Reviewed 3rd March 2020
What is a trust deed in Scotland?
A trust deed is a form of personal insolvency and involves a formal agreement between an individual facing serious debt problems and their creditors. Trust deeds were created as an alternative to sequestration (bankruptcy) in instances where individuals find themselves unable to pay back large amounts of unsecured debts.
Only available in Scotland, trust deeds are designed to provide indebted individuals a chance of a fresh financial start. The terms of a trust deed are crafted in a way that should mean all parties involved are satisfied and that a debt repayment plan can be affordably maintained over a specified period of time.
How does a trust deed work
A trust deed will typically last for a period of four years and is an agreement made between your creditors and yourself and administered with the help of a Trustee. The Trustee has to be a fully licensed insolvency practitioner.
The trust deed will set out the terms under which you will repay the unsecured debts that you owe through a series of affordable monthly instalments. Assuming that you stick to the repayment plan, you will eventually be released from your responsibility to repay the remaining outstanding debts in your name. This means you are not required to pay back the full amount of what you owe, rather just what you can afford over the next four years. After that point, the remaining debt will be written off.
As trust deeds are legally binding agreements, they help to protect individuals from their creditors, which can provide very valuable reassurance to people who have no way of paying off their debts and are worried about the consequences. In that sense, trust deeds are designed to deliver clarity with regard to what debts will and will not be paid back and over what timeframe. That clarity should mean that your creditors are satisfied with the amount they are receiving from you on a monthly basis, while your debt pressures are eased due to knowing that there is an end point in sight.
Is a trust deed right for me?
If you live in Scotland and you are struggling to overcome personal debt problems then a trust deed could be a sensible option and a positive way to get to grips with your financial problems. To qualify for a trust deed, the scale of your unsecured debts has to be in excess of £5,000. With very large scale debts, it could be that creditors will not accept the terms of a trust deed deal as presented to them and you may have to consider a Debt Arrangement Scheme or Sequestration instead.
A trust deed is generally aimed at people who have racked up credit card, store card and other unsecured loan debts and found themselves unable to keep up repayments to their respective creditors. Other types of debt, such as student loans, are not counted into the calculations around trust deeds but generally the aim is to consolidate debts in a way that makes an individual’s financial problems more manageable.
What debts can I include in a trust deed?
Trust deeds are designed to help you manage spiralling unsecured debts. Unsecured debts include some of the most common forms of borrowing such as:
- Credit cards
- Store cards
- Overdrafts
- Personal loans
- Payday loans
You will also be able to include various other debts including council tax arrears, rent arrears, and overpayment of certain benefits. Any secured debts, however, will not be able to form part of your trust deed, meaning you will have to continue to pay these as normal in addition to your trust deed. Secured debts include mortgages and hire purchase agreements. You will also be unable to include student loans, court-ordered fines or penalties, or your obligation to pay child support if this has been ordered by the court.
What are the advantages of a trust deed?
- Your creditors will stop contacting you as all communication will be handled by your Trustee
- You can still have a bank account while in a trust deed, and in most cases it will not affect your job either
- You will usually be able to keep your home although you may have to remortgage or extend the length of your trust deed if you have substantial equity in the property.
- Creditors will not add any further interest or late payment fees onto your outstanding debt
- A portion of your debt is written off at the end of the trust deed as long as you have kept up with the monthly repayments.
What are the disadvantages of a trust deed?
- Not all debts can be included in your trust deed
- Unless creditors accept the proposal you put forward, your trust deed may fail to gain ‘protected’ status and you will be at risk of being made bankrupt
- You can also be made bankrupt if you fail to adhere to the terms and conditions of the trust deed or are unable to keep up with the monthly payments
- Equity holdings in your house might have to be realised to satisfy your creditors. The prospect of remortgaging or selling your home, in extreme cases, can be enough to put some people off entering a trust deed altogether
- Your credit rating will be negatively impacted by entering a trust deed and will remain on your file for six years; however, it’s likely that your credit rating will already be damaged by missed payments at this point anyway
- Signing up to a trust deed will become a matter of public record as an entry is made on The Register of Insolvencies.
How does a trust deed become a protected trust deed?
Once a trust deed becomes ‘protected’ your creditors are no longer able to contact you or to request that you pay them more money. They are also unable to add additional fees, charges, or penalties onto your existing balance and cannot take legal action against you. This means they cannot force you into bankruptcy (sequestration).
A trust deed can only become protected if your creditors agree to this. Your proposal, along with the amount you are able to pay on a monthly basis, will be sent to all your creditors and they will have five weeks to send a written objection if they do not agree to the terms. So long as a majority of your creditors agree to the proposals (or do not respond in any way) then your trust deed will become protected, and all creditors – including those that objected – will be bound by its terms.
What happens if my trust deed does not become protected?
If you are not able to gain protected status for your trust deed, this does not mean you cannot carry on with the arrangement as it is. However, an unprotected trust deed does leave you open to legal action from creditors should they decide that they want more money from you than what you are currently paying or decide to apply to have you sequestrated (made bankrupt).
Alternatively you may wish to consider other debt relief solutions which may be more appropriate to your circumstances. Options could include a Debt Arrangement Scheme (DAS), Debt Management Plan (DMP), or voluntary sequestration.
What is the role of the Trustee in a trust deed?
A key figure throughout the life of a trust deed agreement will be the insolvency practitioner assigned as its Trustee. It is the responsibility of the Trustee to make sure that all relevant parties are fully aware of the terms of the deed and are clear as to the details of any repayment deal that has been struck.
You will make your agreed monthly payment direct to your Trustee. They will take their fee from this payment before dividing the rest among your creditors on a proportional basis depending on how much you owe them. Your Trustee will typically act as the middleman between yourself and your creditors meaning you will no longer have to have any contact with them.
How will a trust deed affect my credit rating?
The reality is that entering a trust deed arrangement in Scotland is very likely to have a negative impact on your credit rating as an individual. As a result of which, potential lenders and creditors may view you as a risk when it comes to taking on unsecured debt.
However, if you are already in a tricky financial position, it is likely that your credit rating has already suffered and therefore you may find it difficult to access any additional credit in any case. What a trust deed offers is a chance to arrest the decline of your situation with regard to money and debt management and to demonstrate a willingness to meet your obligations and move forward.
The typical duration of a Trust Deed is four years, during which time it is recommended you do not take on any further unsecured debt. So, for that period of time, your credit rating is not likely to be a pressing concern. Once the deed has ended, your credit rating might be far from perfect but you will at least be in a position to improve it as time goes on by showing an improved capacity for handling credit and unsecured debts effectively.
For many people, taking on more debt is the last thing on their minds after completing a trust deed. During the time of being in a trust deed you will have learned a lot about money management and how to live within your means without relying on credit cards or overdrafts. It is advised that you take these lessons forward with you and limit your reliance on credit as much as possible in your life after a trust deed.
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When your Trustee is drawing up your trust deed agreement, they will take into account any assets you own and identify the level of equity there is. When it comes to your home, equity is defined as the difference between the value of your property and the amount you owe on your mortgage or secured property loan. Your property will be valued at the start of your trust deed and this figure will be fixed. That means that even if your property has increased in value by the time your trust deed ends, it will still be the original figure which is used to determine your equity position.
It is highly unlikely that a trust deed would be recommended to you if this would require you to sell your home. If you only have a small amount of equity in your property, you may be able to exclude this from your trust deed meaning it would not be considered an asset. Your Trustee will always aim to ensure that you can stay in your home and in the vast majority of cases this will be possible.
Depending on the level of equity, you may be asked to remortgage your property at the end of the trust deed in order to release funds; alternatively your trust deed may be extended by a further year should remortgaging not be an option.
How will I afford to live while my trust deed is in place?
A trust deed is not designed to make life unbearable or increasingly difficult for people who have found themselves saddled with debts they have no hope of paying back. In fact, affordability on the part of anyone entering a deed is an essential consideration from the outset and as the process moves forward.
From the perspective of creditors, the key issue is reliability and therefore it makes sense for them to ensure that the terms of your trust deed are realistically affordable. Forcing you to pay an excessive amount towards your trust deed only increases the risk that you will fall behind in your contractual payments thereby meaning the creditor receives nothing. From the point of view of creditors, it is better to receive some repayments in a structured way rather than to receive little or nothing from debtors who do not have a trust deed in place and who have no hope of becoming debt-free.
So a trust deed takes account of the kind of everyday overheads and outgoings you are expecting to face as an individual and seeks to ensure that you have enough money to live on while the deed is in place. The contributions are calculated by using the Common Financial Tool which is a calculator set down in legislation to assess affordable contributions
It is your responsibility as the indebted party to inform your Trustee when and if your financial situation changes significantly in any way, whether for better or worse. If you don’t then there’s a chance that the terms of your trust deed will be breached, potentially leading to the collapse of your trust deed agreement.
Will I lose my job after entering a trust deed?
It is not necessarily the case that your employer will find out if you enter a trust deed in Scotland. Unless stipulated by the terms of your employment contract, you are not obliged to inform anyone of your decision to enter a trust deed. Where your contract states that you have to, however, you will of course need to make your employer aware of the details, although this does not necessarily mean you will lose your job as a result.
Some sectors and employers tend to take a dimmer view of insolvency than others. If you work in the legal or financial sector for example, you may well face questions about your decision to enter a formal insolvency arrangement. It is always best to check your employment contract first to understand whether you are likely to face disciplinary action as a result.
After you’ve entered a trust deed, there is always the remote chance that your employer will spot your name on the Register of Insolvencies although this is only likely to be the case if they are searching for you specifically.
How does a trust deed affect me if I am self-employed?
There are no laws that prohibit anyone entering a trust deed from operating on a self-employed basis. It might make it more difficult for the terms of a deed to be agreed by all the necessary parties should your income be erratic or seasonal, but legally speaking self-employment is perfectly acceptable for the purposes of obtaining a trust deed.
A chance for a fresh start
Key to the appeal of trust deeds is their potential to offer individuals a fresh start in the way they deal with their financial matters. A trust deed should not be seen as an easy way out of debt, but it does present a route out of a situation which has become unmanageable.
As with all issues around debt management and insolvency, it’s vital that you seek out the advice of an expert who can help you find the best way forward depending on your individual situation. The experts at Scotland Debt Solutions provide free and confidential support covering all aspects of personal debt and insolvency from our five offices located across Scotland. Get in touch with us directly to find out how we might be able to help and advise you.
What are the next steps?
If you are considering a trust deed as a way out of your current debt problems, talk to one of our knowledgeable and experienced advisors now.
They can make an assessment, based on your personal circumstances, and determine whether a trust deed is your best option. If so, we will work with you to draft an agreement detailing the proposed repayment plan and present this to your creditors.
Should a trust deed not be appropriate, we will talk you through the options which may be more suitable and help you understand the pros and cons of each. Rest assured that no matter the bad you feel your debt problems are, there is a solution out there which can put you on the path to financial recovery. Take the first step today by contacting our expert team.
FAQ on Trust Deeds
Applying for a trust deed has been on my mind for some time but I’m concerned that all creditors may not agree to my trust deed? What if one of them doesn’t agree?
Yes, although a Trust Deed is not a court process the creditors you have made defaults with are likely to notify the credit reference agencies that you have missed payments. There will be an entry on the Register of Insolvencies that you are subject to a Trust Deed.
A Trust Deed can be setup very quickly. Once you have discussed your financial situation in full with an Advisor and taken time to consider that this is the most appropriate option taking all factors into account. The Trust Deed document and accompanying paperwork can be signed which then gives the Trustee the relevant powers to act on your behalf. The Trustee will make contact with all your creditors and from that point you can stop making payments to the individual creditors and pass all correspondence for the Trustee to deal with. Thus relieving you from the pressure instantaneously.
The Trustee will write to you every six months throughout the period of your Trust Deed to monitor and assess your Financial Position and your ability to maintain the contribution at the current level.
There are no initial setup or additional hidden costs in a trust deed. The Trustee’s fee’s and outlays for administering your trust deed are met from the contributions you pay in on a monthly basis or/and from the assets which may have to be realised in your Trust Deed. The Trustee is paid prior to making a distribution to your creditors. The Trustee’s fees are broken down into three categories, fixed fee, percentage of realisations and costs and expenses associated with the Trust Deed.
A protected Trust Deed is binding on your creditors. It means that if you comply with the terms of your trust deed then the creditors cannot take any further action against you to recover any debts you might be due to them. They cannot arrest your earnings or petition for your sequestration whilst you are subject to a Protected Trust Deed. Unlike an ordinary Trust Deed which is not binding on your creditors. If when presented with your Trust Deed Proposals more than half in number or one third in value of creditors object to your Trust Deed then it will fail to reach protected status.
The Trustee will write to you every six months throughout the period of your Trust Deed to monitor and assess your Financial Position and your ability to maintain the contribution at the current level. In addition to this the Trustee will explain at the outset of the Trust Deed that should you have any change in circumstance which will affect your ability to make a contribution you must update him with immediate effect. If you have a change in circumstance and notify the Trustee of this providing evidence to substantiate your change in circumstance. The Trustee will take all factors into account before making a decision as to whether to reduce, suspend, stop or infact increase your contribution. It may be depending on the circumstance that your Trust Deed period is extended or shortened or that you are able to suspend the payments until such time as your Income position improves.
The main differences between and IVA and Trust Deed are that one is an English Debt Relief process and the other is a Scottish debt relief process. An IVA can only be accessed by English and Welsh residents whereas Trust Deeds are only available for Scottish Residents. In an IVA you must have minimum unsecured debts of £15,000 whereas a Trust Deed is a minimum of £5000. The duration is also slightly different in that an IVA generally lasts for sixty months whereas a Trust Deed lasts for forty eight months.
I am a single mother of two children with a number of debts and loans, including some spiralling payday loans that are stressing me out. I have looked into debt management plans and trust deeds and it seems as though the trust deed is the best option but I’m not sure whether I can consolidate all my debts into one monthly payment? Can loans be included in this?
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