Moneyadvice

Types of Debt

There are two broad categories of debt ‘types’: priority debts and non-priority debts.

It is important that we get priority debts under control first. They can cause several potential legal problems such as eviction from rental properties, repossession of property if you own your home, disconnection of service, fines, and even imprisonment in some cases.

Examples of priority debts include:

  • Mortgage
  • Rent
  • Council Tax
  • Court Fines
  • Gas and Electricity
  • Benefit Overpayments
  • Child Maintenance
  • TV Licence
  • Social Fund Loans
  • Tax Credit Overpayments

There are other debts which are considered ‘non-priority debts’, but also require our attention:

  • Credit & Store Cards​
  • Bank & Building society debts​ (e.g., overdrafts)
  • Unsecured Loans (e.g., payday / personal loans)
  • Catalogues​
  • Parking Charges
  • Personal debts to friends and family​

Debt Enforcement

'Diligence' is the term for various processes of debt enforcement in Scottish law. A creditor can use diligence if someone who owes them money has failed to pay a sum due. The creditor must have a decree (court order) enforceable in Scotland, or a document of debt such as a Summary Warrant before they can carry out diligence.

The court order gives the creditor authority to recover money due to them using whichever method of legal debt enforcement they choose. In most cases, the creditor must also serve a Charge for Payment and issue a Debt Advice and Information Package before using diligence.

Examples of Debt Enforcement:

What is a decree?

A Decree is the Scottish equivalent of a CCJ and is a judgement issued by the court in relation to a claim made by a creditor to a debtor.   

The details of Decrees are supplied by the Sheriff Courts to the Registry Trust who maintain the records containing all small claims and summary cause money decrees granted in the Sheriff Court in the past 6 years.  

The Registry Trust notifies all credit reference agencies of all decrees, recalls and dismissals regularly to update the credit records. These remain on the debtors’ credit file for a period of 6 years. This will show on the file as ‘Satisfied’ when it is paid in full.  

The procedure for satisfaction in Scotland is different to England and Wales in as far as the court does not submit a certificate of satisfaction, but a letter of satisfaction from the pursuer of the court action must be submitted to the Registry Trust with details of the original court action.  

Removing a Decree from a Credit File 

Decrees are only removed from the Register if they are recalled by the court, entered in error, or paid in full within one calendar month of the date of decree. If the decree was paid prior to the court date or entered in error, you can apply for a recall through the court.

Alternatively, you should request a letter from the pursuers (i.e., your creditors) or their solicitors confirming that the decree went ahead in error or was paid in full within one calendar month of the date of the decree. The letter should confirm:

  • Name of the court
  • Case number
  • Date of decree
  • Amount of decree

You should then forward the original written evidence to Registry Trust Limited 153 – 157 Cleveland Street London W1T 6QW together with their administration fee and confirmation of your name and address at the time of the decree. The procedure which needs to be followed in order for a decree to be removed from the Scottish Register is explained on the Registry Trust website’.

The summary warrant procedure is a quick means for certain public creditors to pursue the amounts they are owed. It is used mainly by:

  • Department of Work and Pensions (DWP)
  • UK Government
  • Child Support Agency (CSA)
  • Local Authority (For Council Tax)
  • Creditor with agreement registered with the Book of Council and Session or Sheriff Court
  • Local Authority and fines Enforcement Officers of the Scottish Court Service

A charge for payment is a formal request in writing served on the debtor by the creditor after they have obtained a decree from the court demanding payment of money owed. It includes any interest and associated costs.

Where the debtor is an individual, a creditor is required by law to provide a DAIP prior to using most types of diligence. There is a set timescale for the issue of a DAIP within each of the processes in which it is required. The Debt Advice and Information Package (DAIP) is a booklet providing important information for debtors to help them deal with their creditors.

The booklet provides information about the importance of seeking early advice and provides contact details for organisations which can help the debtor find an advice provider their local area.

Generally, it must be issued no earlier than 12 weeks before diligence is carried out. The DAIP must also be issued before a creditor presents a petition for the debtor’s bankruptcy and prior to the issue of a Certificate for Sequestration.

A creditor can force a debtor to pay a debt if:  

  • A court of tribunal has issued a decree or decision for the money owed.  
  • A time to pay arrangement has been broken by the debtor.   
  • A Summary warrant has been issued for the money owed.

The creditor has the power to do the following once a decree or decision has been made as part of the process:  

  • Arrange for deductions from salary / wages.  
  • Arrest funds from bank / building society accounts.  
  • Place an order on property to stop it being sold. (inhibition). 
  • Arrange for an attachment of possessions that can be then auctioned later to pay towards the debt. 

You are a creditor if you are owed money by a debtor. If a creditor is trying to recoup monies owed to them by a debtor, they may be able to petition the sheriff court to make the debtor bankrupt.

What Are the Criteria for this?
As outlined in the Bankruptcy (Scotland) Act 2016, a creditor can ask a sheriff to award bankruptcy against a debtor if: 

  • they are owed at least £5,000 – this includes any fees, interest, or charges added to the original debt; or
  • they apply for a joint petition with other creditors providing the combined debts are at least £5,000; and
  • they have sent a copy of the Scottish Government’s Debt Advice and Information Packagethe debtor (they must have sent this at least two weeks and not more than 12 weeks before the creditor makes their petition); and
  • they can show the debtor is apparently insolvent (a legal term which means that you cannot pay your debts as they become due)’.

Debt Solutions

There are various debt solutions available to help people deal with any problem debt that they have.

These include -

Informal measures can be sought out to try and help pay off your debts.

These measures include –

  • Consolidation loans
  • Token payments
  • Full and Final Settlement
Solution 1: Consolidation Loans

 

A consolidation loan is the borrowing of money to combine all your existing debts into one. This then leaves a single payment to be made and only one debt to pay.

There are two kinds of consolidation loans:

  • One is a secured loan where assets are tied to the debt (e.g., your house) and if you fail to pay the debt, the assets may be repossessed.
  • Unsecured loans that do not have any assets tied to them.

A consolidation loan is only useful in select circumstances and financially may not always be the best option. A consolidation loan can be more expensive than other kinds of debt that you had before. If you cannot pay a secured loan, then your home may be at risk. A consolidation loan can be a good option if it leads to reduced payments or a reduction of interest.

Consolidation loans are useful for clearing specific debts such as credit cards and loans.

If you can effectively manage to meet your repayments, possess a stable set of finances, and can keep spending under control, a consolidation loan may be the best option for you.

Before you consider borrowing to help pay off your debts:

  • Ensure you have enough money left in your budget (after paying for essentials) to keep up with your repayments.
  • Make sure it is practically feasible for you to afford the repayments for the whole duration of the loan.
  • Shop around for the best deals.
  • Avoid borrowing more than you require.
  • If a consolidation loan is used to help pay off your credit cards, avoid using your card and taking on additional debt.

If you acquire a consolidation loan, tread carefully – you do not want to end up in a position where you are in more debt than what you started with.

It is vitally important to not borrow money from a loan shark. This is someone who lends money without a licence (which is illegal). You can report loan sharks on the Trading Standards Scotland website or you can call 0800 074 0878.

You should always seek out advice from an independent financial adviser prior to signing a new loan agreement. Furthermore, ensure that the financial adviser is regulated by the Financial Conduct Authority (FCA). You can check this on the FCA Register (fca.org.uk)

NOTE: Before taking a consolidation loan, it is strongly advisable to receive debt advice from an approved debt adviser first.

 

Solution 2: Token Payments

 

If you are not able to make payments to your debts in full, it can be useful to offer token payments to show your wiliness to pay. Token Payments are less than the previously agreed amount and constitutes the amount that you can reasonably pay at that time.

A creditor does not have to accept token payments. Token payments are useful as a short-term solution to being unable to pay debts, especially priority ones. However, it can only be used so long before the creditor decides to take action to recover the debt, and you will still have to pay the amounts owed.

NOTE: Before requesting token payments from a creditor, it is strongly advisable to receive debt advice from an approved debt adviser first.

 

Solution 3: Full and Final Settlement

 

A ‘Full and Final Settlement’ is an offer you can present to a creditor where you pay them part of your debt to them as a lump sum and in exchange, they write off any that remains.

The self-evident advantage is that you will no longer be in debt to the creditor(s) you make the agreement with.

However, this solution requires the creditor to agree. This means that they must believe that the lump sum is enough to justify writing off the debt, and that it is preferable to receiving more debt payments. The lump sum will need to be a significant portion of the amount owed.

The fact that the debt has not been paid in full will appear on your credit record, and can show that the debt was not repaid in full.

NOTE: Before doing this, it is strongly advisable to receive debt advice from an approved and independent debt adviser first.

A Debt Arrangement Scheme is a scheme that can help people repay their debts in a manageable way, removing the threat of court action from their creditors.

Through a Debt Arrangement scheme, the debtor sets up a Debt Payment Programme (DPP), making the one regular payment which is shared between their creditors.

DAS may be a suitable option if: ​

  • The debtor can only afford to pay a small monthly repayment amount. ​
  • The debtor has debt problems but will be able to make repayments to these debts over several months.​
Eligibility Criteria for DAS
  • Client Normally resident in Scotland.​
  • The client has been advised by a DAS-Approved money adviser.​
  • The client wants to repay the debt without further action from the creditor (debt collection, legal action etc).​
  • Have a reasonable level of disposable income after monthly basic needs (i.e. rent, household bills, council tax, food etc).​
Those excluded for eligibility for DAS: ​
  • Those involved in Protected Trust Deeds.​
  • Those who are bankrupt / subject to BRO or BRU​.
  • Those who have debts subject to a time order or time to pay direction (under section 1 or 5 of the Debtors (Scotland) Act 1987) in relation to this debt.​
  • Those whose DAS only includes a singular debt and subject to a time order (under section 129 (time orders) of the Consumer Credit Act 1974 (d) in relation to this debt.​
  • Those paying a debt or debts under a conjoined arrestment order.  (exception if a creditor is involved in the conjoined arrestment order or not, has tried to lawfully enforce another debt owed).​
Pros and Cons of DAS

There are several benefits using this scheme:

  • You will not pay interest or debt charges until the end of the DAS. 
  • You will not need to sell your assets.
  • Your employment will not be affected.
  • Almost all unsecured debts can be included. 

However, there are several drawbacks:

  • You will need to maintain payments as part of the programme.
  • Your home can still be repossessed if arrears that persist. 
  • Your landlord can evict you if you have rent arrears that persist.
  • The amount of money you can borrow will be limited.
  • You cannot include certain types of unsecured debt such as student loans, fraudulent debt, child maintenance arrears and court fines.
  • It may affect your credit rating.

DAS Guidance for Couples (with Joint Liability) and Businesses

Couples

Couples who have joint liability for a debt which may be included in a debt payment plan if they are:​

  • Spouses or civil partners of each other; or​
  • Living together as if spouses ​

Both applicants must consent to the proposal

 

Businesses

Partnerships, trusts, or incorporated bodies can also seek to repay their debts over a certain period (Stipulation Maximum 5 years).​

Excluded from applying for DAS in this category:

  • Limited or public companies​.
  • Not formed under Scots law​.
  • Those established or carrying on business outside of Scotland.​
DAS Process
  • Proposal sent to all creditors.
  • After 21 days, either one of the two following outcomes will happen:
    1. Creditors accept the proposal/no response. The debt payment programme goes ahead.
    2. Creditors reject the proposal. The debt payment program can still be approved if fair and reasonable to do so.

NOTE: ONCE DEBT PAYMENT PROGRAMME APPROVED, CREDITORS MUST COMPLY WITH DAS LEGISLATION.

Variations on Debt Payment Programs

If the situation of the debtor changes, the Debt Payment Programme can be varied to take account of this.​

The debtor, creditor or money adviser acting on behalf of the debtor can apply to the DAS Administrator for a variation to the programme.​

Non-compliance with the conditions of the Debt Payment Programme may cause it to be revoked, and power to resume legal action against the debtor will take effect. This means that the creditors can add all charges, interest and penalties that are due as if the DAS / Debt Payment Plan never existed.

Conditions of a Debt Payment Program
  • Make the first payment under the debt payment programme within 42 days of approval.​
  • Make all payments on the date that they are due.​
  • Pay a ‘continual liability (such as rent or council tax) when due for payment.​
  • Make no additional payments to creditors other than a payment due under the programme (excludes continuing liabilities).​
  • Do not apply for additional credit over and above the allowed amount unless permitted by the DAS Administrator.​
  • Notify money adviser / DAS Administrator of any changes to address or circumstances within 7 days of the change (i.e., changes in employment etc).​
  • Provide info / evidence within 10 working days of request from money adviser / DAS Administrator.​
  • Make payments in respect of credit agreed and obtained under the rules of DAS when these are due.​
  • Give all notices and intimation as required by a debtor under the regulations.​
  • Complete and return any tax / duty return or declaration on time and pay any sums due on time. ​
  • Notify the DAS Administrator if a Money Adviser does not act on their behalf unless the Money Adviser has resigned / suspended or revoked.​
  • A Debt Payment Programme may also be subject to further conditions as advised by Money Adviser / DAS Administrator (subject to approval). This includes but is not limited to a request to gain money from the sale of an asset, guarantee of extra payment s such as a lump sum from any future income or any other reasonable income or any other reasonable condition.​

IF A DEBTOR BREACHES ANY OF THE CONDITIONS, THEIR DEBT PAYMENT PROGRAMME MAY BE REVOKED​.

Variations on Debt Payment Programs Part 2 – Reaching the Conclusion of it

The Debt Payment Programme reaches its conclusion when all payments have been made as agreed, a lump sum payment has been made of all the payments due, or all creditors agree in writing to the completion of the programme prior to the end of the schedule of payments.​

From this point on, the debtor cannot be held responsible for any more payments towards the debt, the interest, charges, or penalties that would be incurred during the duration of the scheme.​

At this stage, all the debtor’s information is removed from the DAS register and the creditors are informed of the completion of the scheme. ​

NOTE: LIKE TRUST DEEDS AND IVA, THERE WILL BE EVIDENCE OF THE ARRANGEMENT ON THE DEBTORS CREDIT FILE FOR UP TO 6 YEARS. THIS WILL BE LISTED AS ‘PARTIALLY SATISFIED’ OR ‘PARTIALLY SETTLED’ AGAINST EACH OF THE DEBTS​.

A Trust Deed is a formal agreement between the Debtor (The person in debt) and the Creditor(s) (The company / person the debt is owed to) utilising a third party (the ‘Trustee’) to administer and repay towards the debt. This repayment is based on affordable payments to the debtor.​

A trust deed can become ‘protected’ if the majority of creditors agree to the terms of the trust deed. This means that the trust deed is binding on all creditors, and they cannot take any steps to recover the money owed to them. If a trust deed is not ‘protected’ then it will not be binding on all of your creditors, and they could still take action to recover the money you owe them.

A trust deed usually lasts for four years. Once it is completed, your unsecured debts will be written off.

This solution is for people with more than £5,000 of unsecured debt.​

Pros and Cons of Trust Deeds

 

Benefits of a Trust Deed:

  • If agreed with creditor the debt is ‘frozen’ at the start of the arrangement – continued co-operation means no further interest or charges being applied.​​
  • Once your trust deed is approved, your creditors will not chase you for payment or add more interest and charges to your debts, and they cannot take any court action.
  • Can keep essential vehicles under £3,000.​​
  • No need to physically appear in court.​

Drawbacks of a Trust Deed:

  • An insolvency Practitioner takes a charge for their service out of the monthly repayment – it is important to understand what this will be.​​
  • A Trust Deed may affect terms of employment. (Certain roles require disclosure).​​ If you are concerned about this, you should check your contract or speak to your HR department.
  • There is a risk of bankruptcy / sequestration if the Trust Deed fails.​​
  • The debtor’s Credit rating is affected for 6 years.​
  • Some assets may have to be sold as part of the process.
  • Your name will be on the Register of Insolvencies for 5 years.
  • If you are granted a trust deed and you rent your property your landlord may terminate your tenancy agreement.
  • If you are a homeowner, you may have to release equity from your property.
Debt Types – Trust Deeds

A trust deed includes most unsecured debts, such as credit card debts, overdrafts, and personal loans. Your trustee will discuss this with you. If you have arrears on your household bills, such as council tax or utilities, the trustee will include them in your trust deed. Some debts are NOT included in a trust deed. These include:

  • Student loans
  • Mortgages (unless there is a shortfall resulting from repossession then it will be).
  • Criminal fines
  • Fraudulent debts, such as benefit fraud
  • Child maintenance arrears – if you are not paying child maintenance, the arrears can be included. If you are paying child maintenance, the arrears are excluded.
Trust Deeds – Process
  • Complete Income and Expenditure assessment.
  • Referral to insolvency administrator/trustee.
  • A notice is placed on the Register of Insolvencies.
  • Trustee writes to creditors setting out proposed terms of the trust deed.
  • Creditors are given time to accept/reject the trust deed.
  • If no objections are received trust deed becomes ‘protected’.
  • Trustee writes statement of accounts to creditors, debtors, and the AiB.
  • Trust Deed begins (typically 4 years).
Debtor’s Discharge from a Trust Deed

This is not an automatic process – the application must be made to the AiB for discharge if the Trustee is satisfied that, to their knowledge, the debtor has met their obligations under the Protected Trust Deed (PTD) and have co-operated in the administration of the PTD.​

The Accountant in Bankruptcy (AiB) will not discharge a debtor if they are not satisfied that the debtor has co-operated for the duration of the PTD and that this has impacted on the final dividend return to creditors.

The AiB will also refuse to register the discharge if they are not satisfied that full declarations have been made of assets and income and that the appropriate amount and number of contributions have been made.​

‘Sequestration’ is the name for the process of Bankruptcy in Scotland.​

What Are the Criteria for Sequestration?
You must meet the following criteria to be sequestrated: 

  1. You have not been made insolvent in the past 5 years.
  2. You must be able to pay the application fee of £150. You may not need to pay this if you receive benefits or have no surplus income. 
  3. You are resident in Scotland or have lived here for at least one year.
  4. You owe at least £3000 worth of debt.

NOTE: Advisers MUST issue debtors with a debt advice and information package (DAIP) and a debtor’s guide for sequestration cases.

What Are the Pros and Cons of Sequestration?
Sequestration is a serious commitment that should be considered carefully. There are several benefits to sequestration: 

  1. Your creditors will not be able to pursue you for debts and you will only have to talk to the insolvency company.
  2. You will not need to pay your creditors anymore.
  3. Current enforcement action stops – for example, an arrestment order, where a court makes an order telling your employer to pay some of your wages directly to your creditor. If you become Bankrupt, this will stop.
  4. After is it done, you will be rid of at least a large part of your unsecured debts. Your Bankruptcy will usually come to an end (you will be ‘discharged’) after 1 year. Some debts will not be written off, such as student loans and criminal fines.
  5. You can retain certain household goods and keep some money to live on. Certain goods are not treated as assets in Bankruptcy. These are items such as: clothing, bedding, furniture, and household equipment for basic domestic needs. Items you need to earn a living (for example, tools and books) can be excluded up to a total value of £1,000. A vehicle that you need to travel to and from work, or to do your job, can also be excluded up to the value of £3,000.

However, there are several consequences: 

  1. The sequestration will require any monthly income considered disposable to be sent to the insolvency company.
  2. Your assets (e.g. your house or your car) may be sold to release funds for your sequestration. However, there may be some safeguard options you can use to protect your family from losing their home if they reside with you.
  3. Certain types of employment will have restrictions (e.g. director of a limited company). Check your work contract or contact your HR department to clarify this.
  4. You cannot hold public office (for example, as an MP, MSP, councillor, or member of a school board) and you cannot serve as a company director unless the sheriff court agrees.
  5. Your credit rating may be affected for six years, and you will be on the Register of Insolvencies for 5 years. Even after this period it can still be difficult to get credit, such as a mortgage as lenders may ask whether you have ever been Bankrupt.
  6. The trustee has wide powers over your financial affairs.
  7. You cannot take out credit of more than £2,000unless you tell the creditor about your status.
  8. You cannot take out credit of any amount if at that time you have debts of at least £1,000. 

What Happens at the End of Bankruptcy?
Most of your debts will be cleared after the sequestration process has been completed and you do not need to pay them back. This is referred to as ‘discharge’. Some debts cannot be wiped off, such as student loans and criminal fines. In other words, once sequestration is completed, your unsecured debts are written off and you should not receive any further contact from creditors.

If you were sequestrated under the standard type of Bankruptcy, you will be expected to be discharged after 12 months providing you cooperated with your trustee. If you were required to make contributions during your Bankruptcy, you will normally have to continue paying these for 4 years from the date you were sequestrated. 

You can apply for a certificate of discharge from the Accountant in Bankruptcy. The contact details for this can be located within the Accountant in Bankruptcy website

Being sequestrated does impact your credit rating for up to 6 years. This will make it more difficult to acquire credit like a mortgage or a loan in the future.

Minimal Assets Process, or MAP Bankruptcy is a form of Bankruptcy aimed at people with low income and few assets. ​

NOTE: Advisers MUST issue debtors with a debt advice and information package (DAIP) and a debtor’s guide for MAP cases. Please see further information below for these packs.

What Are the Criteria for MAPs?
To apply for the MAP, you must meet the following criteria:

  • You have not been made insolvent in the past 5 years.
  • You are resident in Scotland or have lived here for at least one year.
  • You owe no more than £25,000.
  • If you have a car, it must be worth £3000 or less.
  • All assets you have other than a car must be worth less than £2000 in total, and no single item may be worth more than £1000.
  • You must not be a homeowner.
  • You must either have no income besides that which meets essential living costs, or you must have an income made solely from income-based benefits (e.g. universal credit).
MAP – Pros and Cons

Pros:

  • Client will not need to appear in court.​
  • There is no application fee payable for a MAP Bankruptcy.
  • Discharge from MAP is normally after 6 months, as opposed to a longer period in Sequestration / Full application Bankruptcy.
  • Creditors – Cannot chase debt / add any charges, interest, or take court action.​
  • Most unsecured debts are included. 

Cons:

  • Like standard sequestration / bankruptcy, credit rating will be affected for 6 years.​
  • Bank likely to close / freeze accounts, meaning only basic bank account will be available.​
  • Potential to be evicted if in private let.​
  • Some debts not included (Student loans, child maintenance & court fines).​
  • Self-Employment – obtaining credit for goods and services more difficult.​

Further Information

If you require additional information and support for any of the topics, please check out the following links: