Do Trust Deeds Balance Debtor and Creditor Interests?
18th November 2010
The 2010 trust deed survey examined whether a protected trust deed is perceived to be fair by those who have used them and those who are considering signing one.
“Do you think that a trust deed strikes a fair balance between a debtor and their creditors?”
Of those that expressed a definite opinion:
Many of the 18% of respondents who do not think trust deeds work fairly may believe this due to poor service, or to other problems created by their insolvency practitioner (see previous articles). The overwhelming majority of those who took the survey do perceive their debt arrangements to be fair. This can be explained by the balance a trust deed in Scotland creates between the relevant parties. There are three parties involved:
The debtor - The debtor promises to pay what they can reasonably afford each month, for a fixed period, to pay the trust deed fees and help to repay some of the debts. They are also expected to pay a sum in lieu of equity in assets such as a home or car. During the course of the trust deed they are expected to live on a restricted budget to help repay the debts. In return, if they meet their obligations, they will be legally forgiven any further responsibility for repaying any of their unsecured debts which have not been repaid by the trust deed.
The creditors - The creditors agree (or are bound to agree by other creditors) to accept the prospect of only partial repayment of the debt owed to them. However, the involvement of a trustee reduces the expenses involved with their own debt collection procedures. The trust deed allows them to bring the matter to a sensible conclusion within a realistic timeframe. The restricted budget that the debtor agrees to maximises the amount that will be repaid towards the debts, as does the contributions in lieu of any equity.
The trustee - The trustee is the insolvency practitioner at the trust deed company. They broker an agreement between a debtor who can no longer fully repay his or her debts, and creditors seeking repayment of the money owed to them. In return the trustee draws fees for their work that, in theory at least, have been agreed with the debtor and the creditors.
In recent months creditors have been working hard to restrict the fees charged by some trust deed companies so that they can maximise the return they receive. The AIB has been looking at this issue as part of their review of protected trust deeds as they have become concerned about the percentage of trust deeds where the creditors receive nothing at all. The media has also reported on the issue. One such article featured the manager of a credit union who was extremely frustrated by what he considered to be inappropriate marketing and operation of trust deeds which was costing his credit union greatly.
Trust deed companies naturally do not wish to see their fees reduced to a point at which they can no longer operate profitably. If that were to happen they would no longer be able to provide the service. This would cause great difficulties for both debtors and creditors alike.
It would therefore seem that upon review, a trust deed does strike a fair balance between the parties involved. Some debtors wish that they had received better service from their trust deed companies. Some creditors will feel that a greater percentage of the money paid into trust deeds should find its way to them. Some trust deed companies will feel threatened that their fee levels are being eroded at a time when their professional and skilled services are needed by both debtors and creditors.
The balance of fairness may therefore move a little between the parties over the coming months and years. What will remain constant is that protected trust deed are here to stay, set to remain one of the most important ways to balance the interests of debtors and creditors when the full repayment of debts is no longer possible.
In our next article based upon the 2010 trust deed survey we will look into whether quality information exists for those considering a trust deed.
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