Protected trust deeds: improving the process consultation

Part 8 : Proposals which will need legislative change

Earnings Arrestment

8. An earnings arrestment is a form of diligence which requires the employer of a debtor to make a deduction from a debtor's net earnings for enforcement of a single debt. The employer is compelled to deduct an amount from the debtor's wages or salary each time these are paid. This continues until all the money owed to the creditor has been paid or until the person leaves that employment or is made bankrupt. There is a limit to the amount which can be deducted and this is dependent on when the debtor is paid and how much the debtor earns.

8.1 In order for an earnings arrestment to be put in place, a creditor must be in possession of a decree (or relevant document of debt) and must have issued the debtor with a Charge for Payment. A Charge for Payment normally allows the debtor 14 days in which to make payment. Upon the expiry of the 14 days the creditor can proceed with enforcement action against the debtor's earnings if the debt remains unpaid. Where the debtor is an individual, creditors must also have provided a Debt Advice and Information Package to the debtor.

8.2 At present PTDs do not invalidate or stop any existing earnings arrestment, which will normally continue to be collected alongside a trust deed. This means that the particular creditor who has acquired an earnings arrestment order will get 100% of their debt repaid, whilst the others will get whatever dividend is calculated after taking the earnings arrestment into account. It should be noted, however, that the particular creditor who has pursued the earnings arrestment has already paid for this, including relevant Court and Sheriff Officer costs to put this in place and should the earnings arrestment cease, they may not recoup the money they have spent taking this action.

8.3 An award of bankruptcy will immediately stop an earnings arrestment ⁴. The insolvency practitioners in the PTDWG requested that the provision in the Debtor (Scotland) Act 1987 be extended to provide that as of the date when a trust deed becomes protected an earnings arrestment stops automatically. In doing so this would prevent one creditor from having preference over all other creditors.

8.4 This change would require the amendment of primary legislation.

Question 35. Do you agree that there should be an the extension of the provision for sequestrations in the Debtor (Scotland) Act 1987 to provide that as of the date when a trust deed becomes protected an earnings arrestment stops automatically?

Income Payment Orders

8.5 A PTD is a voluntary arrangement and a debtor is expected to comply with the terms of the arrangement to provide information about assets and liabilities, income and expenditure, to cooperate in the realisation of their estate and to pay contributions.

8.6 Contributions are agreed between the debtor and trustee at the start of the process, and the debtor normally undertakes to pay their trustee from their income for the period of the trust deed (normally 3 years), or a longer period to compensate for any failure to pay for a period during the term of the trust deed. A debtor who unreasonably fails to comply by not paying their contributions is regarded as not having kept to the agreement and thus should not have the benefit of imposing that agreement on creditors. Where the debtor does not pay the contributions agreed, then the trustee has two forms of recourse, a) they can petition for the debtor's bankruptcy, or b) they do not discharge the debtor from their debts.

8.7 Where the debtor has not met with his obligations under the trust deed, or the trustee considers that it would be in the best interest of creditors that an award of sequestration is made, the trustee can petition for the debtor's bankruptcy.

8.8 If the trustee deems discharge from the PTD inappropriate, but does not think bankruptcy is the correct solution either, they must inform the debtor in writing that they do not consider discharge appropriate and state the reasons why. It would not be appropriate to refuse to discharge a debtor because of a change of circumstances which prevents them from continuing to pay contributions. Where the trustee refuses to discharge the debtor, the debtor is not discharged from their debts and creditors are no longer bound by the PTD and can proceed to pursue the debtor for the money they are owed. In this situation, the trustee should notify the creditors that they have refused to discharge the debtor. The debtor has a right of appeal to the Sheriff ⁵.

8.9 In bankruptcy, section 32(1) of the Bankruptcy (Scotland) Act 1985, as amended, provides that the debtor's income, other than income arising from estate which is vested in the trustee, belongs to the debtor. However, section 32(2) of that Act allows for the trustee to apply to the sheriff for an Income Payment Order ( IPO) requiring the debtor to make a contribution from that income to the trustee. A contribution can be sought for a single amount or for regular payments.

8.10 An IPO under section 32(2) made by a sheriff must detail the period during which it is effective. That period may be after the date of the debtor's discharge but no later than 3 years after the date the order was made.

8.11 One proposal discussed by the PTDWG was for the introduction of IPOs to PTDs. The group welcomed this proposal as there are a small number of debtors who fail to comply with the agreed contribution payments in PTDs. To proceed with this proposal, a change in legislation would also be required.

Question 36. Do you consider that recourse over and above the option to sequestrate the debtor or deny discharge from the PTD should be available to the trustee?

Question 37. Should consideration be given to the introduction of IPOs to PTDs for debtors who fail to comply with the agreed contribution payments?

Future PTD product

8.12 At the PTDWG, Citizens Advice Scotland ( CAS) stated that their research has indicated that many of their clients are unable to access PTDs as a form of debt relief due to the level of fees involved. Using the figures quoted at the DAF, CAS propose that a simplified trust deed with a maximum duration of 5 years, excluding heritable property, and with a fixed fee of approximately £500 to £700, would make this form of debt relief more accessible to a number of debtors.

8.13 Although some members of the group challenged these figures on the grounds that there are currently statutory fees in the region of £450 to £500 payable to the AiB before any administration fees are attributed, group members were generally supportive of setting up a sub group to look at the possibility of introducing a simplified, lower cost, model PTD which would enable more people to access this form of debt relief.

8.14 It was noted by some group members that the introduction of the Certificate for Sequestration may be a route to debt relief for those debtors unable to access the trust deed procedure. Section 9 of the Home Owner and Debtor Protection (Scotland) Act 2010 amends the Bankruptcy (Scotland) Act 1985, by introducing a new route into bankruptcy on the basis of a certificate completed by an authorised person certifying that the debtor is unable to pay debts as they become due. The debtor must demonstrate to their money adviser or insolvency practitioner that they are unable to pay their debts as they become due. The money adviser or insolvency practitioner can then sign the certificate. This new route allows a debtor to apply to the AiB to be made bankrupt if they have been granted a certificate for sequestration. It is expected that this new route will allow people access to debt relief who currently are excluded.

8.15 During discussion some group members felt that the group looking at a simplified model PTD should be put in abeyance until after both the introduction of the Certificate for Sequestration and the development of the AiB Protected Trust Deed Guidance as these may remove the need for a simple model PTD.

Question 38. Do you agree that there should be a different product for some specific straightforward cases which would reduce costs and possibly make the process available to a wider group?

Question 39. Under what circumstances would you envisage this product could be used, for example no heritable property, no assets, low number of creditors?

Question 40. What do you consider a realistic charge for such a product would be?

Question 41. Were such a product to be introduced, should there be any extra responsibilities placed on a debtor prior to agreeing, such as an Income Payment Agreement?

Question 42. Were such a product to be introduced, should this be administered by IPs only, AiB only, or should both IPs and AiB be able to be trustee in simplified model PTDs as in bankruptcy currently?