If you’re struggling with large personal debts that are spiralling out of control, it’s crucial to recognise that there are a number of options available to you.
In Scotland, there are three main Statutory debt-help solutions of which bankruptcy (sequestration) is one. The other two are particularly popular and often lead to some head-scratching about which is most suited for an individual’s circumstances; they are Trust Deeds and Debt Arrangement Schemes (DAS). Debt Management is an Informal Solution and may also be an alternative to the three statutory solutions.
These procedures have a number of similarities and differences but share a common goal in being designed to help Scottish residents repay their unsecured debts via a more manageable, hassle-free instalment plan over a set number of years until they are ultimately debt-free.
Your debt repayments will be based on a standard approach taking into account what you can realistically afford to pay on a monthly basis. With a trust deed, your trustee will analyse your budget and calculate how much disposable income you can free up after important costs such as mortgage/rent, bills, food etc are taken into account. The same will be done in a debt arrangement scheme but this will be carried out by a DAS approved Money advisor or insolvency practitioner.
Paying interest fees and other charges
Thankfully, you needn’t worry about the constant accruing of interest and charges as trust deeds and debt arrangement schemes protect you against incurring more debt by freezing interest and charges. However, interest may be re-added to the debts if you fail to keep up with either arrangement.
If your trustee or approved Money Advisor can show your creditors how you intend to repay them through a structured and manageable process, it’s likely they will agree to you entering into a trust deed or debt arrangement scheme also known as Debt Payment Plan. Your Trust Deed can become ‘protected’ if enough of your creditors agree to it. If more than half of your creditors in number or those accounting for one third or more of your debt do not agree to the terms of the trust deed, it will not become protected. In a Debt Payment Plan (DPP) if one or more creditors object to the proposal the fair and reasonable test shall be applied by the Debt Arrangement Scheme (DAS) Administrator to decide whether to approve or reject the DPP.
This is where we see the first major difference between a trust deed and a debt arrangement scheme. A trust deed procedure normally lasts for four years – this was increased from three years in November 2013. It is designed for people who will struggle to repay all their debts but in this four-year period, they are expected to repay as much as they can realistically afford plus realise any equity in any assets they own. After this time any remaining unsecured debt will be written off, providing the agreement has been honoured throughout. In contrast, a debt arrangement scheme will last until all debts are repaid however there is no requirement to realise your assets in a debt arrangement scheme.
By entering into a debt arrangement scheme, this won’t affect your home or mortgage providing you keep up with your repayments. In a trust deed, however, it’s likely that you’ll have to release some equity from your home but only in rare cases would you be expected sell it. In some instances you can exclude your home from your trust deed if your secured creditors grant their permission for you to do so. However, the rest of your creditors will have the chance to object to this proposal when asked to agree to the protection of your trust deed.
There is no minimum debt level required to enter a Debt Arrangement Scheme. You must however owe a minimum of £5,000 to access a Trust Deed.
Unsurprisingly, both solutions will have an adverse affect on your credit rating and this damage is likely to stay on your file for six years.