and is unlikely to be better than if they declared bankruptcy.
Unfortunately almost no systematic studies exist (see here) of the experience of individuals who have succeeded or failed on DAS (and ideally a control group who could have but did not choose to undertake a plan). The 2012 study did suggest that there was a trend among young individuals to take out a DAS to repay smaller amounts of debt and a DAS could be useful for an individual caught up in high cost credit problems. So the DAS may be useful for some debtors. Or it may represent simply a benign state sanctioned collection agency and, given the long length of the repayments–almost a form of ‘debt peonage’.
But once again we encounter the failure by governments to develop good evidence based policy in the area of bankruptcy. The danger is that a form of DAS (with its “breathing space”) is layered on to the unnecessarily complex system of personal insolvency alternatives in England and Wales without a reappraisal of the existing system.
Scottish DAS Agreements: Closed, Live and Revoked
Source: Scottish Accountant in Bankruptcy.