What is a Trust Deed?
A Protected Trust Deed is a legally binding solution for people who are struggling with unsecured debt. This type of personal debt solution is only available to people living in Scotland, so if you live in England or Wales, an Individual Voluntary Arrangement (IVA) or Debt Management Plan (DMP) might be the right solution for you. Its also used as an alternative to other forms of debt relief in Scotland, such as the Debt Arrangement Scheme (DAS) or Sequestration (Bankruptcy).
- Trust Deeds are an agreement between you and a licensed Insolvency Practitioner (IP), for the benefit of your unsecured creditors
- An assessment of your affordability will be carried out, the payment that you will make is equal to your income minus all of your day to day living expenses e.g. rent, bills, food etc.
- Monthly instalments are usually made over four years, but this can be longer
- At the end of the arrangement, the remainder of your debt is written off
- During the arrangement, any interest or fees on your debts are frozen at the date of commencement
- Once a Protected Trust Deed comes into effect, creditors should no longer contact you
- As long as you stick to the terms of your agreement, creditors can no longer take legal action against you for recovery of their debts
- Trust Deeds must be prepared and administered by an IP
- Once you have entered into an arrangement, the IP who set it up also becomes your Trustee and it is their job to manage the administration of your Trust Deed
- Trust Deeds allow you to retain much greater control over any assets you might possess, including property and vehicles
Are You Eligible?
To be eligible you must meet the following criteria:
- You currently live in or have lived in Scotland within the last 12 months, or has a place of business in Scotland
- You have unsecured debts of £5,000 or more
- You must be able to pay a monthly contribution from income and/or has releasable assets that will enable a minimum return to creditors of normally 10p in the £.
- You are insolvent (unable to pay the debts as they fall due and/or their liabilities are greater than your assets)
The Trust Deed Process
For many, the process can often be very confusing and difficult to understand. To make life a little easier, we have put together this diagram explaining how it all works.
How much does it cost?
- The Trustee’s fee and costs is met from the funds received into the Trust Deed; there are no payments due by you over and above the agreed contribution from the income and/or assets.
- We do not charge set up fees and we would advise against using any company who does.
- Creditors agree the level of the Trustee’s fee at the beginning of the arrangement and monitor that level throughout.
- There is no cost to you if you decide against signing a Trust Deed after taking advice but deciding not to proceed.
Trust Deed Benefits
Protection from legal action
Once protected, the creditors cannot take legal action against you for recovery of any debt outstanding as at the date the arrangement was signed.
You no longer have to deal with the creditors – we negotiate with the creditors for you, taking away the pressures of the constant phone calls and distressing mail.
Interest, fees and charges
Are frozen – the creditors can only claim for the outstanding balance due to them as at the date the Trust Deed was signed.
The home and other assets can be retained, subject to their value and your specific circumstances, advice must be taken prior to proceeding.
You only make one affordable monthly payment, calculated after an allowance has been made for all of the general living expenses and household bills.
You will normally make payments for a 4 year period; however, in certain circumstances that period could be extended – after the agreed period you will be discharged from the Trust Deed and all remaining debts will be written off.
If you are in financial difficulty, a trust deed can be signed as soon as you are ready to proceed. Firstly, you must seek financial advice from an approved person. Once you have received the necessary paperwork, had the options explained to you and you’ve had time to consider the consequences and alternatives then you can proceed to sign a Trust Deed. It should be noted that once signed the Trust Deed is a legally binding document and cannot be withdrawn.
A Trust Deed does not involve court proceedings.
Debt write off
The creditors will write off anything you could not manage to repay at the end of the Trust Deed. Sometimes this figure can be significant, even the majority of the debt. You avoid bankruptcy whilst still writing off a significant amount of the debt.
Stops Earnings Arrestment
An earnings arrestment will be removed on protection of the Trust Deed.
Peace of mind
All of this adds up to a less stressful life in which you can take control of your finances and no longer fear a ringing phone or a knock at the door.
What debts can be Included?
All unsecured debts can be included, such as:
- Personal loans
- Credit cards
- Catalogues/Store cards
- Pay day loans
- Council tax arrears
- Over paid tax credits due to HMRC
- HMRC debts (PAYE, NIC & VAT)
- Over payment of DWP benefits
- Rent arrears (although may be a problem if still living in the property)
- CSA arrears (you must pay ongoing maintenance)
- Outstanding car parking charges
- Shortfall on mortgage or car HP, following repossession
- Personal guarantees, if crystallised
What debts cannot be included?
- Mortgages, secured loans, hire purchase and any other loan secured on a property, motor vehicle or home furnishings
- Fines issued by the Court
- Student loans
- Debts obtained fraudulently
- Crisis loans from the DWP’s Social Fund
Joint Debt & Trust Deeds
Joint debts can be included in your Trust Deed
The other person is still responsible for repaying the full amount – not half of the debt
If the other person would struggle to repay debt, they may need to seek debt advice, or enter into a Trust Deed themselves
‘Joint’ Trust Deeds do not exist, but two individuals can each enter into separate Trust Deeds which include their joint debt(s)
A Trust Deed and Your Assets
In a Trust Deed you can keep your home, although you may need to release some of the equity for creditors as part of the agreement.
If you are a home owner, the level of equity (difference between the value of the house and any loans secured on it) is calculated and fixed at the start of the Trust Deed.
The equity, if applicable, has to be realised for the benefit of the creditors but this is normally done without having to sell the home – it is extremely unusual to sell the home in a Trust Deed, unless you wish to do so.
Equity, if applicable, can be realised by the following methods:
- Third party payments e.g. family, friend, business associate etc.
- Extending the payment period of the Trust Deed, normally by one or two years, depending on the level of equity
- Re-mortgage or secured loan
- Mortgage to Rent scheme
- Sale by private bargain or open market
Your motor vehicle
In almost all cases you will be able to keep the car, especially if it is required for work purposes. If the car is valued at less than £3,000 then it will not be considered as a realisable asset of the trust estate.
If the car is brand new and/or worth a significant amount then you may be asked to trade it in for a less expensive car, releasing either income or a lump sum to the Trust Deed.
If the car is subject to a Hire Purchase agreement or another type of secured finance agreement, you will be allowed the contractual repayment within the monthly expenditure (provided it is not excessive) and, in most cases, you will be able to keep the car.
Always confirm the type of car finance before proceeding, original agreements must be provided.
If you have savings before you start your Trust Deed, it is very likely that they will be paid to the Trust Deed.
However, when calculating your affordable monthly payment, a ‘contingency’ allowance of up to £20 a month is often taken into account.
There could also be an allowance for irregular expenses, such as MOTs, household repairs etc.
Ultimately, however, if you are managing to save a significant sum, your trustee will increase the amount of your Trust Deed payments to enable a higher return to be paid to your creditors.
Your pension fund will not be counted as an asset when the terms of your Trust Deed are being decided.
However, if you are currently drawing from a pension, this will be counted as part of your monthly income. If you are currently employed, and paying into an employer pension scheme, you may have to reduce these payments to free up more income for Trust Deed payments.
With a private pension, you might be asked to suspend payments altogether for the duration of your Trust Deed. Before a Trust Deed and during a Trust Deed you should not release a ‘tax free lump sum’ from your pension without discussing this with your adviser and/or IP.
Advantages & Disadvantages
There are two other key debt solutions available in Scotland. Sequestration is the Scottish form of bankruptcy. It involves the sale of your assets in order to pay off your debts. Debt Arrangement Schemes, which result in Debt Payment Plans, organise your payments into an affordable monthly payment that you pay until all your debts are fully paid off. Below we have created a table which compares these three options.
As with everything in life, there are disadvantages to the Trust Deed procedure. Remember; if you find that a Trust Deed won’t work for you, there are other options, such as the Debt Arrangement Scheme or Sequestration.
- Creditors may object to the Trust Deed proposal in sufficient number or value, causing it to fail to achieve protected status, as a result, sequestration (bankruptcy) or DAS become alternative solutions.
- Your credit rating may be adversely affected.
- Granting a Trust Deed may result in you being refused credit, before or after the discharge is granted.
- You may not be able to act as a Director of a limited company unless the company’s articles of association allow it.
- Student loans are not discharged in a Trust Deed (or a Bankruptcy).
- Equity in the property and/or other assets you own may have to be realised for the benefit of the creditors.
- Your current employment or future employment prospects may be affected by entering into a trust deed.
- A trust deed normally requires a minimum return of 10p in the £ to creditors, if the circumstances will not allow this then sequestration becomes a viable alternative.
- A trust deed has a 4 year acquirenda term i.e. the Trustee has claim on assets acquired for a period of 4 years from the date of signing the trust deed e.g. inheritance.
Managing a Trust Deed
- A review of your circumstances is conducted once per year through an annual review. This will happen each year throughout the duration of your Trust Deed
- If you find that your income has increased or decreased, your monthly payment can be adjusted
- Whilst you are in a Trust Deed, there is nothing to stop you from accessing further unsecured credit
- Any debt accrued whilst you are already in a Trust Deed cannot be added to it
- For this reason, it is advised that you carefully discuss the possibility of taking out further loans with your Trustee before doing so
- If you are likely to miss a Trust Deed payment, it is essential to let your Trustee know as soon as possible so they can communicate with your creditors
- If your missed payment is the result of financial emergency outside of your control, your Trustee is likely to extend your Trust Deed by however many months you missed, with reduced payments considered
- Missing a payment is, officially, a breach of the terms of your Trust Deed, so in some cases is can lead to your bank account being frozen, or your creditors petitioning for your sequestration
Cancelling a Trust Deed
- A Trust Deed is a legally binding agreement, so cannot be cancelled at will
- If you are unable to make payments which your creditors find acceptable, your Trust Deed may fail
- The failure of a Trust Deed is likely to end in your sequestration
If the Worst Should Happen
- If you were to pass away during the course of a Trust Deed, your Trustee is responsible for ensuring that your creditors receive as much of what they are still owed as possible
- This is achieved by selling your assets: if the Trustee cannot raise enough money to pay the debts off entirely, the rest are written off
- Your loved ones will not be responsible for your remaining debt, but may not receive what your will had bequeathed them
If you need help managing your Trust Deed with us, please don’t hesitate to call our existing customer line at 0800 0431 431.