How does a trust deed work?

October 4, 2018

Trust deeds are formal insolvency procedures that are available only in Scotland. They offer a viable alternative to bankruptcy if you’re struggling to repay unsecured debt, and generally last for three to four years.

Trust deeds work by transferring your assets to the trustee, and making a single affordable monthly repayment that is then distributed to creditors included in the agreement. Here we look at various aspects of trust deeds that can help you decide whether this personal insolvency process would work for you.

Trust deed eligibility

You may be eligible for a trust deed if you:

  • Live in Scotland
  • Owe unsecured debt of at least £5,000
  • Seek the services of a licensed insolvency practitioner (IP) to establish whether it’s the right insolvency solution for you
  • Can make a regular monthly payment to the trust deed
  • Have little prospect of repaying your debts in a reasonable timescale

Your assets and monthly contribution

When you agree to a trust deed you must transfer most of your assets to the control of the trustee, who will then sell them for the benefit of your creditors. If you’re a homeowner with equity in your property, you may also be required to release this to increase creditor returns.

The insolvency practitioner assesses your income and expenditure and arrives at a monthly trust deed contribution after deducting essential living costs, including mortgage/rent payments, utility bills, and food.

When a trust deed becomes protected

If your trust deed isn’t protected it means interest can be added to your debt. It also leaves you open to legal action by creditors who haven’t agreed to the arrangement, so this is an important aspect of how trust deeds work and their future success.

Hopefully a sufficient number of creditors will agree to the terms of the trust deed when the insolvency practitioner distributes the proposal, but there are cases where the arrangement has to remain unprotected:

  • If at least half of creditors object to the proposal
  • If creditors collectively holding a minimum of one third of your total debt object

What types of debt can be included in a trust deed?

A trust deed is designed to help you repay a proportion of your unsecured debt. This could include credit and store card debt, bank overdrafts or personal loans, payday loans, and catalogue debt.

It doesn’t include secured loans such as your mortgage, or hire purchase agreements. If you have these types of debt, repayments are included in the calculation of your essential living costs. This is what makes trust deeds affordable, as your priority payments are budgeted for prior to the trust deed repayment.

What happens at the end of a trust deed?

One of the benefits of entering into a trust deed is that any debt remaining at the end of the term is written off, leaving you debt-free. Your creditors will be aware of the proportion of debt they’re likely to recoup, and cannot pursue you any further for this money once the arrangement comes to an end.

The trust deed remains on your credit record for six years from the start date, even though its term is shorter, and is likely to affect your ability to borrow during this time and potentially beyond.

For more information on how Scottish trust deeds work and whether they’re an appropriate solution for you, contact our experts at Scotland Debt Solutions. With four offices around Scotland we can quickly assess your financial situation and establish your best options. Please call to arrange a free consultation.

John Baird

Insolvency Adviser

Tel: 0800 063 9250

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