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Bankruptcy and Diligence (Scotland) Bill - Breathing space for debt problems?

22 May 2023

The Bankruptcy and Diligence (Scotland) Bill proposes to introduce measures designed to help those in financial difficulty and suffering with mental health problems to get some much needed "breathing space".

The 15-21 May 2023 is mental health awareness week in the UK and the theme this year is 'anxiety'. Mental health is something that affects all of us and whilst trying to keep up to date with developments within the law, I came across the Bankruptcy and Diligence (Scotland) Bill ("the Bill") which was introduced to the Scottish Parliament in April. It's no surprise that there is a correlation between financial pressures and mental health. The Bill proposes to introduce measures designed to help those in financial difficulty and suffering with mental health problems to get some much needed "breathing space".

The stated purpose of the Bill is to bring forward stakeholder recommendations to introduce improvements to current insolvency solutions as well as making technical changes to bankruptcy legislation. More importantly, the emphasis of the Bill is to help and improve the lives of people struggling with problem debt and serious mental health issues.

It also introduces recommendations to improve debt recovery processes for creditors (known as diligence) by making them more efficient whilst also maintaining protections for those who are subject to diligence.

The provisions

The Bill contains provisions which, broadly, fall into three categories:-

1.  A platform for the introduction and regulation of a "mental health moratorium".

The policy underpinning the "mental health moratorium" is to create a new form of protection which provides space to individuals who are experiencing debt problems as well as serious difficulties with their mental health.

As yet, the Bill does not set out how such a moratorium would operate but it does envisage that regulations made in accordance with the enabling power may include a framework about matters such as:

(i) Eligibility criteria

(ii) Time period for the moratorium

(iii) What actions, if any, a creditor can take during the moratorium.

The devil is, undoubtedly, in the detail and as things currently stand, no draft regulations have been issued underpinning the Bill. We do not yet know how such a moratorium will operate. Nevertheless, the Bill acknowledges the interaction between problem debt and mental health issues and strives to introduce a new regime to provide some breathing space to a debtor.

2.  Minor and technical amendments to the current bankruptcy regime designed to provide clarity and improve the processes set out within existing legislation.

The current regime under the Bankruptcy (Scotland) Act 2016 contains a number of errors, missing time limits and erroneous cross referencing. The Bill proposes to introduce a couple of amendments to the existing legislation, all of which appear to be uncontroversial.

3.  Measures to modernise debt recovery mechanisms to streamline and improve processes.

Sections 6-10 of the the Bill proposes a series of amendments to the current law of diligence in Scotland in relation to:-

(i) Arrestment (freezing of funds/goods) – the Bill introduces a requirement on the third party holding the debtor's funds/goods (e.g. the bank) to disclose to an arresting creditor the existence of and the nature/value of any property captured by arrestment. In circumstances where an arrestment is unsuccessful, it imposes a duty on the third party to explain why nothing was captured (e.g bank balance was below the protected minimum threshold).

(ii) Diligence against earnings – which allows a creditor to instruct a debtor's employer to make deductions from a debtor's earnings and pay deductions to the creditor. The Bill introduces a new requirement that an employer who is served with an earning arrestement, must notify the creditor within 21 days of receipt as to whether an arrestment has been successful.

(iii) Provision of debt advice and information package in relation to diligence on the dependence (a form of diligence carried before a court judgment is issued for the purpose of ensuring there are assets from which a creditor can be paid, if successful). The Bill proposes that debtors are given a debt advice and information package during diligence on the dependence to sign post the debtor towards advice.

(iv) Exceptional attachment notice and redemption periods – extending the timescales for redemption before items which have been attached can be auctioned so as to give a debtor more opportunity to pay the underlying debt.

(v) Money attachment when premises are open – the proposal is to provide some flexibility for when a money attachment can take place depending on the trade or business being carried out without the need to apply to the court (e.g allowing an attachment to be executed against a nightclub at 1am on a Sunday).

The Bill aims to strike a balance between the interests of both the debtor and the creditor albeit, in its current format, it is light on the detail of how that will work in practice. The Bill will now be referred to the parliamentary committees for consideration with a debate expected later in 2023. It is anticipated that the Bill will come into force by summer 2024 with underpinning regulations setting out the operating framework of the mental health moratorium to follow some time thereafter. 

If you would like any further information, please contact Lauren Rae, Head of Dispute Resolution, Scotland.

Further Reading