The Bankruptcy and Diligence (Scotland) Act 2024

The Bankruptcy and Diligence (Scotland) Act 2024 (2024 Act) received Royal Assent on 15 July 2024. The 2024 Act covers three elements: (i) it introduces the framework for enhanced protections for individuals with serious mental health problems, (ii) it modifies the Bankruptcy (Scotland) Act 2016 and (iii) it modernises debt recovery mechanisms. In this article we focus on the first – the newly proposed mental health moratorium.

Mental Health Moratorium: A Closer Look

A pivotal change brought in by the 2024 Act is the establishment of a mental health moratorium (MHM), which gives Scottish Ministers the authority to establish regulations to pause debt enforcement against individuals with serious mental health issues. The MHM aims to provide individuals with protection and breathing space from creditor action until their mental health improves.

The 2024 Act outlines several considerations for Scottish Ministers when formulating the regulations, including:

• Eligibility criteria or conditions for the moratorium to apply;
• The types of debts the moratorium would cover;
• The process for determining if the eligibility criteria are met;
• The duration of the moratorium for an individual; and
• The actions creditors can take during the moratorium and the consequences of those actions.

These are guidelines on what the regulations may take into account, giving discretion to Scottish Ministers to consider additional aspects. Draft regulations were published in May 2024 and although they are yet to be finalised, they currently envisage that during a moratorium a creditor may not, in respect of a moratorium debt:

1. take any enforcement action (this includes contacting the individual for the purpose of enforcement, serving a charge for payment, commencing or executing diligence to enforce payment or commencing or concurring in the presentation of a petition for sequestration);
2. require the individual to pay interest that accrues during the moratorium period; or
3. require the individual to pay fees, penalties or charges that accrue during the moratorium period.

Current Moratorium in Scots Law and the Gaps

Currently in Scotland, a six-month moratorium is available for debtors to address debt issues and seek advice. This period was initially six weeks but was extended to six months during the pandemic and has remained unchanged. However, the current system does not cater specifically to individuals with mental health issues, leading to several key problems which the 2024 Act aims to resolve:

1. Limited Accessibility: The current moratorium system was not easily accessible to individuals with severe mental health problems due to barriers such as low motivation and difficulties in reaching out for help.
2. Misalignment with Mental Health Recovery: The standard six-month period did not always align with the varying durations of individuals’ mental health crises and recovery periods, potentially exacerbating financial and mental health difficulties.
3. Restrictive Reapplication Rules: The existing system allowed only one application every 12 months, not accommodating those experiencing recurring episodic mental health crises.
4. Accrual of Interest and Charges: There was no provision to freeze interest and charges on debts during the standard moratorium, leading to escalating debt levels that could hinder recovery from mental health crises.

The new MHM seeks to create a more inclusive and flexible system, providing adequate protection and support to individuals with mental health issues. While the Scottish Government has discussed the likelihood of limiting eligibility criteria to parameters outlined in existing mental health legislation, they acknowledge that a solid foundation for the new legislation will enable considerations for expanding eligibility criteria in the future.

Catching up or Setting the Pace - Comparison with England and Wales

The 2024 Act seeks to align with provisions in England and Wales, specifically, the Mental Health Crisis Moratorium (MHCM) introduced in 2021. The MHCM provides debtors with respite during mental health treatment plus an additional 30 days. The 2024 Act aims to adapt these provisions, considering improvements based on experiences from England and Wales.

Drawing on lessons learnt from the MHCM, the Scottish MHM should aim to:

1. Provide clear guidance to debt advisers on their new responsibilities under the MHM;
2. Clarify how creditors can challenge an MHM; and
3. Introduce safeguards to prevent misuse of the moratorium by those not genuinely in need.

Conclusion and Takeaway

As the new MHM takes shape following the implementation of the regulations, it will be intriguing to see how it compares to the existing MHCM in England and Wales. We will provide an update when the regulations come into force as lenders and insolvency practitioners alike should stay informed on the evolving landscape of debt recovery against individuals in Scotland.