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.
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.