Mental ill health and debt often go together - Alan Munro

Navigating the labyrinth of bankruptcy law can often resemble a challenging odyssey. The legal landscape had remained relatively unchanged in this area until the Bankruptcy (Scotland) Act 1985, but the following 20 years saw many subsequent amendments that left the system overly convoluted and messy.

Since then, among more exciting additions were the introduction of the Debt Arrangement Scheme, in 2002 under standalone legislation, giving debtors time to clear debts in full, and changes in 2015, when Scotland was the first UK jurisdiction to introduced moratoriums – a commendable attempt to provide temporary respite for debtors.

Initially set at six weeks, the protection period was extended to six months during the pandemic and has since remained unchanged. However, the recently proposed Bankruptcy and Diligence (Scotland) Bill introduces a groundbreaking provision – a mental health moratorium on debt recovery.

The Royal College of Psychiatrists says one in four people with mental health problems are also burdened by debt, highlighting the urgent need for such an intervention. Granting Scottish Ministers authority to pause debt recovery for individuals suffering from a mental health condition marks a pivotal moment.

Alan Munro is an Insolvency Practitioner, Wright, Johnston & Mackenzie LLP (Picture: Mark F Gibson)

This moratorium, intended to be temporary but with no fixed standard expiry period, signifies a progressive step toward recognising and addressing the intersection of mental health and debt. The bill leaves the details of the scheme to yet to be published regulations, raising questions about implementation and eligibility.

A critical aspect demanding clarity is the question of responsibility. What type of mental illness will qualify for the moratorium? If that person lacks capacity, who bears the duty of determining eligibility and that an application should be made? Who notifies creditors about the necessity for such protection? If not the individual with a mental health condition, their medical caregivers, law enforcement, or the financial institutions involved?

The intricacies need addressing to ensure a seamless, effective application of this safeguard. Watching the creation of this mechanism unfold will be something that interests many in my line of work.

There is a stakeholder-led expert working group that seems to be nodding to a two-step approach, with debtors protected from creditors for the duration of treatment for a mental health condition, and then month-long cool-off period after treatment finishes. The law will have to still try to balance competing interests of debtors and creditors alike. This is to offer the debtor some relief, not grant debt forgiveness.

Scotland is now playing catch-up with England, where similar laws have been recently put in place. Despite being behind in the timeline, the significance lies in the recognition of mental health as a valid factor in debt-related matters.

As a lawyer with nearly 25 years in the field, my professional stance aligns with the belief that this legislation is a step in the right direction. Over recent years, there has been a positive trend among creditors, particularly major financial institutions, showing leniency towards a debtor’s wellbeing. This aligns with the Financial Conduct Authority's mantra of treating customers fairly, reflecting a broader societal understanding of the complex relationship between debt and mental health.

The new bill’s mental health moratorium is a commendable initiative that demands attention from legal experts, financial institutions, medical professionals and the public alike. It not only acknowledges the intricate interplay between mental health and debt but also signifies a humane approach to an otherwise challenging aspect of insolvency. This legislation will undoubtedly be a focal point for ongoing discussions and evaluations.

Alan Munro is an Insolvency Practitioner, Wright, Johnston & Mackenzie LLP