Scottish consumers are not getting a fair deal. Their homes are being placed at risk because they are being denied solutions that are enshrined in legislation, writes Alan McIntosh.

In 2010, when the black clouds of the credit crunch still overhung Scotland’s homeowners, the Scottish government formed the Debt Action Forum which had the task of exploring how the property of home owners could be better protected.

In relation to personal insolvency, the forum considered a number of options, including removing the home as an asset from bankruptcy or protecting a minimum amount of equity. Both, at the time, were dismissed as being too radical without first there being a full public consultation, which never materialised.

However, when the Home Owner and Debtor Protection (Scotland) Bill 2009 was introduced, section 10 proposed a different type of trust deed for debtors which excluded the home. This meant the home would not be placed at risk by the insolvency solution.

The logic was unlike with sequestration, creditors had to consent to trust deeds for them to be protected, so if the home was excluded, it would only be with their agreement.

Despite such trust deeds being enshrined in legislation, most recently under s166 and s167 of the Bankruptcy (Scotland) Act 2016, few have been proposed and few consumers, if any, are advised of their existence when seeking help with their debts.

The only explanation for this is the insolvency industry is not providing access to the remedy for consumers. There are a number of reasons for this, which are considered below, but it means consumers are being denied a solution that Parliament felt should be available.

The reasons against Protected Trust Deeds that exclude the home, can be broke down into two main parts: one, they are not in the consumer’s interests; and two creditors won’t agree to them.

Not in Debtor’s Interest

First, in relation to arrangements not being in the consumer’s interest, this is premised on the argument that it’s not just the home that is excluded, but also any secured debts. This means if the debtor’s home is later repossessed, the home owner can still be pursued for the shortfall.

However, on the basis such trust deeds need not be used where there is an affordability issue in relation to secured debts, the likelihood of there being a repossession has to be remote, easily outweighed by the risk of home loss through a traditional trust deed.

Equally, although all debts, with a few exceptions, are included into a trust deed, very few consumers, other than those struggling with secured debts enter into them in the expectation they will address their liability for secured debts.

The argument, therefore, is a weak one, particularly when there is no risk of the home owner losing their home through a lack of affordability.

The unavailability of such trust deeds, however do place the homes of consumers at risk. This can often be due to circumstances changing and arrangements not performing as expected.

Also where consumers are unable to grant a trust deed because of the levels of equity, often the only option is a Debt Payment Programme under the Debt Arrangement Scheme, which often requires them to pay up to 10 years, often stretching finances to breaking point.

In the worst case scenarios, home owners are denied any statutory option for addressing their indebtedness that doesn’t involve the loss of their home.

Creditor Consent

The other argument that creditors will not consent to proposals has more merit, but recent developments in the industry, means this is now unlikely to be the case in a wide number of cases where home owners do have equity.

Taking Individual Voluntary Arrangements (IVAs), which are the closest comparator with Protected Trust Deed across the UK, current standard practice is for debtors to propose paying an extra twelve months’ contributions to address the equity in their home, when re-mortgaging is not possible. A similar practice has developed in Scotland, introduced by high volume IVA providers, known as “equity rich protected trust deeds”. These make similar proposals to dealing with equity as are made in IVAs and are often accepted by creditors. In practice this can mean as much as £20-30,000 equity being disregarded by creditors in return for an extra year’s contribution to the arrangement.

Equity rich protected trust deeds, however, are problematic. They still require the consumer’s home to be conveyed to the trustee for the benefit of creditors, which means there is always a risk the home could be sold. Also it is believed they could be challenged. If a trustee fails to realise the full equity in the home, this arguably constitutes a breach of “trust” in the trust deed and potentially dissenting creditors may challenge the legality of how the trustee is dealing with the assets of the trust deed. To date the Accountant in Bankruptcy has issued two “Dear Trustee” letters in relation to equity rich protected trust deeds, expressing their dissatisfaction with the practice and the four main insolvency bodies that regulate insolvency practitioners have echoed this view to their members.

It is unlikely, however, where the home is never conveyed to the trustee, it could be argued there is a breach of trust, as the trustee cannot be held to have failed to do something which the trust gives him no power to do: sell the home.

It is clear there is an appetite amongst UK mainstream lenders to show consumers more forbearance in relation to their principal home in personal insolvency, possibly because it is recognised the social impact of a forced sale is often disproportionate to the financial benefit for creditors and often results in reputational damage for creditors.

Equally, few lenders provide unsecured loans, credit cards and other unsecured borrowing on the basis where genuine financial hardship arises, the home will act as a security for payment. If that was the intention, they would have secured the borrowing in the first place.

Clearly, the argument that creditors will refuse to agree to all such Trust Deeds is a weak one.

Where the outcome produced is similar to that achieved in an IVA, lenders by objecting to such proposals would expose themselves to a charge of discriminating against Scottish debtors and not treating them fairly, an obligation the Financial Conduct Authority places strong emphasis on.

Ultimately, no commercial insolvency practitioner can be forced to provide such a service, but equally unless the industry begins to respond to this clear change in the attitude of lenders, they could be accused of failing to provide best advice to those consumers who seek help from them.