The debt showdown - IVAs vs Trust Deeds

IVAs and Trust Deeds. What’s the difference? Debt Management Today spoke to experts within the industry to discover the similarities and the differences between these two stalwart methods of debt management...

An Individual Voluntary Arrangement is, according to EuroDebt, “a contractual agreement between an individual and his/her creditors, usually to accept a reduced level of repayment over a set timescale.”

Similarly, a Protected Trust Deed is described as “a formal and legally binding debt solution available to residents of Scotland which is an agreement between an individual who is unable to pay his/her creditors in full and an Insolvency Practitioner (the Trustee).”

So where do the differences lie?

Neil Cronshaw, Insolvency Practice Manager at Varden Nuttall, which forms part of the Release Money group, highlighted some of the comparisons that can be drawn between the two debt solutions. “The fundamental difference is that Trust Deeds are only available for Scottish residents – having lived there for more than six months, whilst IVAs are for people resident in England and Wales,” he said.

“The term of the arrangements are also different,” he added, “A Trust Deed usually lasts around 36 months (three years) while an IVA lasts around 60 months (five years).”

David Rankin, Insolvency Practitioner at Harrington Brooks, said: “The practical effect of the difference is mainly seen in the rules around voting – a lower percentage of creditors’ votes are needed to secure a Trust Deed than an IVA.”

A Trust Deed, which is exclusive to Scotland, requires an individual to have unsecured debts of more than £8,000 and for no more than one third of the creditors (by value of debt) to object to the individual’s Trust Deed becoming Protected.

In comparison, the debts required for an IVA are a minimum of £15,000 and a proposed IVA can only be accepted if a majority vote of 75 per cent (by value of debt) of those creditors present is achieved.

Ross Walker, EuroDebt’s Debt Solutions Advisor, who is based in Scotland, explained further: “With Trust Deeds all of the client’s assets are conveyed, although Protected Trust Deeds exclude the home where there is a mortgage is involved.

“With an IVA, the client must of course make their best endeavours to get the equity out, perhaps by remortgaging; however they are unlikely to lose their home if they cannot do so. In a Trust Deed any equity must be realised.”

How do they help?

Ross Walker said: “We do quite a few Trust Deeds and I think they are particularly good for someone with a ‘reasonable’ amount of debt, say £25,000, and little or no equity.

“The majority of debt for a lot of these individuals tends to be on credit and store cards. The clients that I meet are often paying minimal monthly payments which take an extremely long time to pay off.

“In this situation Trust Deeds can be a lifesaver – if someone with a lot of debt is struggling to pay £500 per month just to stand still then we can get them into a Trust Deed and they can be paying back £200-225 a month for three years and then the debt is written off.”

David Rankin suggested that Trust Deeds are perhaps better for consumers than creditors. “The general convention is that returns are lower for Trust Deeds than IVAs because of the shorter term entered into.”

What about IVAs?

Vance Parsons at EuroDebt explained: “Having an IVA accepted gives you the opportunity to avoid bankruptcy whilst repaying your creditors to the best of your ability over a realistic timetable. They give certainty to a previously uncertain future, and assist with financial rehabilitation leading to an eventual repaired credit rating.”

David Rankin provided an example. “One case I dealt with involved Mrs O – a 48-year-old psychologist with her own home in London and a 19-year-old son at university.

“Her debt level was £108,000 which included credit cards, loans, tax credit overpayment and legal fees for her divorce. In the IVA she offered £330 per month for 60 months, which gave an estimated dividend of 11p in the pound.

“The creditors accepted the IVA at the meeting, with a £43 increase. Mrs O was happy to accept the increase and was delighted with the outcome, as she now had a clear end date and manageable goals.”

What other options are there?

Neil Cronshaw said: “Now we provide Trust Deeds, as a company we are able to provide assistance to the whole of the UK and hopefully in the future we will be looking at sequestration cases and advising in all areas of Scottish insolvency.”

Another option offered in Scotland is the Debt Arrangement Scheme (DAS) which is an alternative to bankruptcy or Trust Deeds. “Debtors do pay back their debts in full, but interest rates and charges are frozen. The DAS involves an approved money adviser who liaises with the debtor to draw up a proposal for a debt payment programme,” David Rankin explained.

When asked whether this would be a viable solution throughout the rest of the UK, he added: “The barrier would be the automatic freezing. Whilst charges do get frozen in an IVA, they don’t in a DMP – and this is basically a regulated DMP. I think if the DAS was introduced as an alternative the banks would be likely to lobby against it because they would end up writing off a lot of money with regard to the interest charged.

“However, banks and other lenders have become more accepting of IVAs, particularly over the last 12 – 24 months as it has become evident that there has been a significant squeeze in income.”

Ross Walker added: “People want certainty, they want to know how much they are going to have to pay and when it is going to start and finish.”

It seems that, for the right consumer, either a Trust Deed, if resident in Scotland, or an IVA, if resident in England and Wales, could be the perfect tool to give them the certainty and the legal protection that is so important for those in debt.

By Miranda Atty

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