The Bankruptcy and Diligence (Scotland) Bill was passed by the Scottish Parliament on 6 June 2024 and a date for it coming into force is awaited.
One of the main changes introduced by the Bill is a mental health Moratorium on debt recovery action (the "Moratorium"). How the Moratorium will work in practice is set out in separate regulations which were published in draft in May 2024 and will be subject to a public consultation.
Whilst the draft regulations are not yet in force and are subject to change here's a guide to how they currently envisage the Moratorium operating.
Who can apply for a Moratorium?
A money adviser may submit an application for a Moratorium to the Accountant in Bankruptcy in respect of individual resident in Scotland who is not subject to another debt solution (such as a trust deed, debt payment programme, or sequestration) and who meets the mental health criteria and debt criteria.
Mental health criteria
An individual meets the mental health criteria if they are subject to certain orders, certificates, or directions under the Criminal Procedure (Scotland) Act 1995 and the Mental Health (Care and Treatment) (Scotland) Act 2003, or if they are voluntarily or otherwise receiving equivalent crisis, emergency or acute care or treatment in the community from a specialist mental health service in relation to a mental illness of a serious nature.
Debt criteria
An individual meets the debt criteria if a mental health professional has confirmed that, in short, the individual has a problem with debt which is or is likely to be contributing to or has contributed to their mental illness, is causing the mental illness to deteriorate or appears to be hindering the recovery from mental illness and the individual is unable deal with their debt as a consequence of their mental illness.
The ways in which the mental health criteria and debt criteria are to be met are set out in detail in the regulations and both have to be confirmed in writing by a mental health professional who also has to sign the application. The Accountant in Bankruptcy can request supporting evidence from the mental health professional.
What happens if the application is granted?
If the Accountant in Bankruptcy is satisfied that the mental health criteria and debt criteria are met, they must:
- Issue a notification of the start date of the Moratorium to (a) the individual and any legal adviser or nominated point of contact, (b) the money adviser who signed the application, (c) the mental health professional who signed the application, and (d) every creditor of the individual known to the Accountant in Bankruptcy - such creditor details may have been provided in the application or may be obtained by the Accountant in Bankruptcy undertaking a credit check on the individual; and
- Enter the individual's name and the start date of the Moratorium on the mental health Moratorium register.
What is the effect of a Moratorium on creditors?
Restrictions on enforcement action
Whilst a Moratorium is in place a creditor cannot take any enforcement action such as contacting the individual to enforce payment, serving a charge for payment, executing any diligence to enforce payment such as an arrestment or attachment, presenting a sequestration petition, or having funds released to them in respect of an arrestment.
A creditor also cannot require the individual to pay interest, fees, penalties or charges that accrue during a Moratorium period.
During a Moratorium period a creditor can still contact or engage with an individual's money adviser, or at the individual's request regarding a Moratorium debt or a debt solution in respect of the debt, and/or engage with the individual in relation to matters unrelated to the Moratorium debt (such as in relation to payment of ongoing liabilities).
Obligations on a creditor
Where a creditor is notified of a Moratorium, they must undertake a reasonable search of their records to identify any debt owed to them by the individual and advise the Accountant in Bankruptcy of this debt.
The creditor must also identify any debt owed by the individual that the creditor has assigned to another party and advise the Accountant in Bankruptcy of this debt and the contact details of the party the debt is assigned to, and also advise the party the debt is assigned to of the Moratorium.
Right to request a review
Where a creditor is notified of a Moratorium they are entitled to ask the Accountant in Bankruptcy to review the Moratorium to determine whether it should continue or be cancelled if (1) the Moratorium unfairly prejudices the interests of the creditors - for example, if the individual has sufficient funds to discharge their debts as they fall due, or (2) there has been a material irregularity in the application process - for example the individual did not meet the relevant criteria when the application was made.
What is the effect of a Moratorium on the individual?
During a Moratorium period the individual must both (1) pay a continuing liability when due for payment and (2) not apply for or obtain credit beyond an amount of £2,000, which failing the Accountant in Bankruptcy can cancel a Moratorium on a period of notice of at least 28 days.
How long does a Moratorium last?
A Moratorium starts on the day after an entry is made in respect of the individual in the mental health Moratorium register and continues until the day six months after the day the individual stopped meeting the mental health criteria.
There is an obligation on the mental health professional that signed the application to notify the Accountant in Bankruptcy as soon as they become aware that an individual no longer meets the mental health criteria. Where no such notification is received by the Accountant in Bankruptcy they must before the end of six months from the start of the Moratorium request from the mental health professional confirmation of whether the individual still meets the mental health criteria and if they no longer meet it, the date on which they stopped meeting it. This must be requested every six months. Provided that the individual still meets the mental health criteria the Moratorium will continue.
The Moratorium period could end sooner if the individual is sequestrated, the individual enters into a trust deed or a debt payment programme, the individual dies, or the Moratorium is cancelled. The Moratorium period could carry on beyond the six months mentioned above if there is an application for sequestration, a trust deed, or a debt payment programme that has yet to be determined.
What's next?
It will be interesting to see what responses are received to the public consultation and the changes that are made to the regulations as a result. Ultimately, it will likely only be once the Moratorium is in force and operating that we can truly assess whether it works successfully in practice, however it is generally accepted that its introduction is a positive step for debtors with serious mental health problems. It's also welcome that the draft regulations make provision for creditors to seek a review of the Moratorium in appropriate circumstances, although, following litigation in England in connection with the operation of similar provisions, it's likely that those parts of the draft regulations will be subject to careful consideration during the consultation period. The operation of the Moratorium will be reviewed by the Scottish Ministers after five years of it coming into force and it is likely that further changes will be considered at this point.
