Does England & Wales Need a Debt Arrangement Scheme
11th April 2017
Does England and Wales need a Debt Arrangement Scheme?
If you don’t live in Scotland, you probably will never have heard of the Debt Arrangement Scheme (DAS). It is a formal Scottish solution that allows you to repay your debts in full and is not a type of insolvency; there is now talk of introducing a similar scheme in England and Wales.
The Debt Arrangement Scheme in Scotland has been around since 2004. To put it simply, it’s a scheme for consumers who are struggling to manage their debts and allows them to repay those debts over a longer period. Importantly, it also freezes interest and charges, so all the money paid into the Scheme, goes towards paying the debt owed.
It also stops any enforcement action being taken by creditors, so no more knocks at the door by bailiffs or debt collectors.
Even if those who are owed money don’t agree to it, they can still be forced into it by a civil servant known as the Debt Arrangement Scheme Administrator. No courts or judges are involved and once someone is in it, they only need to make one payment per month, with a payment distributor dividing up the money and paying the creditors for them.
Sounds perfect, doesn’t it? But, it’s not that simple. There are some catches to the Scheme, which means it’s not always the best choice for someone who wants to deal with their debts.
What are the Catches?
The catches are that debts need to be repaid in full (except for any interest that would be payable after it is set up). However, where someone has a personal loan, by entering the Scheme they often will commit a default on the loan, so all the money owed, including the interest, becomes payable in the Debt Arrangement Scheme. That interest does need to be paid.
Also in Scotland, the same amount needs to be paid each month that would have to be paid if the person granted a protected trust deed (the English and Welsh equivalent of an Individual Voluntary Arrangement). But whereas a protected trust deed only lasts 4-5 years, with the remainder of the debt being written off at the end, debt payment programmes under the Debt Arrangement Scheme continue until all the debts are paid in full. This means someone can be left with no spare cash until their debts are repaid. If that takes 10 years, then it takes 10 years.
Also during that time, the debts owed remain showing on someone’s credit file. They don’t get written off until the programme finishes and even after the final payment, a note that payments have been missed can remain on someone’s credit file for up to six years.
This means credit ratings may be negatively affected for longer than had a protected trust deed been signed.
So why would anyone enter a Debt Arrangement Scheme?
Well lots of people don’t. Since 2015 there has been a 50% reduction in people using the Scheme in Scotland. Many people are now looking at other options that can help them clear their debts sooner.
However, that’s not to say a Debt Arrangement Scheme is never suitable. Where people have large amounts of equity in their home and it’s not possible to protect this through a protected trust deed, many people choose to use the Debt Arrangement Scheme rather than place their home at risk. This is possible as the Debt Arrangement Scheme protects them from being made bankrupt. They still, however, have to pay their mortgage each month.
Also, where people have smaller amounts of debts that can be repaid in less than 4-5 years, many choose to use the Debt Arrangement Scheme rather than bankruptcy or a protected trust deed.
Why would England and Wales want a Debt Arrangement Scheme?
Because there is nothing else like it, and in the correct circumstances DAS can be a very effective tool for dealing with debts.
The closest equivalent in England and Wales is an administrative order, but the problem with these are they require people to have a county court judgement or high court order against them. This is not the case for the Debt Arrangement Scheme. Also, they must owe money to more than one person and cannot owe more than £5,000. With the Debt Arrangement Scheme, these conditions don’t apply.
It can also be a safer option than a Debt Management Plan, which is an informal agreement with creditors, but doesn’t provide the same protection that the Debt Arrangement Scheme does.
At Creditfix we don’t look at any remedy through rose-tinted glasses, but we do agree the Debt Arrangement Scheme is an important remedy that should be introduced into England and Wales.
However, what is important is people get the correct debt help & advice. Bad advice can often make debt problems worse and cost people more. The solution, we believe, should fit the person. Not the other way around.