*This is a collaborative guest post
How does a trust deed work?
A Trust Deed is a legally binding voluntary agreement between you and your creditors (someone you owe money to), and is only available to Scottish residents. If you live in England, Wales or Northern Ireland, there is a similar arrangement called an IVA – however there are different fees, risks and benefits associated.
The Trust Deed is supervised and administered by a licensed Insolvency Practitioner (who acts as the Trustee).
A trust deed involves transferring any assets you own over to the Trustee so they can be sold to raise money to pay your creditors – you do not need to sell your home, however the Trustee may ask you to remortgage to release equity to pay your creditors. You will also be required to repay what you can realistically afford each month – after your living costs have been taken into account. This amount is then distributed among your unsecured creditors.
Joint debts can be included in your Trust Deed however this means the other person will automatically become responsible for paying the full balance not half of the debt.
It is often a good alternative to sequestration (or bankruptcy as it’s known in England, Wales and N. Ireland) as it is less formal and may also avoid some of the legal restrictions which follow from being made bankrupt.
How long does a Trust Deed last?
The Trustee negotiates with your creditors to agree a monthly repayment amount over 48 months (4 years), although a longer period can be considered. Once this time period has ended you will have successfully completed your Trust Deed, and any remaining debt will be written off.
Once your Trust Deed starts all the interest or fees on your debts will be frozen, and your creditors will no longer be able to contact, or take legal action against you.
Are there any fees involved?
The trustee will charge fees for setting up and managing the trust deed, which usually amounts to £4,000 or more. The fee will be taken from your monthly contribution so there is no upfront costs.
Am I eligible for a trust deed?
A Trust Deed may be a suitable option for you if:
- You are a resident or been a resident in Scotland within the last 12 months
- You owe at least £5000 to more than two unsecured creditors
- Must not be able to repay your debt in full in less than 4 years
- You are able to pay a monthly contribution from your income
- You won’t be eligible for a trust deed if you receive benefits
- You can’t have been sequestered in the previous 5 years
This is a guide only, it is not guaranteed you will be accepted for a Trust Deed, you should contact a Trust Deed provider for more details.
What debts can be included in a Trust deed?
All unsecured debts can be included, for example:
- Personal loans
- Credit cards
- Payday loans
- Council tax arrears
- Catalogues/store card debt
- Overpaid tax credits due to HMRC
- HMRC debts (PAYE, VAT, NIC)
- Overpayments of DWP benefits
- Rent arrears
- Outstanding car parking charges
Debts which can’t be included are:
- Hire purchase
- Fines issued by the court
- Student loans
- Debts obtained fraudulently
What is the Trust Deed process?
Once you have approached a licensed Insolvency Practitioner to act as a Trustee, together you will create a proposal of how much of your debt you can reasonably pay off. The Trustee will present this to creditors and will administer the Trust Deed on your behalf through to its completion.
It can take up to 8 weeks to arrange your Trust Deed. Once you have contacted a trustee, they will advise you on your available options and agree with you a realistic, affordable monthly payment. You will also agree on how your assets will be treated. Your Trustee will then make a proposal to your creditors on your behalf, the creditors are given 5 weeks to review the proposal and either accept/ amend or reject the terms. After the proposal has been given ‘protected status’ – your creditors can no longer take any legal action against you and your interest and charges will be frozen.
Although the process of a Trust Deed is informal, it’s worth considering that it is legally binding and once signed, you are committed to the terms that you have agreed with your Trustee and creditors.
Trust Deed pros and cons
With any insolvency arrangement, there are advantages and disadvantages involved. Below are some to consider when deciding if a Trust Deed is right for you.
- Monthly payments are based on what you can reasonably afford
- All interest and charges on the debts are frozen on the date the Trust Deed is signed
- Your Trustee will deal with all the creditor correspondence and queries
- Your creditors are unable to take any further enforcement action against you once your trust deed has been approved
- After paying the Trust Deed for the agreed term – usually 4 years, any remaining debt is written off
- Your IP will take a charge for their service out of our monthly repayments
- If your fail to stick to the terms of your Trust Deed, there is the risk of sequestration (Bankruptcy) and your trustee can arrest your earnings
- When your arrangement is agreed, your credit rating will be affected for 6 years
- It may affect your job – you should speak to your HR department. You can’t exclude assets from the Trust Deed – with the exception of your home
- If you’re a home owner and have equity in your home this must be released to pay your creditors
Will a Trust Deed affect my assets?
If you are a homeowner, the level of equity, which is the difference between the value of your home and the amount you owe to the secured lender, is determined at the start of the Trust Deed. If you have a lot of equity in your home, it must be released to your Trustee to pay to your creditors. Your advisor will discuss with you the different ways to release your equity before you sign your Trust Deed. Every situation is different but it is highly unlikely that you will be forced by your Trustee to sell your property.
In most cases you will be able to keep your car, especially if it is required for work. If your car is brand new or worth a substantial amount then you may be asked to trade it in for a less expensive come to release income or pay a lump sum towards your Trust Deed.
If you have a hire purchase agreement or another type of secured finance, you will be allowed to include your monthly payment within your monthly expenditure – providing the car isn’t excessive. You will need to provide proof of your original agreement.
Your pension fund won’t be counted as an asset. However, if you are currently drawing from a pension this will be counted as part of your monthly income. You may also be asked to reduce any private pension payments during you Trust Deed.