A protected trust deed is one of three statutory debt solutions in Scotland. It involves a debtor’s assets being managed by an insolvency practitioner for the benefit of the creditors for a four-year period. During this time, part of the debtor’s income is paid to the insolvency practitioner.
Last year around 8,000 people entered a protected trust deed, 150,000 people sought debt advice and, beyond that 600,000 adults are considered to be over-indebted in Scotland.
Amongst its calls within the report, the Committee asked for changes to the way fees are charged in protected trust deeds. The current rules can see debtors making contributions but not reducing their overall debt levels for at least the first two years.
Commenting, Committee Convener Michelle Ballantyne MSP said:
“Now more than ever people’s finances will be feeling the strain, and some will be contemplating seeking help to clear their debts.
“A debt solution should work in reducing that person’s debt. We heard evidence which showed that fees were being frontloaded resulting in the overall debt not lowering despite payments being made. This needs to change.
“The Committee welcomes the Scottish Government's commitment to conduct an overarching debt review. However, it is incredibly important that the Scottish Government listen to the Committees recommendations to ensure that protected trust deeds act as an effective debt solution and debtors are safeguarded from the potential harm that can be caused when things go wrong.”
The Committee also heard evidence that online advertising and social media campaigns can target people in debt, offering a solution which is not always suitable for their circumstances.
Michelle Ballantyne MSP added:
“People in debt must receive the right help and advice and not choose a solution based purely on what they saw on social media that day. The Committee recommends tighter regulations on online advertising and believes that free independent money advice would help ensure that people make the decision right for them.
The published report can be found here.
For context there are three statutory debt solutions in Scotland:
Bankruptcy - All of the debtor’s assets are managed by a trustee for the benefit of creditors for a four-year period. Contributions from income will also be required, where appropriate. Almost all outstanding debts are written off at the end of the four-year period, allowing the debtor to become debt free.
Debt Payment Programme under the Debt Arrangement Scheme - Debtors make payments over an extended period of time to pay off their debts. It can last for any “reasonable” time period, but the average is around seven years. Debts are not written off, so the scheme is only available to those who can repay in full over the length of the scheme.
Protected Trust Deed - As with bankruptcy, a debtor’s assets are managed by a trustee for the benefit of creditors for a four-year period. Contributions from income will have to be sufficient to pay the trustee’s fee and provide a return to creditors. Protected Trust Deeds are seen as offering more flexibility than bankruptcy.
Informal debt solutions - Most debtors negotiate informally with their creditors to make lower repayments. These arrangements can be unstable, and do not prevent creditors from taking action to enforce their debts if they think they should be paid more.