A Protected Trust Deed is a legally binding debt relief solution available to people living in Scotland with £5,000 or more of unsecured debt.
What is a Trust Deed?
A Protected Trust Deed is a legally binding debt relief agreement for people struggling with £5,000 or more of unsecured debt. Only open to people living in Scotland a Protected Trust Deed is an agreement between an individual and a licensed Insolvency Practitioner (IP), who takes on the role of Trustee, will manage the agreement with creditors.
Interests relating to your debts are frozen and you you will pay back what you owe, in accordance with your affordability, typically over four years with any remaining debts written off at the end of the agreement.
Once you enter a Protected Trust Deed, creditors will no longer contact you for payment, with all correspondence regarding repayments made through the IP, and if you continue to meet the terms of your agreement creditors they can no longer take legal action to recover debts.
Protected Trust Deeds allow you to retain greater control over any assets you have, including vehicles and property.
This agreement is an alternative to other forms of debt relief in Scotland, such as the Debt Arrangement Scheme (DAS) and Sequestration (bankruptcy). However, it will affect your credit rating for six years and will appear on the Accountant in Bankruptcy (AiB) Register for the duration of the arrangement.
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.
Anyone interested in a Protected Trust Deed will be introduced to our partner company Carrington Dean.
Am I eligible for a Protected Trust Deed?
To be eligible for a Protected Trust Deed, you must meet the criteria below:
- You currently live in or have lived in Scotland within the last 12 months or have 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 have releasable assets that will enable a minimum return to creditors of normally 10p in the pound.
- You are insolvent (unable to pay the debts as they fall due and/or their liabilities are greater than your assets)
What debts can be included in a Protected Trust Deed?
All unsecured debts can be included in a Trust Deed, 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?
The following debts can’t be included in a Trust Deed:
- Secured loans, mortgages, 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
Trust Deeds and your assets
You can keep your home if you enter a Trust Deed, however, you should be aware that you may need to release some of the equity for your creditors.
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, must 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
In almost all cases you’ll be able to keep your car, especially if it’s required for work purposes. If it’s valued at less than £3,000 it won’t be considered as a realisable asset. However, if the vehicle is new/or worth a significant amount then you might be asked to trade it in for a less expensive car, releasing either income or lump sum to the Trust Deed.
If your car is subject to a hire purchase or any other type of secured finance agreement, you’ll be able allowed the contractual repayment within the monthly expenditure (providing it isn’t excessive) and in most cases you’ll be able to keep the car.
It’s important to confirm the type of car finance you are involved with before proceeding – original agreements must be provided.
It is likely that any savings you have prior to starting your Trust Deed will be paid into the agreement. However, when calculating your affordable monthly payment a ‘contingency’ allowance of up to £30 a month is taken into account while there could also be an allowance for irregular expenses such as household repairs and MOTs.
If you find you can manage to save a significant sum during the plan, your Trustee will increase the amount of your Trust Deed payments to ensure a higher return to creditors.
Pension funds 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 advisor and/or IP.
Advantages of a Protected Trust Deed
As with all debt relief options it’s important to consider the benefits entering into an arrangement will have on day-to-day life. Here we shine a light on the benefit of a Protected Trust Deed:
- No more contact or enforcement: Once you enter into a Protected Trust Deed your creditors can no longer contact you and must liaise with your trustee regarding all matters of the arrangement. You can also apply to the Accountant in Bankruptcy for a ‘moratorium’ which will stop creditors taking steps to recover what you owe them as you set up a Trust Deed. However, it’s important to note you can only apply for one moratorium in any 12-month period.
- Debt forgiveness: Protected Trust Deed’s typically come to an end after four years with all remaining debts at that time written off, allowing you to start your debt free future.
- Borrowing money: You are still able to obtain credit, such as a mortgage or credit card, in a Protected Trust Deed but this could be more difficult than previously.
- A Protected Trust Deed doesn’t prevent you from certain employment or public office like sequestration.
- Affordability: You only make one affordable monthly payment, calculated after an allowance has been made for all the general living expenses and household bills.
- No fee: There are no fees associated with setting up a Trust Deed like other debt relief solutions
- A Trust Deed doesn’t involve court proceedings.
- Stops earnings arrestment: An earnings arrestment will be removed on protection of the Trust Deed.
Disadvantages of Protected Trust Deed
Despite the many benefits, there can be disadvantages to entering a Trust Deed as detailed below:
- 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 Debt Arrangement Scheme (DAS) become alternative solutions.
- Your credit rating will be affected.
- 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 pound to creditors, if the circumstances will not allow this then sequestration becomes a viable alternative.
A trust deed has a four-year term which means the Trustee has claim on assets acquired for a period of four years from the date of signing the trust deed e.g. inheritance.
How much does a Protected Trust Deed cost?
- Fees and costs to cover the work of the Trustee is paid using funds received into the Trust Deed, meaning you won’t be expected to pay more than 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.
Managing your Trust Deed
It’s important to be aware of the vital role you play in setting up an managing a Trust Deed.
Change of circumstance: You will be subject to an annual review once a year to discuss your current circumstances, however, it’s important to keep the Trustee abreast of any changes to your income all year round. If you find your income has increased or decreased your monthly payment can be adjusted.
Additional debts: There’s nothing to stop you accessing further unsecured credit whilst in a Trust Deed, however, this cannot be added to the agreement. As such, it’s advised that you carefully discuss the possibility of taking out further loans with your Trustee before doing so.
Missed payments: If you’re likely to miss a Trust Deed payment it is vital to let your Trustee know as soon as possible so they can alert your creditors. If your missed payment is the result of a financial emergency out with your control then your Trustee is likely to extend your arrangement 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.
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)
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.
Frequently Asked Questions
Being in debt alone will already have affected your credit score, and, like most debt solutions, being in a Trust Deed will have a negative impact on your credit. It will remain on your report for six years, making it very difficult to get credit whilst in your arrangement.
Once the six years have passed, you will be able to begin rebuilding your score again.
If you stop making your payments into your arrangement, it can lead to its failure. Falling into arrears will lead to your Trustee losing faith in your ability to pay and your Trust Deed will be terminated.
If you are struggling to pay, it’s important to contact us as soon as possible. We have options to help you through your situation and avoid your arrangement failing.
No. Assets such as your house and car are not included in your Trust Deed.
However, if you are a homeowner and have equity in the property, we may ask you to attempt to release this towards the end of your arrangement. If you are unable to do so, your trust deed may be extended by 12 months.
Once you have made all your payments and your arrangement has been completed, you will be discharged from the trust deed. At this stage, the debts included will be written off and the companies are no longer able to chase you for payments.
You will be sent a letter to confirm this and it’s important that you send this to the credit reference agencies to update your credit report.
Trust Deeds will generally not affect a person’s job. You aren’t required to tell your employer if you are in an arrangement unless you are in debt to them or your contract states that you must declare this.
Some professions also may dictate within their contracts that you cannot be insolvent. It’s important to check this before entering into an arrangement to avoid any trouble.
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