trust deeds
MSP Case Study on Trust Deed Raises Questions
A Scottish Parliament MSP who presented a case study that concerned a constituent who had been in a Protected Trust Deed, as evidence of what‘s wrong with the personal insolvency remedy, has raised a number of questions.
The MSP, Colin Beattie, used the case study as an example of abuses that go on in Protected Trust Deeds, whilst examining the Accountant in Bankruptcy, Dr Richard Dennis, on how the remedy operates.
He gave the example of a woman, whose family were constituents and who passed away whilst in her 4th year of her Protected Trust Deed.
She had already paid £6,000 into the Trust Deed, which she had entered as she had £20,000 in debt.
As she was a Homeowner, the family received a breakdown as to what the cost would be to wind up the Trust Deed.
That sum was £28,000, which initially appears ridiculous for a £20,000 debt, especially as £6,000 had already been paid into the Trust Deed, meaning the total cost could have been in excess of £34,000.
In actual fact during the evidence session by the Economy, Energy and Fair Work Committee, he described the eventual cost as not moral and said it was “banditry”.
Colin Beattie provided a breakdown of the figure:
- £7,000 was for statutory interest
- Trustee Fee £2,500
- Trustee Realisation Contribution Fee 1,270
- Trustee Realisation Lump Sum Fee 3,000
- Legal Fees £3,000
He also added there were additional fees such a AIB Supervision fees, which are £100 per year, so for 4 year Trust Deed would be £400.
Not Clear Cut
However, an understanding of how the costs had been arrived at, shows the figures may not be as obscene as believed and in actual fact, if the lady had used any other solution to deal with her over-indebtedness, they may have been similar or possibly even worse.
What would have been the Options?
As it is believed £6,000 had been paid into the Trust Deed over 4 years, it probably safe to assume the Lady was able to pay £125 per month to her debts, or thereabouts.
If this is all she could afford, repaying her debts in full would not have been a realistic solution, as even with interest and charges frozen, a £20k debt would take over 13 year to repay. For most people, the idea of not having any disposable income for 13 years is not an attractive one and many lenders would consider such a lengthy repayment period unreasonable.
It is likely, therefore, if all the options had been discussed with the lady at the time she sought advice, a Debt Management Plan or the Debt Arrangement Scheme would not have been considered a viable option.
The lady may then have looked at insolvency options, such as Bankruptcy or a Protected Trust Deed.
These would have involved her paying the £125 per month for 48 months, or maybe even 60 months, as she was a homeowner, with the last 12 months going towards addressing any equity she had in her home.
We don’t know why the lady eventually chose a Trust Deed over a Bankruptcy, but generally Trust Deeds are considered to be less risky when you own a home, as Creditors will often agree to disregard more equity so you don’t have to sell your home. It may, therefore, mean this was a consideration.
However, when someone passes away, and there are sufficient assets to pay all the debts owed, the law, not just of insolvency, but Succession requires all debts must be repaid from the winding up of the estate.
The £20,000 of original debt would, therefore, have to be repaid in full.
Also, where there are sufficient assets in insolvency, the creditors also must be paid interest on this debt of 8% per annum.
This is known as Statutory Interest, and is owed to the Creditors, not the Insolvency Practitioners. This would explain the £7,000 in Statutory Interest that Mr Beattie spoke of.
Second, the Trustee’s standard fees for managing the Trust Deed over the 4 years are £2,500 and £1,270 (this latter fee is the cost of collecting the 48 payments).
It would appear the legal fees are the costs charged by the solicitors who eventually sold the property and are paid to them.
The £3,000 fee is the percentage the Trustee is allowed to charge on the sale of the property, for the work they have undertaken in selling the property.
All these fees are governed by legislation, except the legal fees and the Scottish Government have the power to change them.
In actual fact, it was Mr Beattie’s Committee, the Economy, Energy and Fair Work Committee that recently approved the Bankruptcy Fees (Scotland) Regulations 2018, which governs many of the fees. So if the fees are immoral, although legal and an example of banditry, it was Scottish Government Regulations that proposed some of them and the Economy Committee that recommended them to Parliament.
It is clear, therefore, the majority of the costs incurred in winding up the estate were not made up of the Insolvency Practitioner’s fees, but were either the costs of paying off the Lady’s debt and winding up her estate, which if it had not been carried out by the Trustee, would have had to some extent been incurred by her Executor on her passing.
What if another Option has been chosen?
However, what if another option had been chosen?
We have already looked at how long it would have taken to repay the debt in full, over 13 years, so it is understandable why a repayment solution wasn’t chosen.
However, if the Debt Arrangement Scheme had been chosen, it could be argued that £6,000 of the debt would have been repaid to creditors leaving only £14,000.
This is possible, but not certain.
One of the things that occurs in a Debt Arrangement Scheme is when someone dies during it, the Programme is revoked and as a consequence creditors can apply all the interest and charges that they could have applied had the person not been in the Scheme.
Even a contractual rate of 5% on a consumer debt of £20,000 is £1,000 per annum and we know many forms of credit have higher levels of interest applied to them.
It legally is possible, therefore, just paying £1,500 per annum to a debt of this level over 4 years, with interest being re-applied would not reduce the debt by much and in actual fact, the debt could increase.
Now the argument is few creditors would reapply interest and charges, but the truth is we cannot be certain. It is legally possible.
Also, its true to state not all creditors stop interest and charges on debt in the Debt Arrangement Scheme, even though the law requires it, but write it off once the programme is completed.
Also it is true that many creditors in the Debt Arrangement Scheme only reduce the balance owing on a debt in the Scheme by the amount they receive, which is not the same as what the consumer pays, as the payment distributor and DAS Administrator fee is deducted first (albeit this is a cost incurred by the creditor). These fees are now 22%.
In practice, therefore, where cases are revoked it is likely these fees are incurred by the Consumer, not the Creditor, unless challenged
The problem is many clients who stop paying their Debt Arrangement Scheme, don’t continue with the advice agency that was helping them, so most probably don’t challenge the fact they have incurred these fees.
On top of that, as the lady passed away the Lady’s family would have had to appoint a solicitor to wind up the estate, as estates with heritable property are not considered small estates.
It, therefore, is possible that had the lady chosen a debt management option like the Debt Arrangement Scheme, the eventual cost of winding up the estate could have been similar, if not close to, the eventual costs in the Trust Deed as a solicitor would have to have been involved in winding up her estate and her debts paid in full.
It is also, likely, had the lady chosen Bankruptcy as the solution to her debt problems, the cost of winding up the estate may have been greater than that quoted by the Trustee in the Trust Deed.
It is hard not to sympathise with families who find themselves, in this situation, as they are struggling with the shock of a bereavement only then to possibly learn for the first time the extent of the deceased family members debts and also that they were in an insolvency solution.
On top this, they then get a bill for £28,000, which although they are not liable for, has to be paid from the estate.
It is clear from information provided by Mr Beattie, the Insolvency Practitioners fees made up only a very small part of the £28,000, and most of the costs were related to the settling of the debt, winding up her estate and paying statutory fees.
Much of which would have been incurred by her Executor if she had not been in a Trust Deed.
Lessons to be Learned
However, some important policy points arise from Mr Beattie’s case study.
First, if the Scottish Government want to present the Debt Arrangement Scheme as a less risky solution than Trust Deeds, because at least if it fails someone’s debts will be lower, then they must change the law to ensure creditors cannot reapply interest and charges if a case is revoked.
It is all very well stating most creditors won’t, but there is every possibility, legally, they could and a consumers debt may end up being higher considering the levels of contractual interest and fees consumer creditors can charge.
Second, they should explore legal devices to ensure if a case is revoked the 22% payment distribution fees and DAS Administration fees are removed from the balance of debts owed.
Third they should also change the law to ensure that the effect of someone dying in the Debt Arrangement Scheme is not their Programme is revoked.
Instead they should apply a 12 month moratorium to the case to allow an Executor to be appointed and settle the debts if there are sufficient assets available to so.
Finally, the Scottish Government should reduce the level of Statutory Interest that is applicable, from 8% to 1-1.5% above the Bank of England Base Rate.
This is long overdue and even in 2016 Scottish Government Minister, Paul Wheelhouse, described it as punitive. They still have not acted.
Proposed Reforms to Trust Deeds
Below is a paper I have drafted for consideration by the Economy, Energy and Fair Work Committee of the Scottish Parliament, as part of their inquiry into Protected Trust Deeds.
The papers makes a number of proposal to amend the Bankruptcy (Scotland) Act 2016 using Scottish Statutory Instruments.
These proposals are:
- For a process that allows a creditor to apply to not be bound by the discharge of a debtor or a trustee from a Protected Trust Deed;
- To require a Trustee to apply to the Accountant in Bankruptcy where they wish to refuse a Debtor a discharge from their Protected Trust Deed; and
- Finally, to introduce a new procedure to allow a Debtor, through a Money Adviser to apply for the early termination of a Trust Deed, without a discharge, to allow remedial action where people have been mis-advised and to end the practice of people being Trust Deed Prisoners, where the solution is no longer appropriate.
A PDF version of the paper can be downloaded here. A previous submission I made to the Committee can be found here.
Background
The background to this paper, is to contribute to the inquiry by the Economy, Energy and Fair Work Committee of the Scottish Parliament into Protected Trust Deeds.
That inquiry has been launched because several Stakeholders have raised their concerns with Protected Trust Deeds, a form of personal insolvency in Scotland.
The concerns primarily relate to:
- The way that Protected Trust Deeds are marketed and a view by some that they are being mis-sold;
- A view that some consumers would have been better using another formal debt solution;
- The failure rates in Protected Trust Deeds and the consequences that this has for the consumer; and
- Finally, a view by some smaller creditors that Protected Trust Deeds have a disproportionate effect on them, and Insolvency Practitioner Fees lead to poor returns for them.
In response to this, although accepting there is no consensus within the sector, the Accountant in Bankruptcy has mooted several proposals.
These can be summarised as:
- Increasing the minimum level of debt, a consumer has before they can enter a Protected Trust Deed;
- Extending the duration of the Protected Trust Deed;
- Amending the rules how Protected Trust Deeds are approved to increase Creditor engagement and to allow AiB more power to refuse a Trust Deed Protection; and
- Finally, requiring a Trustee to set a fixed fee at the point of proposing the Trust Deed;
Concerns with Proposals
I have a few concerns in relation to these proposals.
First, they are unlikely, in themselves to significantly reduce the number of Trust Deeds becoming protected and even if they were, this is not necessarily a desirable outcome.
Trust Deeds levels are not actually at a level that they should be causing undue concern. Even if they were to rise to 2009 levels, of just under 10,000 per year, that would still only represent one-tenth of one percent of the entire Scottish population.
For an advanced consumer credit-based society, I would argue that such levels of personal insolvency are not a matter of concern. There is always going to be consumers who are not able to repay their debts, or even repay them with a reasonable period of time, so personal insolvency will be an appropriate solution for many and this is healthy if it addresses historic problem debts that people have. The key question is are those solutions appropriate for the consumer and is the level of consumer insolvencies across Scotland rising to a level that could pose a risk to the health of the wider economy?
Second, by just making it harder for people to enter Protected Trust Deeds, we may inadvertently drive people into less appropriate solutions such as bankruptcy, or even the Debt Arrangement Scheme, where the failure rate is believed to be currently twice what it is for Protected Trust Deeds in their first five years.
Thirdly, changing the voting arrangements for Protected Trust Deeds in not likely to reduce the number of Trust Deeds becoming protected, as due to the engagement of many commercial creditors through Creditor Agents the outcome is not likely to change in most cases and the smaller creditors are still not going to be able to object to Trust Deeds becoming Protected.
Finally, in relation to the AiB having increased powers or scope to refuse protection to a Trust Deed, this is likely to be problematic. First it will require guidance to be published to indicate when Trust Deed protection is likely to be refused. If this doesn’t happen, it will be harder to advise consumers on when Trust Deeds may be a suitable option for them.
The decision of the AiB will also have to be subject to review and appeal and even where a Trust Deed is Protected, but later fails, resulting in the consumer possibly losing out, it could be argued the AiB could be subject to complaints that they made the wrong decision and didn’t consider affordability etc. and as result the consumer has suffered harm and loss.
Understanding the Problem
The primary problem with Protected Trust Deeds is that many feel that from the perspective of being a creditor, or a consumer, who they don’t work for, is they are not fair.
However, personal insolvency is by its nature unfair to most Parties that are affected by it. The essential purpose of a Trust Deed is to wind up the financial obligations of a consumer whose can no longer meet their financial obligations.
By implication this means their creditors will be losers. It also means the consumer themselves will often be losers, as they will be denied access to further credit for several years, will have to pay over almost 100% of their disposable income for 4 years and may even have to realise and surrender assets.
However, occasionally, it is possible when looking at Trust Deeds, to see in certain cases that the solution was not appropriate for the consumer at the outset, or their circumstances have changed, so it is no longer appropriate.
When this happens the AiB, who have supervisory and regulatory powers, have not been known for being pro-active in making interventions in cases, even though they have had the power to do so for several years.
This often leads to consumers either being refused a discharge and having their debts returned to them or becoming a Trust Deed prisoner with no easily accessible process for reversing what may have been the consequences of bad advice in the first place, or their own misfortune.
Thirdly, even when creditors feel that the proposals being made are so fundamentally unjust, they feel powerless to influence the process or represent their interests and are often outvoted by larger creditors who can weather the insolvency process better.
All this has led to Trust Deeds becoming discredited as a solution.
Proposed Solution
As a solution to these problems, I would like to suggest some amendments to the Bankruptcy (Scotland) Act 2016, which won’t require primary legislation and could be achieved by regulations made by the Scottish Ministers.
The primary legislation that governs Protected Trust Deeds is the Bankruptcy (Scotland) Act 2016.
The specific part of the Act that deals with Protected Trust Deeds is Part 14 and Section 194 of the Act allows the Scottish Minister to make Regulations that modify or add to Part 14, providing the change that could be made could have been made by the Minister under paragraph 5(1) of Schedule 5 of the Bankruptcy (Act ) 1985.
This is below :
The primary legislation that governs Trust Deeds, therefore, can be amended by way of a Scottish Statutory Instrument, using I believe the negative procedure
The proposals avoid changing the essential characteristics of Trust Deeds, that if done out with a full review of all formal debt solutions in Scotland could have unintended consequences, such as denying people options, but also increasing the number of people forced into applying for their own bankruptcy.
The proposal instead would introduce three new provisions into the 2016 Act, which arguably AiB have already powers under section 179(1) they could use to achieve the same effect (the power to issue directions to Trustees), but would also introduce new procedural processes for applying and making these directions and would make a political statement that AiB must increase its regulatory role in how they supervise and regulate Trust Deeds.
The proposed provisions are:
Creditor application to not be bound by the Discharge of the Debtor or the Trustee
This provision would allow a creditor that has objected to a Trust Deed becoming protected to make an application to AiB that they should not be bound by the effects of the Debtor or the Trustee receiving a discharge from the Trustee.
The creditor would have to show that the Trustee’s proposed intromissions with the Trust Deed estate would be unduly prejudicial to their interest.
This would not be a judicial process and so, therefore, would be quicker and less expensive than the Creditors having to use any existing powers the 2016 Act gives them.
However, Creditors would only be able to apply where they had notified the Trustee of their objection to the Trust Deed before it became protected and providing the application was made within 28 days of the Trust Deed becoming protected.
It would also, if successful not be fatal for the Trust Deed, so the Debtor and Trustee could decide whether or not to continue with the Trust Deed or whether the Trustee or the Debtor should be able to apply for the Trust Deed to be terminated and another option used.
There would be a right to review of any decision on any application for all parties, with an ultimate right to appeal to the Sheriff on a point of law.
Trustee to seek Approval from AiB to Refuse a Debtor a Discharge
Currently, a Trustee must seek the approval of AiB to provide a Debtor with a Discharge, but not to refuse a Discharge.
This provision would introduce a new provision into the 2016 Act that would require the Trustee to seek the approval of the AiB if they wish to refuse a Debtor a Discharge.
AiB as part of this process would have to allow the debtor and the creditors to make representations as part of this proposal and have the power to refuse the Trustee’s application. They would also be able to issue directions to the Trustee as part of their decision.
It is not specified in the provision what these directions may be, but it could include reducing the contribution the Debtor is to pay or even directing the Trustee to apply for the Discharge of the Debtor.
It is hoped this would tighten up protections for consumers in Protected Trust Deeds, and have a cautionary effect on Trustee’s refusing Debtors a Discharge, and would also require AiB to ensure that the interests of all concerned are considered before a Debtor is refused a Discharge.
Debtor Application to seek Early Termination of a Trust Deed without a Discharge
This provision would allow a Debtor to seek an early termination of their Protected Trust Deed without a Discharge, but only through a Money Adviser.
Again, this would be an administrative process where the application is made to the AiB, so should be faster and less expensive than any existing court procedures that are available.
It is hoped this provision would allow a consumer, where they believe they have mis-sold or mis-advised a solution to seek remedial action that restores them, to the extent that is possible, back to the position they were in prior to granting the Trust Deed.
It would also allow AiB to issue directions, as it is appreciated terminating a Trust Deed early could leave many matters unresolved, such as what to do with funds already ingathered or what happens when assets have been sold or are in the process of being sold and what happens to contributions that have already been made or possibly have been taken from benefits, when they should not have been.
Equally, it is appreciated that some consumers may try and use this process when they anticipate they are about to come into possession of assets that could be used to pay their debts. In such cases, AiB could refuse the application or could agree to grant it only on compliance with a direction.
The power to issue a direction would, therefore, allow AiB to address any unresolved issues to help restore the consumer back to the position they were in prior to granting the Trust Deed and end the problem of Trust Deed prisoners where a Trust Deed is no longer the appropriate solution for a consumer.
It would also require the Debtor, on the Advice of a Money Adviser, to state how they intend to address their over-indebtedness, whether that is through sequestration or a Debt Arrangement Scheme.
The provision would be subject to a right of review or appeal to the Sheriff on a point of law only.
Conclusion
I believe these proposals would avoid any fundamental changes to Protected Trust Deeds, which for the reasons mentioned above, I believe are likely to have unintended and undesirable consequences and should only be considered as part of a full review of all formal debt solutions.
However, in recognition, there are genuine concerns by many stakeholders, I believe the above proposals could begin to address some of the concerns that have been raised and allow remedial action to be taken on a case to case basis.
I also believe, the accumulated effect of these provisions on Trust Deeds and the Trust Deed market will be to improve current practices, as providers will be reluctant to take cases that pose a risk of being reviewed under the above provisions or applying for a Debtor to be refused a discharge, without exhausting all options first.
I also believe as such they will help restore confidence in Protected trust Deeds, that is overdue and necessary, without restricting their availability where they are an appropriate solution for consumers.
Finally, whereas I don’t believe there is any consensus for the AiB’s proposed amendments, I believe there could be consensus across the sector for these proposed amendments.
Proposed Amendments
Below are draft versions of the proposed amendments to the 2016 Act that I believe should and can be made.
These draft versions are for illustrative purposes only (not being a legal draftsperson), however, I believe they are helpful in considering the proposals, in that they focus attention on what procedures should be used and hopefully, will help others contribute to the discussion.
After s178 insert S178A
178A Creditor’s application to not be bound by the Debtor or Trustee’s discharge
(1) A creditor who has notified the trustee of their objection to the trust deed within the relevant period may apply to AiB under this section within 28 days of the Trust Deed’s Protection being registered on the Register of Insolvencies
(a) On receipt of an application by a Creditor, AiB must notify the other creditors, the Debtor and the Trustee and provide them with a copy of the Application that has been made and invite them to make representations to AiB within 28 days of receipt of the notification.
(b) After the time allowed under (a) for representations to be made, AIB, if satisfied, on grounds other than those on which a petition under section 177(1)(b) has been or could have been presented by the creditor, that the Trustee’s proposed intromissions with the estate of the debtor will be so unduly prejudicial to the creditor’s claim that the creditor should not be bound by the debtor or trustee’s discharge, AIB may order that the creditor is not to be so bound.
(c) On deciding the application under (b), AiB must send a copy of their decision, with reasons to the trustee, the Creditors and the Debtor.
(d) Any party to the Trust Deed can request a review of AiB’s decision within 14 days of receipt of their notification of the decision
(e) On receipt of a request for a review AiB should notify the other parties to the Trust Deed of the request and complete the review within 28 days of the request being received. AiB must notify all parties to the Trust Deed of the outcome of the review.
(h) In completing a review of their decision, AiB must either decide to uphold their original decision or amend their decision as if they were deciding an application under (b).
(i) Any Party to the Trust Deed can appeal AiB’s decision under (h) to the Sheriff within 14 day of being notified of that decision. Appeals are on a point of law only. The Sheriff’s decision is final.
Replace section 184 (8) with:
Section 184 Protected trust deed: discharge of debtor
(8) If, on request by the debtor or as soon as reasonably practicable after the end of the period for which payments are required under the trust deed, the trustee believes the debtor should be refused a discharge, the trustee must make an application to AiB for the Debtor to be refused a discharge and
(a) inform the debtor and the Creditors that an application has been made by notice in writing—
(i) of the facts and the reason why a refusal should be granted,
(ii) that the debtor will not be discharged from their debts and obligations in terms of the trust deed if the application is granted, and
(iii) of their right to make representations to AiB within 28 days of receipt of the notification as to why the application should or should not be granted
(iv) The Trustee must advise the Debtor they can seek independent advice from a solicitor or from a Citizen Advice Bureau or Local Authority Money Advice Service and provide details of free money advice services within the local authority area the Debtor resides
(b) The Application will be in the form of a statement (being a statement in such form as may be prescribed for the purposes of this paragraph) and must specify:
- The reasons why the Trustee believes the Debtor has failed to meet their obligations under the Trust Deed and failed to co-operate with the administration of the Trust Deed;
- Whether the Debtor has consented to the Application being made;
- Outline what funds have been ingathered
- What the fees and outlays of the Trustee are at the date of the application;
- What dividends have been paid to Creditors and are likely to be paid in any final distribution by the Trustee
(c) AIB must not decide whether any application should be granted or rejected until 28 days have passed from receipt of the application
(d) In considering the application AiB must decide and have regard to any representations that are made, whether it is fair and reasonable to grant the application having regard to the interests of the Trustee, the Debtor and the Creditors.
(e) In deciding the application AiB can only:
- Grant the application
- Grant the application and issue a direction to the Trustee under section 179 (1)
- Reject the application
- Reject the application and issue a direction to the Trustee under section 179 (1)
(f) AiB decision on the application must be notified to the Trustee, the Creditors and the Debtor with a statement as to the reasons for their decision and a copy of any direction issued.
(e) Any party to the Trust Deed can request a review of AiB decision within 14 days of receipt of their notification of the decision
(g) On request for a review AiB should notify the other parties of the request and complete the review within 28 days of the request being received. AiB should notify all parties to the Trust Deed of the outcome of the review.
(h) In completing a review of their decision, AiB must either decide to uphold their original decision or amend their decision as if they were deciding an application under s184 (8) (e).
(i) Any Party to the Trust Deed can appeal AiB’s decision under (h) to the Sheriff within 14 day of being notified of that decision on a point of law only. The Sheriff’s decision is final.
(j) The status of a Trust Deed should not be amended on the Register of Insolvencies until the review and appeal process has been completed or the time allowed to seek a review or appeal has lapsed.
Insert after s184 (8)
(8A) A Money Adviser may make an application on behalf of a Debtor to AiB for the early termination of their Trust Deed (without a discharge from their liability to repay their debts), if that Money Adviser is a Money Adviser for the purposes of section 9.
- The Application will be in the form of a statement (being a statement in such form as may be prescribed for the purposes of this paragraph) and must be sent to the Trustee in the Trust Deed at the same time as the application is made to AiB and specify:
- The Name of the Money Adviser and their employers contact details
- The reasons why they believe the Debtor should be released from their Trust Deed, including any information they believe relevant as to how the Debtor entered the Trust Deed and how it has been administered
- How the Debtor proposes to deal with their debts should they be released from their obligations under the Trust Deed
- On receipt of the Application AiB must contact the Trustee and invite them to indicate within 28 days whether they support the Application and to make any representations they believe AiB should consider in determining whether to grant the application or reject it.
- On being notified of the Application, the Trustee should have regard to the interests of general body of Creditors to the Trust Deed.
- AiB should decide the application only after the Trustee has had 28 days notification of the application
- In deciding the application AiB must either:
- Grant the Application
- Grant the application and issue a direction to the Trustee under section 179 (1)
- Reject the Application
- Reject the application and issue a direction to the Trustee under section 179 (1)
- AiB’s decision on the application must be notified to the Trustee, creditors and the Debtor with a statement as to the reasons for their decision and a copy of any direction issued
- Any party to the Trust Deed can request a review of AiB decision within 14 days of receipt of their notification of the decision
- On request for a review AiB should notify the other parties of the request and complete the review within 28 days of the request being received. AiB should notify all parties to the Trust Deed of the outcome of the review.
- In completing a review of their decision, AiB must either decide to uphold their original decision or amend their decision as if they were deciding an application under s184 (8A) (e).
- Any Party to the Trust Deed can appeal AiB’s decision under (h) to the Sheriff within 14 day of being notified of that decision on a point of law only. The Sheriff’s decision is final.
- The status of a Trust Deed should not be amended on the Register of Insolvencies until the review and appeal process has been completed or the period allowed to seek a review or appeal has lapsed.
Protected Trust Deeds – Is there a Future?
This is a submission I have made to the Economy, Energy and Fair Work Committee in response to their call for evidence on Protected Trust Deeds.
I have extensive experience of Protected Trust Deeds (PTDs) as a Money Adviser and have previously been employed as a Senior Manager in the personal insolvency industry and was also employed in the Republic of Ireland in 2015 as Personal Insolvency Practitioner.
In 2016-17 I was also employed as a Project Manager with Govan Law Centre with their Personal Insolvency Law Unit, which involved taking on problematic cases where people were in Protected Trust Deeds and providing people with advice and assistance.
During my time in that role we highlighted the alarming failure rates of some Personal Insolvency Firms, with some Firm’s having failure rates as high as 88% for Protected Trust Deeds. Govan Law Centre also called for action by the Scottish Government and The Accountant in Bankruptcy (AIB). That call was ignored, and no action was taken.
The History of Protected Trust Deeds
Trust Deeds historically are a creation of Scottish solicitors and date back to the 19th century.
A common law solution, based on Trust Law, they were created as an alternative to sequestration, to allow people struggling with debt to voluntarily enter into arrangements with their creditors. Trust Deeds, however, required all creditors to agree to them and did not include any provisions for debt write off.
In 1985, PTDs were created to address some of the shortfalls of Trust Deeds, by introducing a statutory process that allowed them to become protected. This process involved the appointment of a licenced insolvency practitioner. There was also a voting procedure introduced where two-thirds of creditors had to agree before a Trust Deed could become protected.
In turn, where a Trust Deed was protected, the Trust would propose, after 3 years normally, the consumer would receive relief from their debts.
Between 1985 and 1993, there was almost 25,000 Protected Trust Deed proposed, but less than one percent became protected. This was due to non-engagement by creditors, which meant the requirement of obtaining creditor agreement was never achieved.
However, as failure to obtain protection constituted apparent insolvency (which was pre-requisite for a consumer to apply for their sequestration), failed Trust Deeds became an important route for consumers to enter bankruptcy, and over the same period, there were 24,861 Trustee petitions for sequestration.
In 1993, the Bankruptcy (Scotland) Act, changed the voting rules for PTDs, so creditors with one-third in value had to object before it failed.
Between 1993/94 and 2003/04, almost 24,566 Trust Deeds were protected. Numbers increased over the following decade with the numbers peaking in 2009 with 9,188.
Use of Trust Deeds by Free Sector
PTDs were widely used by the free money advice sector up until 2010.
Prior to then, free money advice agencies referred cases to private insolvency firms (as only private sector firms can do Trust Deeds).
The perceived advantage of a PTD was it was easy to access and did not require the client to prove apparent insolvency, which they had to if they wanted to petition for their own sequestration.
This was difficult to do and often relied on creditors taking legal action, meaning consumers were often unable to access bankruptcy and would have been left in debt limbo if it had not been for PTDs.
Trust deeds were also not viewed as having as damaging an effect on people’s credit rating.
Prior to the credit crunch, for example, it was common for people in PTDs to be able to re-mortgage and release equity, so they didn’t have to sell their home.
Also, prior to 2008, the general view was when a PTD failed, the only option available to a Trustee was to sequestrate the consumer (and usually where the failure had arisen from a genuine inability to make payments, to appoint the AIB as the Trustee).
The effect of this was failed Trust Deeds were not perceived to be the problem they are today, as the Trustee would use sequestration to address the consumers over-indebtedness.
Trust Deeds in the Post 2010 Landscape
In the post 2010 era Trust Deeds have been less used by the free sector, as the Homeowner and Debtor Protection (Scotland) Act 2010 introduced Certificates of Sequestration, which allows money advisers to certify a consumer should be allowed to apply for their sequestration (Certificates removed the legal obstacles that had existed with apparent insolvency being a pre-requisite for bankruptcy).
Also, after 2008, Trustees could refuse a consumer a discharge from their Trust Deed and to request their own discharge, therefore, removing the need to sequestrate the consumer to bring the Trust Deed to an end.
This over time has led to a dramatic increase in the number of consumers who have entered PTDs and had them failed, even after paying years of contributions and being given all their debt back with interest. Over time this has discredited Protected Trust Deeds in the eyes of many, as it is now viewed to be a product that often fails and does not produce the benefits that are used to sell it as a debt relief solution in the first instance.
This concern peaked in 2015, when the AIB reported in their annual report one firm had a failure rate of 88% for 392 cases that year. That equated to 344 cases where the consumer did not get their debt relief and the funds that were paid were kept by the Trustee firm. In none of those cases were a dividend paid to the creditors.
Despite this issue being flagged up to the AIB by Govan Law Centre’s Personal Insolvency Law Unit and the Herald newspaper giving it editorial attention, no action, that is known of, was taken by the AIB.
It is generally accepted this situation has now improved, but it has left PTDs widely discredited across the advice sector and the AIB discredited as an effective Regulator in protecting consumer interests.
It is also worth noting, the AIB has never consulted on the failure rates in PTDs or proposed any remedying action.
In this regard, it must be asked whether the failure to act has been motivated by the AIB’s dependency on Trust Deed fees?
In 2018-19, for example, of the £10.7 million the AIB had in operating income, £3.2 million came from PTDs.
Certainly, I have found the AIB have demonstrated a reluctance to give “directions” to Trustees in PTDs, which is a power they were given in 2013, suggesting a unwillingness to become involved, even where there is evidence that a consumer is not refusing to co-operate.
The Benefits of Protected Trust Deeds
However, there is without a doubt a benefit to Protected Trust Deeds.
In 2018-19, for example, 7,485 PTDs came to an end. Of those 1,540 failed (20%), but 5,945 people did become debt free.
Trust Deeds also retain benefits in that they allow assets to be dealt with more flexibly than sequestration does, particularly in relation to the principal home.
A consumer with equity in their home has fewer options for keeping their home in a bankruptcy, than they do in a PTD.
Lenders have also shown they are willing to let people keep their home, even where there is equity, in exchange for a couple of more year’s contributions.
Although this practice has been frowned upon by the AIB, it has been allowed by large commercial consumer creditors, who take a similar approach in Individual Voluntary Arrangements across the UK.
This home-friendly approach has been necessary as the Scottish Government have not looked at the treatment of the home in personal insolvency since 2010 (when they gave an undertaking they would).
Also a type of PTD that was introduced by the Scottish Government in 2010 to exclude the home has been an abject failure, and this policy failure has never been addressed.
Also, the average dividend in Protected Trust Deeds in 2018-19 was not the 16p in the pound that had been anticipated, but 20p in the pound, suggesting they outperformed what creditors had hoped for when they agree to them.
Smaller Creditors – Credit Unions
It is no secret, however, that some of the biggest critics of Protected Trust Deeds in recent years has been Credit Unions. This is understandable from their perspective as personal insolvency can have a disproportionate effect on them.
However, Government legislation cannot make bad loans good.
If people cannot pay their debts within a reasonable time, they will seek other solutions, and if it is not Protected Trust Deeds, it will be sequestration, or just non-payment.
Credit Unions are also already in a far stronger position than most other creditors are, being able to use Summary Diligence, but still are suffering from increasing levels of bad debts that are nothing to do with personal insolvency.
The question must be asked how sustainable many small credit unions can be in a highly commercialised consumer credit market?
One must ask whether the process of consolidation, which is already happening amongst credit unions, needs to be accelerated, so they can be more sustainable in a landscape when their customers are not just borrowing from them, but also from guarantor loan firms, credit card firms, pay day lenders and car finance companies. The risk to credit unions in the lending market has increased and it is nothing to do with personal insolvency.
As to suggestions that it is credit union members savings that are being put at risk through rising insolvencies, it must be noted that all savings are protected by the UK’s Financial Compensation Scheme
Is there a future for Protected Trust Deeds?
I believe there is a future for Protected Trust Deeds, however, there must be significant changes.
The AIB has failed as a Regulator and as a result of this, what we have seen in the last ten years can only be described, to varying degrees, as a dysfunctional market.
The worse of that may be over; however, free sector money advisers do come across significant number of cases where consumers have been refused discharges, through no fault of their own, and as result have seen years of contributions go nowhere to reducing their debts.
However, when we consider failure rate, we need to place these in context.
In the Debt Arrangement Scheme, the failure rate is believed to be as high as 40% in the first five years (contrast that with a 20% failure rate for PTDs over a similar period). Forcing people to pay longer, rather than giving them realistic debt relief is not a realistic solution.
Debt management does not work for everyone and restricting access to debt relief is not the answer.
With Trust Deeds more must be done to protect consumers who genuinely cannot afford to maintain their contributions. Refusing a discharge should only be allowed in those minority of cases where people can pay but refuse to pay.
The AIB as a Regulator must be more involved in approving the refusal of a discharge, with a stronger obligation on them to issue directions where necessary, including a direction to set a “nil contribution” order where appropriate.
We also need to examine how equity in the principal home is dealt with in personal insolvency and to that end the Scottish Government should make good on their promise to consult on how the home is dealt with.
Finally, we need to accept that personal insolvency is about the failure of someone’s ability to meet their financial obligations and about managing the conflicting claims of their creditors.
Unfortunately, this means all parties are losers, including the consumer.
Denying access to debt relief, however, doesn’t transform that situation and make any Party a winner, nor should it.
Standard Financial Statement: Is it fit for purpose in Scotland?
The Credit Services Association (CSA), a trade body that represents debt recovery and purchase organisations, has raised its concerns that new guidelines for the Standard Financial Statement (SFS) may exacerbate the position many consumers find themselves in when struggling with problem debts.
The Standard Financial Statement, which the Accountant in Bankruptcy (AIB) have recommended be adopted as the new financial statement for formal debt solutions in Scotland, is produced by the Money Advice Service and is intended to be a common financial tool for all creditors and debt advisers to use in determining how much consumers can afford to pay towards their debts.
The CSA, which is part of the governing body for the SFS, is concerned that new trigger figures, which are used to create a rebuttable presumption that someone’s expenditure may be excessive, are concerned that new guidelines for the figures may be excessive after being updated by as much as 30% in some category areas.
Their fears are that by indicating some consumers have less to spend on their debts, consumers may enter repayment plans that may last longer and, therefore, keep the debtor in debt longer, whilst others may feel a type of insolvency may be a better solution for them, when it isn’t.
However, in Scotland, fears amongst money advisers and the AIB are that the figures are already too austere for consumers, who are in repayment plans, and the SFS’s predecessor, the Common Financial Statement (CFS) which adopts a similar methodology to the SFS, has been instrumental in large numbers of Debt Payment Programmes under the Debt Arrangement Scheme failing.
Scottish Government Minister Paul Wheelhouse has recently announced plans to introduce new rules that even if the SFS is used for the DAS in future, it will not be necessary for consumers to propose paying all their disposable income to their debts each month.
Comparative Studies
The problem with the Standard Financial Statement, like the Common Financial Statement is both seek to determine what is a “reasonable” level of expenditure by looking at the average expenditure of the lowest 20% in the Office of National Statistics Living Costs and Food Survey. This survey looks at what people are actually spending, rather than what they require to be spending to maintain a reasonable standard of living.
The consequences of this can be seen in the guidance notes for the Common Financial Statement 2018, which actually saw “trigger figures” for categories of expenditure reduced, despite inflation running at 3%.
However, as both the CFS and the SFS both look at what people are spending, rather than what is needed for a reasonable standard of living, the methodology used can result in expenditure amounts being downgraded at a time of rising living costs. This is for the simple reason that with stagnating income levels, rising living costs and much expenditure in recent years being driven by consumer borrowing, which is now becoming harder for lower income groups to access, people are now being forced to spend less.
This has led to some uprating of figures in the SFS, by removing for example, some of the lower income groups in the Living Costs and Food Survey sample group. This has included those in receipt of Universal Credit and has contributed to the uprating of the average expenditure overall within the study group.
Scotland’s Dilemma
The problem for Scotland is whether now to adopt the SFS, which the Accountant in Bankruptcy have recommended or whether to seek an alternative to the Common Financial Statement 2018 when it expires in 2019?
The problem is the SFS has proven volatile in the first year of it’s existence, with initial concerns in Scotland that the trigger figures for the SFS 2017 were too low and would have led to more consumers being presumed, albeit the presumption is rebuttable, as having unreasonable expenditure amounts.
There was also a concern many consumers who were wishing to utilise the Minimum Asset Route into bankruptcy may be found to have disposable income and, therefore, be deemed ineligible to apply, forcing them to use full administration bankruptcy procedures instead. This in turn leads to complicated debates as to what types of income can consumers legally be expected to pay their debts from. There is no question, for example, that consumers cannot be forced to pay towards bankruptcy from benefit only income, although the AIB do hold that contributions can be taken from child maintenance money (for a fuller debate on this issue, see here). The consequence is that people whose only income is benefits and child maintenance, may be forced to use full administration bankruptcy simply because the AIB believes it is legitimate to take a contribution from income that is paid to a child via their parent and the CFS or SFS help determine that the consumer can afford a contribution.
In support of adoption of the SFS 2018 guidelines, however, the AiB have released a comparative study of financial statements which they believe shows the SFS 18 guidelines are more favourable than the CFS 18 guidelines (although a smaller study by Money Advice Scotland suggests this may not be the case). What the AIB have not released, however, is a comparative study between SFS 18 and CFS 17, which still applied in Scotland until a few weeks ago, or any response to the recent downgrading of expenditure items in CFS 18 that resulted from the methodology that can see average expenditure amounts fall at times of increasing living costs.
In addition to this, no explanation has been provided as to why the CFS 18, in the guidance notes, was not given the same corrective treatment that SFS 18 received by removing lower income groups from the sample group.
The problem is now likely to be exacerbated as the Scottish Government have announced that even if SFS 18 is adopted in Scotland, new changes will not require applicants to the Debt Arrangement Scheme to propose 100% of their disposable income to repayment programmes. The fact the Credit Services Association already believes the SFS 18 is overly generous, it’s likely their members would not accept DAS proposals that only offer say 75% of a Debtor’s disposable income as payment, although the AIB will be able to force acceptance using their fair and reasonable test under the Scheme.
The Way Forward
The problem for the Scottish Government is there is no clear way forward.
It was only in 2016/17, for example, that for the first time more debt payment programmes were successfully completed than were revoked. One of the main reasons believed to be behind this being that consumers have been finding that they are being told to pay more than they can afford.
The AIB, however, are reluctant to see contribution levels in any formal solution reduce, as they themselves realise much of their operating costs from fees charged against cases where contributions are made and are expecting, because of a reduced number of cases, a shortfall of approximately £4.2 million in their funding.
The problem is, however, section 89 of the Bankruptcy (Scotland) Act 2016 (2016 Act) requires Scottish Ministers to establish a Common Financial Tool (CFT) to determine contribution levels, that allows for reasonable levels of expenditure by debtors. Whether that has been achieved by CFS 18 that has seen trigger figures reduced for certain categories at a time of rising living costs is questionable.
Whether designating the SFS as the new CFT will achieve this is also debateable, considering it’s volatility and the fact key stakeholders are already questioning the recent uprating of figures and calling for a further review as soon as possible.
The question now must be asked, as the CSA, is part of the governing body for the SFS and accepted the 2018 figures, whether other governing body members also have concerns?
The question also has to be asked if a further review of the SFS or even the CFS were to see a further downgrading of the figures at a time of rising living costs, whether Scottish Ministers would be fulfilling they obligations in creating a tool that allowed for reasonable expenditure by consumers?
The danger being that in designating either the CFS or the SFS as the Common Financial Tool, Scottish Ministers are delegating this legal responsibility that they have under section 89 of the 2016 Act, to a third party that does not have such a legal responsibility, is not accountable to Ministers or Parliament and does not publicly release it’s trigger figures for public scrutiny or comment.
Mis-Use of Trigger Figures
One argument is that much of the problem arises from a misunderstanding of how trigger figures should be used.
Creditor and AiB concerns are they are used as an allowance by money advisers for their clients, whereas money advisers complain they are used as a cap by the AIB and creditors to drive down the reasonable living expenditure of consumers, which if you wish to exceed places an increased administrative burden on the money adviser and evidential burden on the consumer.
You then get anecdotal stories from money advisers of clients having to provide evidential proof of purchasing incontinence pads, or having to explain how the Disability Living Allowance of their children is spent or of having to fight to ensure contributions are not taken from the child maintenance money of children to pay towards their parent’s debts.
The problem is there is a lack of understanding by the Money Advice Service as to how trigger figures are in practice used. They are clearly a key battle ground for the AIB, money advisers and creditors alike, as recently evidenced by the concerns raised by the Credit Services Association and their calls for them to be downgraded.
A Scottish Solution?
There is now a clear and comprehensive case for Scotland to devise it’s own Common Financial Tool.
There is no overwhelming case for a UK wide solution, albeit it is clear it would be preferable from the perspective of UK wide financial service organisations and also debt advice bodies.
However, there is no UK wide system of laws for dealing with debts; debt law historically always being different under Scotland’s legal system and being devolved to the Scottish Parliament.
Also, unlike the rest of the UK, the Common Financial Tool was placed on a statutory footing in Scotland in 2015 and carried with it particular legal responsibilities for Scottish Ministers that the Money Advice Service, who own the SFS and the Money Advice Trust, who own the CFS, don’t have either in Scotland or elsewhere in the UK.
In addition to that, it is clear that Scotland, with the recent proposals by Scottish Ministers as to how contributions in the Debt Arrangement Scheme are determined, has already begun to diverge further from what is likely to be considered good practice across the UK and by the SFS governing body.
Clearly it would now be more advisable for the Scottish Government to look to establish it’s own Common Financial Tool, that is best suited to the peculiarities of the Scottish system of debt laws, with 48 month payment periods in Bankruptcy and a Debt Arrangement Scheme, where not all a debtor’s disposable income has to be offered as a contribution in a payment plan.
Bankruptcies Down, Protected Trust Deeds Up
The Accountant in Bankruptcy in Scotland have released their third quarter Statistics for 2017-18.
The figures show that the number of sequestration in Scotland have fallen, whilst the number of debtors granting protected trust deeds has increased.
There has also been a slight increase on the number of debtors who have entered debt payment programmes under the Debt Arrangement Scheme.
Speaking on the release of the figures, the Minister for Business, Innovation and Energy Paul Wheelhouse said: “The longer term trend for bankruptcy is very much a downward one and it is heartening to see this reflected in these recent figures.
“There is absolutely no doubt in my mind the UK Government’s persistence with its failed policy of austerity is causing real hardship and strain for financially vulnerable families all across Scotland. They face even more challenges once the impact of the UK Government’s reckless determination to pursue an economically damaging Brexit becomes known.
“However, these Accountant in Bankruptcy figures indicate the numbers of people falling into bankruptcy and signing protected trust deeds are around half of what we saw eight or nine years ago. The Scottish Government is doing what it can to mitigate the worst of these Westminster policies.
“The Debt Arrangement Scheme is the only statutory debt management programme in the UK and we are rightly proud of its success in providing a viable option for those seeking to pay their debts without plunging into insolvency.”
The full report can be accessed here.
Can Benefit Overpayments be Recovered during a Formal Debt Solution?
It is not unusual for clients in formal debt solutions to find they are still subject to debt recovery action by the Department of Works and Pensions (DWP) for benefit overpayments, when they believed such action should have stopped.
So can the DWP still recover overpaid benefits whilst a claimant is in a formal debt solution?
The answer depends on whether the debt owed is included in the solution or not.
How do you know?
Personal Insolvency
In terms of personal insolvency in Scotland, there are two types of formal solutions: the first is a protected trust deed and the second is sequestration (which includes bankruptcies accessed through the Minimum Asset Procedure).
In terms of both these solutions all debts are included up to specific dates. For sequestration, that date is known as the “date of sequestration”. So any benefits overpaid up to that date are included.
In terms of Protected Trust Deeds, the relevant date is the date when the trust deed was granted.
Date of Sequestration
What date constitutes the date of sequestration depends on the route that was taken to make the debtor bankrupt.
If a creditor makes the debtor bankrupt, then the date of sequestration is the date the petition to sequestrate the debtor was warranted by the court. This is also known as the first order date ; and is always before the date when the court awards the bankruptcy.
Where the debtor has applied for their own bankruptcy, the date of sequestration is the date the bankruptcy is awarded.
Can the DWP recover debts that are included?
In essence, the DWP don’t, although arguably they could during the bankruptcy or protected trust deed if they were to use direct deductions from benefits or a Deduction from Earnings order.
The Department of Works and Pensions recover benefits according to guidance (see here).
This guidance states in relation to personal insolvency, at paragraph 6.3:
Once the insolvency period has commenced, any deductions from benefit
should cease, and any deductions made after the start date of the insolvency should
be refunded to the debtor. This includes any monies recovered for a fraud debt
And at paragraph 6.7 in relation to sequestration, it states:
Where the recoverable overpayment period is entirely before the start date of the bankruptcy order, or where the overpayment period spans the bankruptcy order, recovery should be suspended until after the end date of the order. This is regardless of when the overpayment decision is made, for example a decision could be made after the order date. On discharge the outstanding balance is written off unless it is a fraud overpayment, when normal recovery action should commence.
What, is important, therefore, is the date the overpayment occurred, not the date that it was decided there had been an overpayment.
Protected Trust Deeds
In terms of Protected Trust Deeds, the law is similar, although the important date is not the date of sequestration, but the date the trust deed was granted.
It is also important to note the guidance only applies to trust deeds that are protected and not unprotected trust deeds. Recovery action, therefore, does not cease until the trust deed actually becomes protected.
It also important to note, that the overpayment is only written off when the debtor is discharged. If the debtor is refused a discharge by his Trustee, recovery action can be commenced again.
In terms of whether the debt is included or not, all debts are included providing they arose in a period prior to the trust deed being granted.
The relevant paragraph in the guidance is at 6.9, where it is stated:
The recoverable overpayment(s) must be included in the Protected Trust Deed and any debts not included will not be discharged at the end of the period. Recovery is suspended until discharge at which point any debt included in the Protected Trust Deed is written off unless it has been classed as fraud when normal recovery action can commence, or recommence. Unprotected Trust Deeds are not considered a form of insolvency and recovery will continue as normal.
The Debt Arrangement Scheme
The Debt Arrangement Scheme is different from protected trust deeds and sequestration, in that it is not a form of personal insolvency, albeit it is a formal debt solution.
Debts remain owed until they are paid off in full, although all interest, fees and charges are stopped from the date an application is made to the scheme, providing it is subsequently approved.
In terms of benefit overpayments, this is also covered by the DWP guidance at paragraph 6.15, where it states:
DAS is NOT insolvency, but is a government-run, voluntary debt solution administered by the AiB [Accountant in Bankruptcy], but not involving the courts. It allows the debtor to freeze any interest, fees and charges on their debts whilst repaying their debts in full over a longer period by way of a Debt Payment Programme. The debtor makes agreed regular payments to an approved payments distributor who then makes payment to DWP Debt Management if included in the DAS. If our debt is included in the DAS we would suspend recovery until the period ends, but where it is not included we would continue with deductions throughout the DAS period.
All debts are normally included in debt payment programmes, but unlike with trust deeds and sequestration, where they are included by operation of law, in the Debt Arrangement Scheme the claimant must notify their adviser they have the debt and the adviser must include it.
If the debt payment programme is subsequently revoked, the debt again becomes recoverable .
Opinion: Personal Insolvency
Despite the numerous reforms, casework has shown up many failings of the personal insolvency system in Scotland, and a structure based more on principles and less on regulation is needed. I considered this issue in the January 2017 edition of the Journal of the Law Society of Scotland.
Personal insolvency in Scotland is a dysfunctional market. Thousands of debtors and small creditors each year receive a poor service, which although maybe not representative of the whole industry, means significant numbers of service users are being failed.
Poor services take the form of some firms refusing discharges from protected trust deeds (PTDs) in up to 88% of cases, almost always meaning no dividend for creditors.
We have also found in a number of cases, particularly creditor sequestrations, where debtors have assets and may be solvent, justified concerns in relation to overbilling, with strong evidence of “time dumping” to increase fees. However, challenging such fees is prohibitively complex and costly, which leaves these cases impenetrable to any scrutiny.
Equally, statements that there is no desire for families to lose homes except where absolutely necessary sound hollow, when in almost two thirds of cases we have undertaken, this outcome is avoided once independent advice and assistance is provided.
In our experience, attempts to intervene have been less welcomed in cases where the Accountant in Bankruptcy (AiB) is the trustee than with private trustees, who tend to be more prepared to take a commercial, commonsense approach.
We have no way of knowing whether similar results would be produced over a larger group, but feel it is incumbent on the Scottish Government and the industry to find out. Even if not, it would bring a better understanding of the reasons why and the frequency with which people lose their homes: at present there is a dearth of such information among the plethora of statistics collected by AiB, indicative in itself of the importance afforded this issue.
Arguments for more regulation, however, predictably meet resistance from practitioners. They claim they are already overregulated: that resonates as true when you consider the layers of regulation that they need to comply with from professional bodies, AiB and, where it applies, the Financial Conduct Authority.
Practitioners are frustrated with the cost and burden of constant legislative change, which never seems fully to address the evil it targets, but takes a broad-brush approach to all in the industry, and does not reduce the scope for new controversial practices to be developed, such as in relation to trust deeds where the debtor is balance sheet solvent or is rich in equity, which does not get realised for creditors.
Yet bad practice continues: debtors are sold solutions, not advised; homes are lost when not necessary; dividend levels for creditors in PTDs, AiB is reporting, are plummeting. All of which means the arguments for further reform are overwhelming.
The problem is the market innovates and adapts faster than legislation and those with supervisory responsibilities, resulting in poor regulation despite the layers of rules. Equally, professional bodies protest they cannot discipline members, as those with supervisory responsibilities fail to report them, claiming no rules have been broken, while complaining they are unhappy with practices.
Even from discussions with AiB, it is hard not to sense that regulatory fatigue has set in. This at a time when all the evidence points to the need for further reform. Debtors feel a similar fatigue when trying to avoid the sale of their homes: a sense that obtaining independent advice is pointless, that there is no point engaging.
The inevitable conclusion is that a new approach is needed, one focused more on higher level principles and ethics than a strict rule based system. Less tinkering, but a peeling back of the layers of regulation to allow less burdensome but more effective oversight. Arguably, AiB needs to consider whether the remedies would be better served by their retreating from some areas where they are not effective.
Debtors need to obtain independent, specialist advice. Too often it is assumed every option has been exhausted, when it hasn’t. We have seen cases where debtors pay thousands, borrowed from family members, but are not linked to any specific process, like recall or abandonment of a property. Sometimes it is nothing short of a ransom payment to avoid action to sell a home, when the action is raised later anyway.
The personal insolvency industry needs change, but not just for the sake of it and not just more rules to correct for a lack of foresight last time, otherwise we will always be chasing solutions. It needs regulatory leadership to be provided which protects the interests of all stakeholders.
PTD13s – Discharge on Composition
Can a debtor bring a protected trust deed, granted after the 28th November 2013 to an early end, without making 48 monthly payments or paying the creditors all monies owed to them?
This is a question I have recently been asked as the assumption is that since the Protected Trust Deed (Scotland) Regulations 2013 commenced, this is not possible. I answer it below.
Composition in Protected Trust Deeds
One of the most useful tools that the Personal Insolvency Law Unit have had at its disposal in assisting our clients has been discharges on composition. In many cases, it has allowed us to finalise a debtor’s Protected Trust Deed and release them from their obligations, whilst protecting their home, which they would have lost otherwise.
To understand what composition is, it’s worth re-reading the comments of Sheriff Reid in the case of Allison Donnelly v Royal Bank of Scotland at paragraph 58:
“….a discharge on composition is a procedure whereby the creditors agree to an absolute discharge of the debtor, usually in return for part-payment of their debts. Composition may be judicial or extra-judicial, and it may be general (i.e. it applies to all creditors) or partial (i.e. it applies to some creditors) (McBryde, Bankruptcy (2nd ed.), 18-62). There is only one form of judicial composition and it is general in nature (Bankruptcy (Scotland) Act 1985, section 56 & schedule 4). In any event, the essence of a composition is that it operates as a complete discharge, freeing the debtor from all debts and obligations for which he was liable at the date of sequestration, terminating the trust or sequestration process, and reinvesting the debtor in his estate to the same extent as it had vested in the trustee (Goudy, supra, 408).
Post 2013 Protected Trust Deeds
In 2013 the Protected Trust Deed (Scotland) Regulations, stated unless the conditions in regulation 4 to 10 were met a trust deed could not gain Protected status (regulation 3(1)).
The conditions required to be met under regulation 8 were:
- Any payment period proposed in the Trust Deed must be for a minimum period of 48 months (regulation 8 (2) (a)); and
- This could only be for a shorter period, where the shorter period allowed all the debtors debts to be paid in full (interest included). (regulation 8 (3)).
Termination of Protected Trust Deeds
However, this doesn’t mean a debtor has to pay all 48 monthly contributions or all the debts in full to obtain a discharge and bring the Protected Trust Deed to an end.
Regulation 24 (2) (Discharge of Debtor) states to obtain a discharge a debtor must be considered to have co-operated with his trustee and met all his obligations under the trust deed.
To meet his obligations a debtor may have to make all 48 contributions (although arguably if he can show his circumstances didn’t allow him to, there is still an argument he didn’t refuse to co-operate or that he failed to meet his obligations under the Protected Trust Deed).
We need to look at the Trust Deed document itself, which will vary. Most Trust Deed documents will, however, lay out the basis in which trust deeds can be terminated. This may be because the debtor has refused to co-operate (and, therefore will be terminated by the Trustee – grounds to refuse a discharge), but equally usually includes a clause that allows a discharge on composition.
So in short, Trust Deeds, even those granted after the 28th November 2013 can be brought to an early close. It is the Trust Deed document itself which outlines how Trust Deeds can be terminated.
A debtor who seeks a discharge on composition is not failing to co-operate or failing in his obligations, but merely bringing the arrangement to an end in line with the provisions included in the deed, if it allows composition.
The conditions outlined in Regulation 8, only need to be satisfied for the Deed to become Protected.
Discharge on composition is an inherently sensible and equitable remedy that debtors can use, with the agreement of their creditors, when the circumstances of a case make it advisable.
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