Michael Reid

My recent article regarding personal financial challenges provoked a certain amount of feedback because many individuals are struggling to pay their bills and have a concern that their personal financial position will worsen as costs continue to increase, such as utilities, debt servicing, food and travel.

A key point to remember in a time of difficulty is that one should never suffer in silence. There are numerous sources of personal debt advice, many of them free of charge.

An experienced advisor will normally seek additional information to that which is brought to the first meeting because, invariably, the concerned individual focuses on the one or two pressure points, whereas an overall view is likely to produce a more encompassing and suitably structured plan. Good advice takes time. There is usually no “quick fix” as one sometimes sees advertised.

Before Covid-19 arrived, the legislation in Scotland provided each person with the benefit of a six-week moratorium. The application process was straightforward and meant that an individual was given a six-week bubble of protection against all creditors, thereby relieving the immediate stress of creditor pressure and allowing time to establish a plan of action.

Many aspects of insolvent legislation were changed during Covid-19 in order to cope with the situation, one of which was to increase the personal debt moratorium period to six months. During this period, no creditor can take any formal action against an individual to recover a debt. Thus, if a person is thinking of applying for bankruptcy or signing a trust deed, the law provides a fairly lengthy period of time to consider matters.

Whilst the six-month breathing space is helpful for many, it is important that an individual does not fall into the trap of increasing debts during this period simply because there is no immediate creditor pressure. That would be seen as an abuse of a process that is designed to help rather than exacerbate matters.

One debt moratorium can be applied for in every rolling 12-month period. It is accessed through the Register of Insolvencies maintained by the Accountant in Bankruptcy (www.aib.gov.uk), normally with the guidance of an accredited money advisor. Access to the Register of Insolvencies is free and often used by credit reference agencies and banks in order to help obtain a picture of a person’s financial status.

When one looks at an individual’s spending pattern, a money advisor’s focus tends to review what are ‘essentials’. Essential expenditure for one person is not the same for another and of course, there are other issues to consider that surround a person’s propensity to spend, e.g. happiness, competing against others, bored, concern (if any) about the consequences, perception amongst friends, etc.

Undoubtedly, the dominant factor for many individuals is the desire to retain their house where it is owned. If it is possible to establish a repayment framework for all debts within a period not exceeding, say, seven or eight years, the Debt Arrangement Scheme “DAS” may well be the preferred way forward. A DAS can be entered into either immediately or during the period of a debt moratorium because the decision is taken by the individual rather than a creditor.

The DAS process requires input from an accredited money advisor and the whole process is co-ordinated/monitored by the Accountant in Bankruptcy. If a DAS is possible in terms of settling all known liabilities over a realistic period, interest is frozen and further, the Accountant in Bankruptcy is able to bind all creditors to a DAS should the view be taken that the individual’s proposal is reasonable in all of the circumstances. After essential expenditure has been settled, the individual pays a contribution to a Payments Distributor who issues a regular dividend (normally monthly) to all known creditors pro-rata to the level of each claim. The key attraction of a DAS is that the house is exempt from the process.

As one might imagine, a DAS can anger creditors when they see the person safely ensconced in their house, perhaps with large equity, whilst they are forced to wait seven or eight years to be repaid and cannot charge interest. Perhaps… but the law seeks to balance the perceived needs of all parties in this type of situation.

A person subject to a DAS can still have a bank account. Clearly, a bank is unlikely to offer an overdraft facility, and other lenders will decline to offer credit whilst the DAS is in place. However, the fact that the house is safe, creditor pressure is removed and someone else is dealing with regular creditor payments are significant advantages and explain the increasing numbers of individuals who have entered the DAS process on an annual basis since its introduction in 2004.

Any accredited money advisor will be able to provide more information and that is why, as mentioned at the start of this article, don’t suffer in silence. Arrange for a proper assessment to be undertaken, listen to the options, and create a clear plan of action that includes saving the house if at all possible.