On the 1st of November, the Scottish Government published their response to the Consultation on Bankruptcy Law Reform to outline a range of reforms they plan to take forward in a Bill for Parliament.
So what does this mean for insolvency practitioners and for the consumers looking to become insolvent and clear their debts?
The proposed changes to Protected Trust Deeds
There are a couple of important changes to trust deeds in this reform:
- The minimum term will likely be set at 4 years (and this goes for bankruptcy/sequestration too)
- Highly likely that a minimum dividend of 30p-50p in the £1 will be set for creditors
- A new minimum debt level will be set at £10,000
- A notice in the Edinburgh Gazette will no longer be required
- The Accountant in Bankruptcy (AIB) will take a more proactive role in supervising/directing trustees
There are also a few changes which might impact both sequestration and trust deeds:
- A single finance tool used for assessment of contributions an individual makes
- A requirement to get actual money advise first, before entering insolvency
- Financial education might be a requirement for some debtors before they are eligible for discharge
- Exclusion of some debts from discharge if they are incurred in the 12-weeks prior to granting of a trust deed/application for bankruptcy
- 6 month payment holidays available for certain income shocks (redundancy/sickness/maternity etc)
So what does this mean?
Well, first of all, the minimum dividend of 30p-50p will make trust deeds far less feasible for both the IP and the debtor.
Many IP’s will look to offer sequestration as an alternative and this will consequently reduce the choices of the debtor.
For the debtor, a trust deed with this minimum dividend would extend for additional years. The vast majority of debtors would choose 4-year bankruptcy/sequestration over a 7 year trust deed – because they’d be debt free more quickly.
The move looks likely to suppress trust deeds quite harshly and some might argue that is is a good thing. They are many firms charging fees that border on extortionate and this will make in unfeasible for them to continue this unscrupulous practice.
While it isn’t imminent yet, delaying proceedings could lead to a longer repayment term that the current standard of three years.
A skeptic might say that the Accountant in Bankruptcy (AIB) was pushing to increase bankruptcy and reduce trust deeds because they make more money on the former, but it does seem strange that the government is dictating a minimum payment to creditors – especially when most creditors who responsed to the consultation did not think it was necessary.
It’s interesting that in Trust Deeds, the AIB said they would change the set £250 supervision fee to £100 per year for every year the Trust Deed was “live”.
Historically this was for 3 years and thus, they could be seen to have raised their fees by £50. Now though, they are extending the minimum period to 4 years, and are therefore charging a minimum of £400 for the supervision – £150 more than they were previously.
They also charge 17.5% of a trustees fees as well, which extends to that four year minimum period as well.
These changes are planned for 2013/14 and will only affect cases signed after the law comes into effect.
About the author:
Ian Nuttall is an online editor and finance writer at Debt Help Scotland, providing free trust deed advice for residents in Scotland. He enjoys helping others, investing in new business ideas and discovering new ways to solve problems.