16 Feb 2013

Debt Payment Programmes in the Context of Repossession

Debt Payment Programmes in the Context of Repossession

Kirsty Allen, Solicitor provides a brief overview of the various ways in which a borrower’s participation in the Debt Arrangement Scheme may creep into an action for repossession, and what consideration this may be given in court.

Kirsty Allen, Solicitor provides brief overview of the various ways in which a borrower’s participation in the Debt Arrangement Scheme may creep into an action for repossession, and what consideration this may be given in court.

Some recent data from Scotland's Accountant in Bankruptcy shows a staggering 97% year on year increase in approved Debt Payment Programmes (DPPs) within the Debt Arrangement Scheme (DAS). When compared to a year on year increase of only 4% in Protected Trust Deeds and Sequestrations for the same period it is clear that the DAS is becoming an ever increasingly attractive solution for individuals in debt crisis.

The DAS was originally introduced in 2004 and then heavily amended in 2011.

The DAS offers an alternative to bankruptcy for debtors. Whilst participating in the DPP, debtors are protected from enforcement action being taken against them by creditors in respect of debts contained within the DPP. The added advantage for debtors participating in the DAS is that interest, penalties and charges on debts included within the DPP are also frozen.

Until recently the DAS was associated predominantly with unsecured debt. Secured lenders were not directly affected by the introduction of the DAS as standard securities were not included in the definition of "debt" within the 2004 Regulations. This definition was adopted into the 2011 Regulations and therefore remains in place. The 2011 Regulations draw a clear distinction between continuing liabilities - i.e. ongoing mortgage payments - and mortgage arrears. For the purposes of the 2011 Regulations, and therefore for the purposes of determining what can and cannot be included within a DPP, the definition of "debt" includes a sum due by a debtor but only "to the extent that the sum is arrears of a periodic payment due to be paid under a loan agreement so secured". Mortgage arrears can therefore be included within a DPP.

The 2011 Regulations go on to expressly exclude the principal mortgage advance from the definition of ''debt''. Had Parliament not made this distinction, and simply allowed the definition of debt to be all encompassing, they would have effectively given the borrower a tool for overriding the terms of their mortgage.

Unfortunately the 'story does not end there' for secured lenders. Whilst the DAS does not have a direct effect on the rights of lenders to call up their security, it does have an indirect effect. Scotland's main repossession Act says that where a judge is presented with an Application for recovery of possession, he may only grant a judgment where he is satisfied that PAR has been complied with and generally that the Application is 'reasonable'.

Section 24(7) of the DAS Act says that participation in an approved DPP is expressly included in what a judge must consider.

In courts such as Hamilton and Glasgow we are seeing an increasing trend in borrowers citing their participation in the DAS as a 'defence' to the repossession action. Participation in a DPP though does not prevent a lender from seeking a judgment as the legislation only says that the judge must have regard to a debtor's participation in DAS. A judge may take the view that if the borrower is participating in a DPP he/she has sought financial advice and is 'addressing their debt', in which case they may prefer to adjourn cases to allow the borrower time to maintain payments. It is of course open to a judge to dismiss an action on the basis that he does not consider it reasonable to grant decree whilst the DPP is in operation. Having said this, if the borrower is not maintaining contributions in line with the DPP, or is failing to maintain their ongoing monthly instalment, these are strong arguments to put to the court that it would be reasonable to grant a judgment.

Conclusion? It is important for lenders to remember that DAS does not stop the calling up of a loan. However, the 'shadow of DAS' may come into play when a case enters the court room. Lenders should be guided by their lawyers on how and when to proceed.

Kirsty Allen, Solicitor

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