Dealing with problematic debt is often a stressful process, and so when a debt solution can help to manage the situation it is often seen as a positive thing. One such solution that is available for debtors living in Scotland is the Debt Arrangement Scheme, under which debtors can seek the help of a qualified money adviser to develop and put in place a Debt Payment Programme. Once a payment programme has been agreed between a debtor and their creditors, it allows for them to make more affordable repayments towards what they owe over a longer period of time.
Debt Arrangement Scheme Pros and Cons
Compared to certain other debt solutions, the basics of a payment programme under a debt arrangement scheme are not too difficult to understand – but what are the advantages and disadvantages of this popular Scottish approach to managing debt? In this article, we look at the DAS in more detail and set out some of the key pros and cons that debtors should be aware of.
You have more time to pay what you owe, and your debts will not increase…
One of the most obvious advantages of a payment programme setup under the DAS is that debtors are given more time to repay what they owe. There is no minimum or maximum period for which the programme must run, and they are designed to provide debtors with enough time to pay back what the owe at a rate that is affordable for them.
They generally run for between three to eight years, although it is not unknown for creditors to accept periods of 12 years or longer for larger debts. During this time, debtors are required to make regular repayments towards what they owe. This figure will be calculated by a qualified money adviser who will balance a debtor’s income against the amount they pay towards essential living costs (things like accommodation, utility bills, essential travel and groceries) to determine how much they can reasonably afford to pay each month.
In most cases, once a debt payment programme is in place your creditors will freeze any interest or other charges that would usually be applied to your debt. This means that your debt will not increase for the duration of your DPP and you can work towards paying it off without worrying about the extended amount of time that this will take. Whilst interest and charges are also frozen by a number of other debt solutions, a payment plan under a debt arrangement scheme does not involve declaring yourself insolvent – which can have very serious implications for your financial status and could leave you facing immediate attempts by your creditors to seek your sequestration if the solution fails.
… but you will still owe the full amount.
Although a repayment programme can help you to manage your debts, it is worth keeping in mind that you will still have committed to repaying what you owe in full. Unlike some other debt solutions (such as a Trust Deed or Sequestration), a debt arrangement scheme does not have a mechanism for writing off debt and your creditors will still expect you to settle your debt in full – albeit over a longer period of time than originally agreed.
Debtors should also be aware that they will not be able to temporarily stop making payments (sometimes known as a ‘payment holiday’) towards their arrangement without first gaining the permission a Debt Arrangement Scheme administrator. Once the scheme has begun, debtors will usually be required to continue making repayments without fail until they have paid back the full amount owed. There are consequences of failing to keep to the terms of a debt scheme, and missing payments may lead to your programme being revoked.
The Debt Arrangement Scheme protects you from your creditors…
With a DPP in place, your creditors will no longer be able to commence enforcement action against you and cannot, for example, begin court proceedings to sequester you. Any court action that is already in progress when a DPP formally begins will be stopped unless the debtor is already subject to bankruptcy restrictions or bound by a bankruptcy restrictions undertaking (in which case a DPP under the DAS will not usually be available).
In a similar way, a DPP set up under the DAS can also relieve debtors of the stresses associated with dealings with their creditors. All communications, including the initial proposal of a DPP, should be made via an approved money adviser whilst payments are generally made via a third-party payments distributor. This means that debtors can avoid having to deal with their creditors directly.
… but your credit rating will still be affected.
Although you may be protected from your creditors by a payment programme, your credit rating will still be impacted by your debt situation. As a debt arrangement scheme involves paying back regular amounts of money that are less than originally agreed, in most cases your creditors will record that you have defaulted on your debts – a flag which will remain on your credit record for a period of six years. In addition to this, if you do begin a DPP, your details will be added to the publicly available register which is used by credit reference agencies when updating your report and determining your credit score. Your name will generally remain on the register until one day after your scheme has been completed.
Whilst all of these factors are likely to influence your credit score – making it more difficult to access further credit in future – it is worth noting that many creditors view the Debt Arrangement Scheme quite differently than many other debt solutions and debtors may find that their credit rating recovers relatively quickly once their debts are paid off in full.
A debt payment programme offers a flexible debt management solution…
There is always the chance that a debtor’s circumstances could change during the course of a DPP, and this is recognised by the debt arrangement scheme. If your income falls, repayment amounts can often be adjusted to ensure that the agreement does not fail, and debtors benefit from the advice of qualified money advisers who help devise workable and realistic programmes.
Unlike certain insolvency solutions, a repayment programme will not usually include any restrictions on your assets and you will be able to keep your home whether you rent or own it yourself. Whilst there are some exceptions, the general rule is that you will only be expected to sell or release money from very valuable and obviously non-essential items. This means that, for example, debtors will usually be able to keep their car provided that they can demonstrate that they need a vehicle, and that that the car is not unreasonably expensive.
In most cases, debtors can also rest assured that their employment will not be adversely affected by the arrangement. Whilst there are some select professions that conduct financial vetting of candidates and employees, for the most part, a DPP will not prevent you from working within a certain field. Solicitors, accountants, those with responsibility for money and those working in the police force or fire service may find that they cannot continue in their role if they enter into a DPP arrangement – but this will depend on personal circumstances.
… but it does come with some strict criteria.
Whilst many consider a DPP to be a flexible debt solution, debtors must meet a number of criteria in order to qualify. Firstly, they must be resident in Scotland as the debt arrangement is a scheme backed by the Scottish government. In addition to this, you must owe more than one debt to qualify for it and can only make a single application in any 12 month period.
On the topic of applications, you can only apply with the assistance of an approved money adviser – a list of which can be found on the website of the Accountant in Bankruptcy (AiB) which administers the scheme. Once a DPP is in place, debtors are required to make regular repayments via a payment intermediary who will distribute the funds amongst the relevant creditors. Payment distributors usually charge for their services – although their fees are capped at a maximum of 10% of each payment. These fees will be taken into account when determining how long your DPP will need to run for your debt to be cleared.
On the whole, DPPs set up under the Debt Arrangement Scheme provide debtors with a flexible solution to help them cope with what might otherwise become unmanageable levels of debt. The DAS is not an insolvency solution and so, whilst a DPP will affect your credit rating and have consequences for your financial status, it does not have the same stigma attached to it as declaring yourself insolvent may do.
For those debtors who live in Scotland, have some spare income to put towards their debts and wish to avoid selling their home or assets to settle their debts, Debt Payment Programmes set up under the Debt Arrangement Scheme could provide a viable route towards settling outstanding liabilities.