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Scottish Government To Force More People Into Bankruptcy?

6th November 2012

Last week the Scottish Government published their response to a recent consultation about proposed changes to bankruptcy law. The response sets out a series of new measures and changes that the Scottish Government intends to bring into law via a Bankruptcy Bill “at the earliest opportunity”. There are many implications for protected trust deeds and sequestration (bankruptcy).

Whether intended or not, the proposals seem likely to steer thousands of people away from Scottish trust deeds and into bankruptcy in the future. In this article we explain why this will be the case. We cannot however explain why the Scottish Government would wish for this to be the case.

Firstly, it is proposed that trust deeds will only be available to individuals with debts in excess of £10,000. Currently there is no minimum debt threshold. In the future those with debts of less than £10,000 will be unable to select a trust deed to deal with their debts and are therefore likely to weigh up the merits of bankruptcy or a debt arrangement scheme instead.

Secondly, it is proposed that a minimum dividend of between 30p and 50p will be set for protected trust deeds. A dividend is the amount of money that creditors get back for each pound that they are owed. The dividend is funded by the payments made into a trust deed, but only after the fees and costs associated with the trust deed have been paid first.

We can use a fairly typical example of an individual that owes £25,000 and who is able to pay £200 per month towards their debts. In this instance we’ll assume that the fees and costs associated with the trust deed come to £4000 in total.

Another Scottish Government proposal is that protected trust deeds in the future will last for a minimum of four years (48 months). Let’s say in our example that the £200 is paid on time every month for 48 months. A total of £9600 is paid by the individual over those four years.

£4000 is deducted from this £9600 to cover the fees and costs. £5600 remains to fund a dividend. This actually only provides a dividend of 22.4p for the creditors, well short of the 30p to 50p that the Scottish Government is proposing.

In fact a 30p dividend would require a trust deed lasting nearly five years (assuming the trustee does not increase their fee at all for this elongated supervision of the case).

How about a 50p dividend? That would take nearly seven years to achieve at £200 per month (again assuming the unlikely lack of a fee increase for the trustee).

So… faced with a five year or seven year Scottish trust deed would you sign on the dotted line? Or would you consider this to be unreasonable given that you’d be free from contributing towards your debts in four years if you became bankrupt instead? For most people the logical response will be to proceed with sequestration if the current Scottish Government proposals become law.

Apart from forcing large numbers of less well-off people into bankruptcy, there is another bizarre aspect to this proposed change to Scottish trust deed rules. You’d think that the wishes of creditors would be paramount when creating new rules about minimum dividends from protected trust deeds?

It seems not. With the understandable exception of some credit unions, there was no clamour for higher minimum dividend thresholds from the creditor community. They simply weren’t demanding this change, perhaps because they already have the ability to prevent trust deeds from becoming protected if they aren’t satisfied with the proposed dividend. Which leaves a big question… if creditors didn’t want this, what is the motivation of the Scottish Government in seeking to introduce it?

Is excluding thousands of poorer people from trust deeds and forcing them towards bankruptcy a move that will win the Scottish Government plaudits in the long-term? To most of those working within the debt advice community it appears to be a bizarre decision that will leave the financially vulnerable with fewer options at the point at which they need them most.

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Wylie & Bisset Grant Thornton

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