A Scottish Trust Deed is similar to bankruptcy but perhaps without all the bells and whistles. Once the debtor enters into a Protected Trust Deed (PTD) he is committed to an agreed payment schedule. Ultimately, creditors will receive a small percentage dividend although this can often be lower than what they will receive if the debtor had been made bankrupt.
Like bankruptcy, in a PTD the debtor makes over all of his assets to a trustee. In exchange for this, and subject to the debtor complying with the terms and directions of both, once the PTD or bankruptcy is completed all of the debtor’s debts will be written off. As such, the processes can be seen as a form of debt relief. However there are significant differences between them, with PTDs often being seen as administering a “lighter touch” than their big brother bankruptcy process.
There are important differences between the two, some of the most important being:
- Bankruptcy still has a stigma. It is probably easier to say that you have entered a trust deed than to say you are bankrupt.
- If you are made bankrupt, you could be subject to a bankruptcy restriction order or undertaking. This does not apply to trust deeds.
- Most bankrupts are discharged from bankruptcy within one year, although this can be extended if the debtor does not comply with the trustee’s directions and the provisions of the Bankruptcy Act. During the period of bankruptcy, if the debtor has sufficient assets then he will obliged make a “debtor contribution order” towards debt repayment. This will be for a minimum period of four years and subject to six-monthly reviews. In contrast, a debt payment plan under the Debt Arrangement Scheme could easily run for seven years, sometimes even longer. (However, a DPP is quite different and, to be eligible, the debtor will have regular income, most likely from employment, with creditors likely receiving a high percentage of their debt being repaid.) In contrast, a trust deed will only last for four years.
- Once the trust deed is signed, the trustee will register it in the register of insolvencies. The creditors are then notified of this by the trustee who will have a five-week period to object to it. If creditors, representing more than one half in number or one third in value, object to it then it will not become “protected”. If it does become “protected”, then no creditor can petition for the debtor’s bankruptcy. Also, other creditors who are included in the trust deed will be unable to take further action to recover their debts. Debts incurred after the trust deed is signed will be unable to take further action to recover them. Debts incurred after the deed has been signed will not be protected so these creditors will be able to peruse them, although because the debtor has entered into the deed the likelihood of their recovery will be remote.
Unless the debtor’s home is excluded from the trust deed (which it can be if the creditors consent to this), then the trustee will attempt to realise the equity in the home. Usually, arrangements will be put in place for third party funding to be made available for this purpose.
Whilst there is no doubt that PTDs have their place in debt relief, they have been subject to a lot of criticism. Some say that they take too long to administer and that during their long period of gestation the only person to benefit is the trustee who will charge periodic fees for their administration. This is despite such fees being subject to greater regulation and scrutiny both by the insolvency association’s own regulatory body as well as the Accountant in Bankruptcy. However, despite this, creditors complain that dividend returns are far too low and, from their perspective, it’s simply a debtor’s charter - the effect of which will be to have their debts written of in return for a very poor financial return to creditors.
Whether or not this criticism is justified, Citizens Advice Scotland have said that, in many instances, PTDs do not offer the best option for debtors and that debt payment plans offer a more suitable alternative. Indeed, Citizens Advice are alarmed by the substantial growth in PTDs.
Official figures from the Accountant in Bankruptcy suggest that, in the second quarter of 2019, there were 3,466 personal insolvencies in Scotland. This represents a 12.6% increase in the same period in 2018. Of this number, there were only 1,1178 bankruptcies compared to 2,288 PTDs. Whilst the increase in bankruptcies was only 1.6%, there was a staggering increase of 19.4% in PTDs.
So why has the increase been so large? In Citizens Advice's opinion, PTDs have been “mis-sold”. The implication is that insolvency practitioners are offering incentives to sell them because of the large fees which they can charge rather than debtors being pointed to debt payment plans or the free money advice sector who perhaps would steer debtors to better alternatives.
Citizens Advice have suggested that what they perceive as a problem can be resolved if the market were more closely regulated than it currently is. They argue that debtors are not getting the free impartial advice to which they are entitled and that many of those entering PTDs are worse off than if they had been directed to another debt solution which would include a debt payment programme. Accordingly, the suggestion is that in addition to being regulated by the Accountant in Bankruptcy, the market should also be under the Financial Conduct Authority's supervision.
It is likely that insolvency practitioners will say that the current supervision by their own professional body and the Accountant in Bankruptcy is adequate. They will argue that that they follow the PTD rules, in which case everyone in the process will be treated fairly. If something needs fixing then both of these bodies, working in harmony, should be able to achieve it. Nobody is saying that bad practice should not be investigated and rooted out.
But is it a solution to have another overburdened body in the guise of the FCA to be involved? It is quite likely that what we have in place should be adequate. If it is not working then this should be investigated and the problem resolved. The real question is whether there is the determination to do this.