A Trust Deed is a legally binding voluntary agreement between a debtor (someone who owes money) and their unsecured creditors (someone you owe money to). A Trust Deed allows you to repay an affordable portion of debt and is often a good alternative to sequestration (or bankruptcy as it’s known in England, Wales and N. Ireland).
What is a Trust Deed?
A Trust Deed is only available to Scottish residents and is a voluntary agreement. It can help to avoid sequestration (the Scottish equivalent of the better known bankruptcy) and allows you to repay what you can realistically afford. (This is the amount you have left over after your living costs have been been taken into account). You need to have at least £5000 of debt before you can enter into a Trust Deed.
A licensed Insolvency Practitioner, known as a Trustee, sets up and administers a Trust Deed. The Trustee negotiates with your creditors to agree a monthly repayment amount over 48 months.
Once this time period has ended you will have successfully completed your Trust Deed, and any remaining debt will be written off allowing you to become debt free.
A Trustee has the rights to review any assets you own. They may look to sell these assets if they believe there is any beneficial interest, (the additional value after secured debts are taken into account), to pass on to your unsecured creditors.
Once you have approached a licenced Insolvency Practitioner to act as a Trustee, together you will create a proposal of how much of your debt you can reasonably pay off.
The Trustee will present this to creditors and will administer the Trust Deed on your behalf through to its completion.
Although the process of a Trust Deed is informal, it’s worth considering that it is legally binding and once signed, you are committed to the terms that you have agreed with your Trustee and creditors.
Will the Trust Deed affect my credit rating?
Once you have successfully completed your Trust Deed you will no longer have any outstanding unsecured debt and you will be in a position to start rebuilding your credit rating again.
Your credit rating will have had a ‘mark’ placed against it on the day you entered into the Trust Deed and although this may make it more difficult to get credit in the future, it would certainly not impossible.
As your credit rating will be ‘marked’ for six years in total it will still remain on your credit file for a further two years after your Trust Deed has completed.
What is a Protected Trust Deed?
Your proposal for a Protected Trust Deed will be advertised in the Edinburgh Gazette. Five weeks later, provided no more than half (in number) or a third (in value) of your creditors object to your Trust Deed, then it will become protected.
Once the Trust Deed is protected, none of the creditors named in the agreement can take further action against you or make you bankrupt and importantly for you, their interest and charges will be frozen.
How much does a Trust Deed Cost?
The cost is based on how much money you can afford to offer to your creditors each month. This figure is calculated by subtracting your monthly debt payments and living costs from your monthly income.
If you’re a homeowner and your home is worth more than any debts secured against it, (typically your mortgage), then you may also be required to release some of this equity, but only if you can afford to re-mortgage at the time.
The Trustee is paid for all of the work to set up and administer your Trust Deed, but this is included in your monthly payments. You are not expected to find more money to cover the Trust Deed set up and administration cost.
The only exceptions to this are if you receive a significant windfall during your Trust Deed (such as winning the lottery) or your house appreciates in value to the extent that you are able to pay back your debts in full.
In these circumstances, you would be liable to pay a fee to your Trustee in addition to the creditor payments, however, the Trust Deed cost should be clearly highlighted by your Trustee before you commit to the arrangement.
How long does it take to set up a Trust Deed?
It usually takes up to 8 weeks for a Trust Deed proposal to be drafted by the Insolvency Practitioner, depending on the complexity of the case. The proposal is then passed to the creditors for approval, who typically take a further 2 weeks to approve it.
Your monthly repayments are calculated on what you can realistically afford, so you should take care not to agree to anything that over commits you.
If you have trouble maintaining these payments because of a change in circumstances you should contact your Trustee immediately to explain the reasons.
If you don’t or if you simply stop paying, this will result in the Trustee having to take action. This could include freezing your bank accounts and even petitioning for your sequestration (the Scottish equivalent of bankruptcy).
Does a Trust Deed cover all of my debts?
Only unsecured debts can be included in a Trust Deed – these are debts that aren’t secured against property or other assets e.g. debts such as bank loans, credit cards and store cards. HM Customs and excise (VAT), Inland Revenue and other private loans can also be included in a Trust Deed.
A Trust Deed will not include any secured debts, such as a mortgage or a secured loan.
What are the advantages of a Trust Deed?
The advantages of a Protected Trust Deed are as follows:
- All interest and charges on the debts are frozen on the date the Trust Deed is signed.
- Your Trustee will deal with all creditor correspondence and queries.
- Your creditors are unable to take any further enforcement action against you.
- After paying the Trust Deed for the agreed term – usually 48 months, any remaining debt is written off.
To be put in touch with a debt advice charity who can advise whether you qualify for a Scottish Trust Deed, click here: