Is time running out for Trust Deeds?
Trust Deeds as we know them could be about to change, the Scottish Government is taking feedback from finance companies on potential changes to Protected Trust Deed’s (PTD.) The initial view was published in January, outlining changes the government feels will “enhance the effectiveness of PTDs.”
At this stage the changes proposed look like they will only make Trust Deeds more difficult for people to get approved. Debt solution rules require lawmakers to strike a delicate balance. On one hand, the legal system must offer debtors a ‘clean slate.’ On the other, it should ensure that those who can reasonably afford to pay their debts do, preventing unnecessary losses to businesses.
Though still in consultation, we at Trust Deed Scotland view the Government’s proposals with concern. We believe that proposed changes will tip the balance in the favour of creditors. Specifically, our data suggests that a large percentage of Trust Deeds would no longer gain protection under the proposed changes.
What are they trying to change?
There are 2 main issues the finance companies are seeking to address:
- People with properties that have more than £20,000 in equity, should use the equity to clear debts. Currently TDs can be extended by 12-24m to avoid this;
- The smaller finance companies want stronger voting rights to reject Trust Deeds.
As mentioned, the proposals place a lot of focus on Trust Deeds where a person owns £20,000 or more of equity in a property, most commonly the family home. A major benefit of the Trust Deed is that recently it has become rare for TDs to include contributions from equity in your home.
Currently, a TD is often extended for 12 or 24 months, so that people repay the same amount, but from surplus income instead. The finance companies appear unsympathetic to the importance of this to families that find themselves with substantial debts.
As to the voting process, currently, smaller companies’ votes are usually not enough to prevent a TD being approved. However, if the proposed changes if actioned, will change this. This is important because small companies are more likely to vote against a proposed Trust Deed. As such, we believe the proposals would increase the percentage of Trust Deeds which would be rejected.
How will this change Trust Deeds?
The proposed changes centre around the above two categories of concern:
Proposals for Concerns on Repayment amount and Equity:
- “The minimum debt level in a Trust Deed should be increased (perhaps to £7,500 or £10,000)”
- “a Trust Deed will not be protected if contributions will pay off the full debt in the life time of the PTD or within 60 months.”
The suggestion to raise the minimum debt level is highly concerning. The increase would make it even more difficult for those most in need to get help. Many could even be forced into bankruptcy, as people with £5000-£7500 of debt may not have the required levels of surplus income needed for alternative solutions. The current minimum level of £5,000, introduced in 2013, is more appropriate.
Equally concerning is the second proposal. In simple terms, it would see consumers lose the highly beneficial option of extending their TD beyond the standard 4 years, which allows them to make payments out of surplus income instead of home equity.
Proposals on the Voting Procedure:
- “A Trust Deed will only be protected if, from the creditors who have voted, those who own 75% of the value of debt have actively accepted the terms of the trust deed.”
Currently, a majority of the creditors, or creditors owed over 1/3 of the debts included must actively object in writing to prevent the approval of a Trust Deed. This is concerning as a reduced repayment is often acceptable to larger creditors who can absorb losses more easily than smaller creditors. This often leads to small creditors not responding at all and as a result, enough votes to prevent protection are rare under current rules. The proposed changes require the majority of those who have voted to actively accept the proposed terms. This is significant: the protection of a TD may soon depend on active consent, not active objection from creditors. This change would increase small creditors’ influence and threatens to make protection failures commonplace.
Trust Deed Scotland’s thoughts
We view the proposed changes to Trust Deeds with considerable concern, as they appear to tip the balance in the favour of creditors/finance companies. Proposed changes regarding “high equity” cases and to voting procedures are of particular concern.
These changes could not be pursued at a more irresponsible time. In 2018, Scotland experienced a 12% increase in total personal debt levels. Nationwide, average UK household debt has reached £15,400, an all-time high. Amidst this, the Protected Trust Deed has allowed thousands of Scottish debtors and their families to legally write off large percentages of their unsecured debts, and retake control of their financial affairs. The proposed changes, however, significantly threaten the effectiveness of the Trust Deed. Though nothing is confirmed, it may be the case that for those considering the Protected Trust Deed as the means to write off their debts, time may be running out for guaranteed protection. To those whom that may apply, we urge that you get in touch with our expert advisors today on 0141 221 0999 for a free consultation or leave an enquiry online at www.trustdeedscotland.net or on our Facebook page today.