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.
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.
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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?
Our Scottish based team can help advise you on your debt problems.