What is a Scottish IVA?

In Scotland, an IVA or Individual Voluntary Arrangement is called a Protected Trust Deed. Unlike its equivalent in the rest of the United Kingdom, a Protected Trust Deed lasts for 3 years rather than 5 and can be used for debts in excess of £5,000 rather than £15,000. While many of the other parts of the arrangement are the same, legislation passed by the Scottish Government on September 20, 2013 provides some additional safeguards not available to residents in the rest of the United Kingdom.

In part, the legislation that was passed in Scotland was in response to abuses in the Protected Trust Deed system. Prior to the legislation, less than one third of Trust Deeds paid dividends to creditors. Most payment were eaten up by fees paid to licensed insolvency practitioners who charged hourly for fact-finding and other pre-trust services. Fees for these services were amortized and bundled with payments destined for creditors in a manner designed to hide their true nature. If debtors failed to make payments on their Trust Deed and defaulted, they often discovered that much of the money they thought was destined for their creditors ended up in the pockets of unscrupulous insolvency practitioners.

To address these issues, the 2013 legislation altered insolvency practitioner compensation and dramatically increased disclosure requirements. Rather than charge hourly fees for pre-trust services, insolvency practitioners are now required to charge a flat fee and must disclose the amount upfront. In addition, creditors must approve any additional fees to debtors after the original Trust Deed has been initiated. Finally, insolvency practitioners are required to ensure that debtor social security payments do not end up in Protected Trust Deeds.

Regardless of the legislative improvements to the Protected Trust Deed, the arrangement still has many of the same drawbacks as the Independent Voluntary Arrangement. While debtors gain protection from creditor harassment, they still pay large fees to insolvency practitioners who administer their Trust Deeds. They are also required to report any income increases to their Trust Deed supervisors and are required to increase their payments if their economic situation improves. While a Trust Deed may look better on credit report than a bankruptcy, it still makes it hard for debtors to return to prosperity once the arrangement has been satisfied.

As with an Individual Voluntary Arrangement, a Trust Deed can prevent debtors from finding employment and make it difficult for them to rent a home or buy a car. Depending on the arrangement, debtors can find themselves having to release equity in property, homes, cars, or other assets they already own. For other participants, Trust Deeds can actually cause them to lose their homes as mortgages obtained on a Trust Deed have higher interests rates which are difficult to pay on a reduced income. In some cases, debtors are unable to obtain new mortgages after releasing their equity and end up losing their homes while attempting to comply with their Trust Deeds.

Like IVA participants in the rest of the United Kingdom, many Scottish debtors choose to participate in Trust Deeds in order to protect their business interests or avoid the stigma of bankruptcy. While a Trust Deed may be useful to participants, they shouldn't be entered into lightly. Trust Deeds may not hold the same stigma as bankruptcy but they are still reported in the press. Furthermore, unethical advisors with financial interests in administering Trust Deeds often take advantage of well-meaning debtors and advise them in a way that makes them more money rather than provide debtors with the best solutions.

If you find yourself in serious debt and are considering a Protected Trust Deed, make sure you consult with an unbiased and trustworthy advisor who does not have a financial stake in your decision. If you have a steady source of income, you may be better off contacting your creditors directly and negotiating a payment plan or settlement with them, especially if you have a limited number of creditors. For additional assistance or advice, contact Citizens Advice Scotland for resources in your area. If you do decide to proceed with a Protected Trust Deed, you will have the confidence in knowing that you explored all of your other options.

Sam Jones the author is often asked by readers, what is an IVA?. She often suggests they visi the help and advice pages at uSwitch.