Reviewed 5th December 2019
If you’re a Scottish resident and have high levels of unsecured debt that just seem to be spiralling out of control, it’s time to take action and start on the road towards financial recovery. Two solutions that could help you do this are a trust deed and sequestration (also known as bankruptcy); both are statutory debt relief procedures that are only available to Scottish residents.
Choosing between the two might conjure up some questions; although each arrangement has its similarities, there are also a number of key differences. Here, we’ll analyse the two processes and help you understand the key pros and cons.
The first clear difference is really down to common perception. Simply put, people are often anxious about ‘going bankrupt’. For this reason, sequestration is one of the hardest choices to make. The general consensus among those who are seeking debt help is that sequestration has negative connotations and carries a social stigma. We’d urge you to look past this and approach any arrangement with an open mind. All that matters is finding the best possible solution for your needs and if that’s sequestration, then it might be the best choice you ever make – allowing you to go one step backwards in order to eventually go two steps forward with financial freedom
You may have heard conflicting reports of how long the sequestration process takes. In actual fact, you will ordinarily be discharged from your sequestration within just 12 months provided you comply with the relevant obligations. This will result in almost all unsecured debts being written off after you have been discharged, thus making it a relatively short debt relief solution when you compare it with trust deeds and debt payment plans under the Debt Arrangement Scheme. However, if you have sufficient disposable income to make a contribution towards repayment of your debts then you shall be obliged to do so for a minimum period of 48 months through a Debtor Contribution Order (DCO). The Trustee will review this on a 6 monthly basis and take any change in circumstances for better or worse into account. Sequestration will affect your credit file for six years, making it difficult to obtain credit.
In comparison, a trust deed lasts four years and over this period, you would be expected to repay as much as you can realistically afford via monthly instalments, calculated using the same standard approach as is taken in calculating your contributions for sequestration. This calculation takes into account all your essential living costs, such as mortgage/rent, food, utilities, transport etc. At the end of the four-year period, any remaining unsecured debt will be written off – providing the agreement has been honoured throughout (i.e. no missed payments). As with sequestration, a trust deed would affect your credit rating for around six years.
With both trust deeds and sequestration the long-term objective is to be debt-free and to leave your financial worries behind. To do this, each solution will see you repay your creditors through monthly repayments and realisation of equity in assets you own, subject to minimum values. In a trust deed, an insolvency practitioner known as a Trustee will register your trust deed in the Register of Insolvencies once signed by you. The Trustee then presents the proposals (including the monthly payment you are able to make) to your creditors, who then have a period of 5 weeks to accept or object to the trust deed becoming ‘protected’. If creditors representing more than half in number, or one third in value, objects to the trust deed then it will fail to achieve protected status.
If there are no objections to your trust deed it gains protected status, which means that no creditor can then petition for your sequestration (make you bankrupt) and you are protected from any further action from your creditors who are included in your trust deed. Creditors are no longer able to arrest your earnings, or contact you to make payments towards the debts. You will repay your creditors via the monthly contributions you make to your Trustee. An important point is that if you take on any new debts after you sign the trust deed, this will not be included within the trust deed and these creditors could take legal action against you if you fail to keep up with your agreed payments on these debts.
If your trust deed does not become protected then you are still able to continue with the trust deed (albeit an unprotected one) but be aware it is not binding on creditors and they may consequently decide to make you bankrupt. Alternatively you could apply for your own bankruptcy. Creditors cannot object to a sequestration application like they can a trust deed. Once the award of sequestration (bankruptcy) is made then creditors are bound by this and can no longer ask you for payment.
To apply for your own sequestration you must owe debts of at least £1,500 and you have to pay an application fee of up to £200. There are no upfront costs in signing a trust deed; however, the minimum debt level to access a trust deed is £5,000. Once your sequestration has been awarded there is an entry made on the Register of Insolvencies advising you have been sequestrated, the same applies once you have granted a trust deed.
In both sequestration and trust deeds, it is the Trustee’s duty to realise the value of your assets for the benefit of your creditors. You are however allowed to retain essential things that you need to live and work, for your house, and also your family. You normally will be allowed to retain a car or other motor vehicle so long as the value is under £3,000, and you can prove you have an essential need for it for work and/or family purposes or if you live in a rural area and have no access to public transport.
Your most important asset is normally your home. Unless you have excluded your home with the consent of your creditors in a trust deed then your share in any equity in your home will need to be realised for the benefit of your creditors in both a sequestration and trust deed. Your Trustee will require the house to be valued and will obtain settlement figures from any secured lenders to establish what level of equity is in the property. The Trustee will then explore the options available to help avoid selling the property. It may be that a third party can buy out the Trustee’s interest in the property, or the Trustee may allow you to extend the payment period of your trust deed or sequestration instead. You must remember to maintain your mortgage and secured loan payments during this time or your property may be repossessed.
In a sequestration (bankruptcy) there are certain restrictions you will be subject to. Amongst these are that you are not permitted to have credit of more than £2,000 without declaring to the credit provider that you are an undischarged bankrupt; you may not hold any official office positions as a member of local authority or local Government; you must resign as a director any limited companies you have been appointed to. There are various other restrictions which may impact your current jobs or future employment options, therefore you are advised to check if sequestration is likely to affect your position now or in the future.
There are typically fewer restrictions for those in a trust deed; although it is still worthwhile checking with your employer whether entering into one will affect your job or employment position.
A long-term personal debt crisis is an inevitable consequence of the Covid-19 pandemic unless urgent action is taken to support people in financial trouble.
Food banks across the UK are expecting to see a significant rise in demand this winter as compared with the same period of last year.
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.