25 Jul 2012

A Lender's Guide to Debt Payment Programmes and the Debt Arrangement Scheme

A Lender's Guide to Debt Payment Programmes and the Debt Arrangement Scheme

Rob Aberdein, Partner, looks at DPPs and their implications for secured lenders in Scotland.

Rob Aberdein, Partner, looks at DPPs and their implications for secured lenders in Scotland.

The Debt Arrangement Scheme (‘DAS’) is a Scottish statutory debt repayment tool for debtors (those with secured and/or unsecured debt) that is administered by the Accountant in Bankruptcy (‘AiB’). Although DAS has been around since 2004 the prevalence of Debt Payment Programmes (‘DPPs’) has significantly increased during the course of 2012. This briefing note is intended as a practical guide for secured lenders who may receive applications from borrowers for DPPs.

What is a DPP?

DAS allows debtors put in place a repayment programme (known as a DPP). A DPP collates all their secured and unsecured debts into one manageable repayment that is usually paid monthly. In terms of the scheme, a private sector or money advice sector entity is appointed as the ‘Payment Distributor’ and they assume responsibility for distributing the regular payment to all creditors. In a secured lending context the debtor would be compelled to maintain their contractual monthly instalment in addition to the proposed repayment of the mortgage arrears captured by the DPP.

Who administers DAS?

The DAS scheme is administered at a high level by the AiB who, amongst other functions, assess the eligibility of each DPP Application, deal with objections and grant DPPs.

Objecting to a DPP Application

Should a lender wish to object to an Application, they must do so within 21 days of the date the DPP was posted and must provide justification for their objection.

Having spoken with the AiB, the more information a lender can provide about why the DPP should not be granted, the better. A blanket objection will carry little weight. Information about historic account conduct and affordability are obviously valuable pieces of information that can help ‘build a case.’

Some lenders are also unknowingly consenting to a DPP by not objecting within the 21 day window – in effect silence is taken as ‘implied consent’ and so robust procedures should be put in place for dealing with Applications once they are received.

Objections can be made in writing, by email or through the ‘Debt Arrangement Scheme Hub’ or DASH (once a lender has http://www.dasscotland.gov.uk/publication/dash-registration-form(registered)).

Once registered lenders can also opt to receive DPP Applications via a secure mailbox that is located in the Hub – this obviously mitigates the risk of Applications being misplaced or delayed.

Appeals

A creditor named in an Application for a DPP may appeal to a Sheriff (Judge) against a decision taken by the DAS Administrator to:

  • approve, refuse or revoke a DPP;
  • determine a debt in a DPP;
  • attach a discretionary condition in DPP;
  • dispense with creditors consent; and
  • approve or refuse a variation;

A debtor may also appeal to a Sheriff against a decision made by the DAS Administrator to:

  • refuse a DPP application;
  • determine a debt in a DPP;
  • attach a discretionary condition to a DPP;
  • approve or refuse of a variation;
  • revoke a DPP.

The decision made by the Sheriff is final and binding.

Fees, Interest and Payment Holidays

If an Application is approved by the AiB, all interest and charges are frozen and should the DPP complete successfully, all interest and charges ‘caught’ by the DPP are written off. Should a debtor fail to honour the repayment proposals made in a DPP, it will be revoked and the freeze on interest and charges lifted.

Fees can amount to up to 10% of the total debt caught by the DPP. A flat fee of 2% is charged by the AiB as Administrator and a 4% - 6% fee is charged by the Payment Distributor. There are four firms on the AiB's Payment Distribution Panel and they will always act as the distributor where they are the entity making the Application. Other providers can make DPP Applications but any fees they charge are on a contractual basis between them and the debtor and do not form part of the DPP.

Debtors are able to apply to the Administrator for a payment holiday of up to six months during the course of their DPP if their income reduces by more than 50%. The Administrator will advise the creditors of the variation but the decision whether to allow the payment holiday rests solely with the Administrator.

Revoking a DPP

A DPP can be revoked by decision of the DAS Administrator. A creditor, money advisor or the debtor themselves can apply to have the DPP revoked by completing a Form 5. Usually, a creditor would apply if they have not received two payments and the third is due or if the creditor becomes aware that the debtor had knowingly misled the Administrator during the Application process.

The DAS Administrator will automatically revoke an Application where the debtor is declared bankrupt or signs a Trust Deed.

How do DPPs affect repossession actions?

Once a repossession action has been raised, it is competent to continue to seek a repossession judgment (Decree) where a DPP is in place. However, if the debtor has been maintaining their monthly repayment instalment and if regular payments are being received by the creditor from the Payment Distributor, it is unlikely a Sheriff would be minded to grant Decree.

Conclusions

Although DPPs have been with us for some time, their prevalence is certainly on the increase due to a change in strategy by the AiB. Managed correctly they can be used as a tool to facilitate repayment of mortgage arrears, although security holders must be savvy to the fact that they are in effect ‘writing off’ 10% of an arrears figure that is otherwise secured by a standard security (legal charge). Lenders do not however have to consent to DPPs and where they deem them inappropriate objections should be made timeously and with as compelling a supporting case as is possible. 

Thank you to my colleagues Elaine Stuart and Rachel Main and John Cook of the AiB who assisted in preparing this guidance note.

Rob Aberdein, Partner

Disclaimer: This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice.

Read more: http://www.mortgagefinancegazette.com/industry-comment/debt-payment-in-scotland/


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