Protected Trust Deeds (Miscellaneous Amendment) (Scotland) Regulations 2024: child rights and wellbeing impact assessment

CRWIA Stage 1 – Screening

Brief summary

1. The aim of the Protected Trust Deeds (Miscellaneous Amendment) (Scotland) Regulations 2024 (the “Regulations”) is to make improvements to the operation of Protected Trust Deeds (PTDs). The provisions contained in the Regulations will help to ensure that PTDs are fit for purpose and provide the necessary support and protection to those who need to use them.

The Regulations

2. The Regulations amend the Bankruptcy (Scotland) Act 2016. Below is an overview of what each of the provisions aim to do.

PTD Protocol

3. The PTD Protocol (the “Protocol”) was introduced in October 2021 with the intention to promote good practice, improve transparency and provide further clarity in support of guidance. The Protocol is voluntary which means there is no requirement for trustees to follow it. Its provisions are based on consent only.

4. These Regulations will reflect the following two processes from the Protocol in legislation to ensure that all PTDs are operating under the same rules.

Interim dividend process for trustees

5. In a PTD, a trustee with ingather funds to pay the creditors. These are usually from the sale of assets (things the debtor owns) and a monthly contribution paid from the debtor's income.

6. In current legislation, the trustee in a PTD must pay an interim dividend to creditors no later than 2 years after the date the trust deed is granted. After this, a dividend should be paid to creditors every 6 months. This is only where the trustee has sufficient funds to do so and it does not stop a trustee from paying a dividend to creditors at an earlier stage.

7. Good practice introduced under the Protocol says that, where there are sufficient funds to do so, an interim dividend should be paid to creditors 1 year after the date the trust deed is granted. After this, a dividend should be paid to creditors every 3 months. The purpose of this change is to ensure that the debtor’s payments are contributing to reducing their debt earlier and more frequently in the process.

Refusal of debtor discharge

8. If a debtor does not comply with the terms of their PTD, the trustee can refuse to discharge them. This will usually be because the debtor has not co-operated with the trustee or failed to meet the obligations that they signed up to in their trust deed.

9. The refusal of discharge has significant implications for the debtor. Their debts that were included in the PTD will not be written off which means they will still be responsible for paying them, plus any additional interest or charges during the time of the PTD. Currently, to refuse discharge, the trustee must notify the debtor in writing, and they must send a copy of this notice to the Accountant in Bankruptcy.

10. There was a feeling that this process needed further scrutiny and that the trustee should require the approval of Accountant in Bankruptcy before they can refuse a debtors discharge. Therefore, the Protocol introduced the ‘Refusal of Debtor Discharge Document’. This document is completed by the trustee and must detail the steps they have taken before deciding to refuse discharge. It is sent to Accountant in Bankruptcy to decide whether the refusal of discharge should be agreed or not. This adds extra rigour around the process.

Removal of protection of a trust deed

11. A trust deed is a legally binding agreement between an individual and their creditors. It can become protected if most creditors are happy with the terms of the trust deed.

12. If a trust deed is not protected, then creditors can still take court action to get back the money they are owed. When a trust deed is protected, creditors cannot add more interest or charges to the debt, take any court action for unpaid debts and the debts will be written off at the end.

13. There is currently nothing in legislation to allow for the protection of a PTD to be removed if an error had been made in the protection process, meaning the PTD should not have been protected. An example of this would be a system error where creditors were not notified of the trust deed and therefore not given the opportunity to vote on it. At present, if an error is identified after protection has been granted, then the protection must remain in place and creditors are locked into the terms of the PTD.

14. These Regulations will introduce a new power to allow the Accountant in Bankruptcy to remove the protection from a trust deed when this type of error has been made. This will result in the debtor reverting back to their trust deed before protection and creditors no longer being bound by its terms. The trustee can apply for protection again providing the correct procedure is followed.

Remove time limitations to refuse debtor discharge

15. If a debtor is not co-operating and is failing to meet the obligations of their trust deed, the trustee can apply to Accountant in Bankruptcy to refuse their discharge. Refusing discharge means that, at the end of the trust deed, the debts will not be written off and the debtor will still be responsible for them plus any additional interest or charges.

16. If a trustee wants to apply to refuse a debtor’s discharge, unless the debtor makes a request, they currently must wait until the end of the trust deed repayment period (the repayment period is usually 48 months, but an alternative can be agreed at the start of the trust deed). The consequences of this are that the trustee is locked into a PTD where there is no co-operation from the debtor and the trustee is continuing to incur administration costs for the case.

17. This proposal in the Regulations will allow the trustee to apply to refuse the debtors discharge earlier in the process when they have judged that the PTD will not be successful. This will normally be due to the debtor not co-operating with the trustee. If the refusal to discharge the debtor is approved, the trustee can then apply for their own discharge and bring the trust deed to a close. This new provision merely allows this to happen earlier in the process and does not stop the debtor seeking to obtain another trust deed.

Early discharge of a debtor

18. Currently nothing in the legislation allows a debtor to be discharged early from a PTD unless all debts have been paid in full. The introduction of this new provision will allow early discharge of a debtor when they can no longer make contributions to their PTD through no fault of their own. This new provision allows discharge to happen earlier in the process, rather than having to wait until the end of the 48 month period, it does not otherwise change the process.

19. This would mean that, with agreement from their creditors or Accountant in Bankruptcy, the debtor would be released from their PTD and have their debts included in the PTD written off. This new provision merely allows this to happen earlier in the process but does not change the process as it stands.

Trustee of last resort

20. The only people who can be appointed as the trustee in a PTD are licensed insolvency practitioners. At present, if the appointed trustee is unable to fulfil their duties, they are required to find another trustee to take on their case load. An example of when this might happen is if a trustee retired or if an insolvency practitioners firm closed. There is a risk that it might not be possible to find a new trustee, if the trustee that can no longer act has a very high number of cases.

21. If a case does not have a trustee appointed, it will effectively be in limbo. There would be no one to administer the case and fulfil the statutory duties required which would have a negative impact on the debtor. This new provision will give Accountant in Bankruptcy the power to step in and become the trustee in those cases.

Increased supervision fee

22. The PTD supervision fee is currently £100. It is paid by the trustee to the Accountant in Bankruptcy for their supervision of a trust deed. This provision will allow Accountant in Bankruptcy to increase this fee to £120 to assist with their operational running costs.

Residency criteria to apply for a PTD

23. The current practice in PTDs is that anyone applying for a PTD has to live or have a business in Scotland. This provision will put this explicitly into legislation.

Start date of relevant proposal: September 2023

Start date of CRWIA document: January 2024

Which aspects of the relevant proposal currently affects or will affect children and young people up to the age of 18?

24. It is possible for a young person aged 16 or over to incur debt in certain circumstances, for example, rent arrears. However, in general it is difficult for a person under the age of 18 to obtain credit as many creditors have policies to not approve credit to anyone under the age of 18. This makes it unlikely that a child or young person up to the age of 18 will experience unsustainable debt and require access to a PTD. To put this into context, from January 2019 until January 2024, there have been no PTD cases where an individual has been under the age of 18 at the time that the trust deed became protected. Therefore, it is considered that the provisions included in these Regulations will not directly affect them.

25. In the extremely rare circumstance that a person under the age of 18 did enter a PTD, the following three provisions would have an impact on them. They may also have an indirect impact on a child or young person if a parent or carer was in a PTD.

Removal of protection from a trust deed

26. Removal of protection will revert the debtor back to the position they were in before. They will still be in a trust deed, but they will no longer be protected from creditors taking court action against them to get back the money they are owed. This could include the creditor asking the court to make the debtor bankrupt.

27. If the creditor chose to take recovery action, then this could have a negative impact on the debtor as it could affect their household income. For example, if a creditor chose to place a wages arrestment on the debtor, a percentage of the debtor’s monthly income would be taken to pay back their debt. This would have an impact on the household income and therefore would have a negative impact on the individual. Should there be a child or young person in the household, this could have an indirect negative impact on them.

28. To help to mitigate the impact of this provision, a time limit has been placed on when it can be used. A request to remove protection on these grounds must be done within the first 3 months from the date that the trust deed is protected. If an error is found once the 3 months have passed, the protection must remain in place.

29. If protection is removed, a trustee can apply again for the trust deed to be protected providing the correct procedure is followed. In addition, there will be no barriers in place for the individual to apply for another debt solution.

30. There is also the option to apply for a moratorium. A moratorium lasts for 6 months and protects individuals from creditor action immediately once the application is made. This will allow the individual space and time to consider their options further. More information on moratorium can be found on the mygov.scot website.

31. The potential impact is the same to all those in PTDs. As the person can reapply for protected status again, we expect any negative impact to be minimal and temporary. The person will not be in a worse position than they were in prior to entering a PTD.

Remove time limitations to refuse debtor discharge

32. There is the potential that this provision could have a negative impact on the debtor. Refusing discharge means the debts will not be written off and the debtor will still be liable for them plus any additional interest of charges. They will also no longer be protected from creditors taking court action to get back the money they are owed which could affect the household income. To use the same example as in the removal of protection section, if a creditor chose to put a wages arrestment on the debtor, then a percentage of the debtor’s monthly income would be taken to pay back their debt. The effect on the household income could then have an indirect negative impact on the child or young person.

33. It is important to highlight that the consequences of this provision are no different to the consequences in the current process when a trustee refuses to discharge a debtor. This provision just allows it to be done at an earlier stage in the trust deed process. Therefore, while there is the potential of a negative impact on the debtor and indirect impact on the child or young person, we believe that this is unlikely.

34. The provision could also be seen as having a positive impact, as the debtor will be released from the trust deed and free to pursue another debt solution that is better suited to them. As the main reason for a trustee to refuse discharge is because of non-compliance, this indicates that the PTD was not a suitable solution for the debtor. We believe that due to this second point it is more likely that this will have a positive affect on the debtor and in turn the child or young person.

35. This provision would only be used as a last resort after the trustee has exhausted all other avenues to encourage the debtor to cooperate. As stated previously, the trustee must make an application to the Accountant in Bankruptcy to seek their agreement on refusal of discharge. This mitigates any concerns about the provision being used in the wrong circumstances.

Early discharge of debtor in extenuating circumstances

36. We believe that this provision will only be used in a small number of PTD cases. However, the positive impact that early discharge in these circumstances will have on the debtor will be substantial, and in turn this will have a positive impact on the child or young person.

Which groups of children and young people are currently or will be affected by the relevant proposal?

37. Please see response above.