Scotland operates a robust regime for personal debt, with three main debt programmes in existence. The Debt Arrangement Scheme (DAS) is one debt solution that does not involve outright insolvency and is backed by the Scottish government.
Sequestration offers another route away from unmanageable debt for people in Scotland but is typically a measure of last resort. It works similarly to bankruptcy and requires the debtor to hand over their assets to a Trustee.
A Scottish trust deed does offer an alternative to sequestration under the right circumstances, and following this route generally avoids the loss of the home. Any available equity in the debtor’s property may be used to repay creditors, however.
All of these debt solutions are suitable for repaying debts exceeding £5,000 in total, writes Sharon McDougall, a Debt Arrangement Scheme approved money adviser in Scotland.
What is the Debt Arrangement Scheme?
The Debt Arrangement Scheme may be appropriate when unsecured debt payments have become unmanageable but there is regular disposable income available. A Debt Payment Plan (DPP) is arranged following a close review of the debtor’s income and expenditure.
The payment plan is legally binding as long as payments are made as arranged, and the debtor has protection from creditor pressure.
Benefits and drawbacks of DAS
- People entering the programme do not need to declare full insolvency. All the debts included in the repayment plan are paid off in full, but at an affordable rate and over an extended period.
- The duration of DAS depends on individual circumstances but a strong emphasis is placed on affordability. Creditors also benefit from the knowledge that their debt will eventually be repaid in full.
- One of the problems when paying off unsecured debt is the interest and charges that continuously increase the overall amount owed. DAS deals with this issue by freezing additional charges and monthly interest, allowing people in the scheme to escape the debt spiral.
- The time it takes to repay debts under DAS can be lengthy, which means the debtor will need to live with strict budgeting.
Scottish trust deeds
Scottish trust deeds allow for part of each debt to be written off, which means the debtor has to declare full insolvency and the arrangement is publicly registered. An instalment plan is arranged and put forward for agreement by creditors.
If the majority of creditors sanction the proposed repayments, the trust deed becomes ‘protected’ and legally binding. An unprotected trust deed can remain in place but it does leave the debtor at risk of enforced bankruptcy at a later date.
Scottish trust deeds typically last for four years but can be extended to five years to include the use of equity in a debtor’s property. This means their home may need to be remortgaged to provide the required payment.
Benefits and drawbacks of Scottish trust deeds
- Sequestration can be avoided when the trust deed is protected, and creditors cannot contact their debtor
- There is some flexibility around property – if there is only a little equity in the property or remortgaging is not possible, an extra year may be added to the trust deed duration instead
- Trust deeds are publicly viewable within the Register of Insolvencies
Sequestration is a measure of last resort but offers an escape from severe debt for people who cannot repay. The process involves handing over assets to a Trustee, and depending on their income, making monthly repayments.
People on a low income and with few assets may be eligible to enter the Minimal Asset Process, or MAP, which prevents their unsecured debts from building up when there is no hope of repaying them.
Benefits and drawbacks of sequestration
- Entering sequestration releases debtors from relentless creditor pressure as all contact is made through the Trustee
- It allows them to become debt free in a relatively short time and offers a fresh start to rebuild their finances and credit rating
- Tools and equipment required for work purposes can be retained by the debtor and are not included in the arrangement
- A record of sequestration stays on the debtor’s credit file for six years so obtaining borrowing or credit will be very difficult
Debt programmes in Scotland
This range of debt solutions in Scotland offers vital support for financially vulnerable people and valuable protection from creditor pressure. The interest and additional fees and charges often cause a spiral into unmanageable debt even when the original amount seems controllable.
These Scottish initiatives cover unsecured debts, such as bank overdrafts, payday loans, credit cards and store cards, and personal loans. The extra time they provide to repay is critical for many people in significant debt, as is the fact that a single repayment is made rather than multiple repayments that were previously required each month.