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What’s the difference between a protected and unprotected Trust Deed?

Reviewed 29th April 2024

What does it mean when a Trust Deed becomes protected?

A Scottish Trust Deed is a formal debt procedure that enables you to pay off a proportion of your debts when they have become unaffordable. Any amounts remaining at the end of the Trust Deed are written off, offering you a fresh financial start.

Trust Deeds can be protected or unprotected, and it’s important to know the difference between the two. Essentially, whether or not a Trust Deed becomes protected depends on the proportion of creditors that vote in its favour.

If you own property you’ll also have to include it in order for the Trust Deed to become protected. If there’s equity in the property it may be used to repay some of your debts, although unlike sequestration, you may not need to sell your home.

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How do Trust Deeds work?

The purpose of a Trust Deed is to enable a debtor who is struggling to keep up with repayments to pay off their unsecured debts to the best of their financial ability. A new instalment plan is negotiated to repay over an extended period of time, typically four years.

Creditors included in the Trust Deed must vote on whether to accept the new arrangement within five weeks of the proposal being made. The problem is that some may veto the Trust Deed if they believe they can recover more of their debt via a different route, such as compulsory liquidation.

Creditors vote to reject or protect the Trust Deed

Creditors have five weeks to vote on the proposal, and if sufficient numbers vote in favour the Trust Deed is protected. In order to become protected, 50% or more of creditors, or creditors representing more than 33% of the total debt, must vote for the Trust Deed.

During this five‐week period objections might be raised by creditors and then settled by the insolvency practitioner, or there may be no objections at all. In either case, the Trust Deed will become legally binding.

What are the implications of an unprotected Trust Deed?

If a Trust Deed is unprotected it means that creditors aren’t legally obliged to accept the proposed repayments and may still undertake legal action against your business, leaving you at risk of being forcibly wound up.

A further consequence of an unprotected Trust Deed is that charges and interest can be added to your debts. These additional amounts can significantly increase the overall amount that you owe.

The difference between protected and unprotected Trust Deeds

For a Trust Deed to achieve its main aim of helping you pay off unaffordable debt, it’s important to gain protected status. This makes the new arrangement legally binding, and provides you with certainty over your repayments.

Your creditors cannot take legal action against you as long as you pay the required monthly amount. Furthermore, there won’t be any additional charges or interest and you will no longer have to face creditor pressure in relation to these debts.

It’s important to seek trusted advice and guidance when considering a Scottish Trust Deed ‐ a reputable company will only put forward Trust Deed proposals they believe are likely to be sanctioned by creditors.

Scotland Debt Solutions has been helping Scottish residents to escape debt since 1989, and can establish whether a Trust Deed is your best option. If so, we’ll put forward a solid proposal to your creditors and support you throughout the process.

Please get in touch with our expert team for more information and independent advice. We operate offices throughout Scotland and can offer you a free, same‐day meeting to discuss your situation.

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