A Trust Deed is a legally-binding debt relief arrangement in Scotland for individuals overwhelmed by unsecured debts. It involves making monthly payments for a fixed period of four years, with the goal of repaying a portion of the debt while being protected from legal action.
A Trust Deed is a debt solution in Scotland that offers support to individuals struggling with unaffordable debt. A Trust Deed can offer a structured way for people to get back to financial stability.
In this guide, we'll explore what Trust Deeds are, which debts can be included in a Trust Deed, and how to apply for a Trust Deed. We'll also look at the different options available to Scottish residents facing the challenge of unaffordable debt.
A Trust Deed, also known as a Scottish Trust Deed, is a legally-binding voluntary agreement designed to help individuals in Scotland who are struggling with unaffordable debt.
It involves working with a licensed Insolvency Practitioner (IP) who acts as a Trustee to manage your finances throughout your arrangement.
During a Trust Deed, you one single monthly payment based on your financial circumstances. These payments last for a set period, which is typically four years.
The Trustee will distribute your payments to the people you owe money to, allowing you to repay a portion of your debts while legally protecting you from creditor actions. At the end of your payment term, any included debts not repaid will be written off.
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A Trust Deed and a Protected Trust Deed are similar in that they are both formal arrangements for managing unaffordable debt in Scotland. However, there is a crucial distinction between them:
Trust Deed: A Trust Deed is the initial agreement between a debtor and their creditors. It outlines a repayment plan that they intend to stick to, but it isn't automatically protected under law.
For a Trust Deed to become protected, it needs the consensus of creditors who collectively represent a majority of the debt value.
Protected Trust Deed: A Protected Trust Deed is one that has been accepted by creditors representing the majority of the debt value, and is now protected under law. If creditors that you owe more than one third of your debt object to the proposal, your Trust Deed will not receive protected status.
Once you've had the Trust Deed protected, all creditors will become bound by the terms of the Trust Deed, even those who did not agree to the terms.
Protected Trust Deeds offer an added level of protection and ensure that creditors cannot take legal action against the individual, providing you with more security throughout the repayment period.
In order to qualify for a Trust Deed in Scotland, you will need to meet the following criteria:
Residency: You must be a resident in Scotland, have lived in Scotland in the last 12 months, or have a place of business in Scotland.
Debt level: There is often a minimum debt threshold, which can vary but is typically around £5,000. You should have unsecured debts exceeding this amount to be eligible.
Insolvency: You must be insolvent, meaning you are unable to repay your debts in full when they are due.
Affordability: You should be in a position to make monthly repayments toward the debt. Your disposable income after covering essential living costs is crucial in determining the amount of these payments.
Before agreeing to anything, it's important that you contact a debt advisor or Insolvency Practitioner in Scotland who will be able to assess your eligibility and understand your specific situation.
A Trust Deed is designed to help people deal with unsecured debts, or common debts, which are debts not secured by an asset like your home or car. We've listed some of the most common examples below.
Again, it's best to consult with a debt advisor if you're unsure whether your debts will be eligible to be included in a Trust Deed.
Because Trust Deeds are designed top help with unsecured debts, secured loans which use an asset as collateral won't be eligible to be included. There are some common examples below.
If you do owe money to a secured creditor, it's important to remember that you will be expected to keep up with payments even after you enter into a Trust Deed. Additionally, debts like court fines and student loans cannot typically be included in the arrangement, but you should consult with a debt advisor to be sure.
Applying for a Trust Deed in Scotland involves going through a structured application process. Here are the key steps you should expert:
Seek free debt advice from a qualified debt advisor or debt charity. They will assess your financial situation and help you determine whether a Trust Deed is the right solution for you.
Choose an Insolvency Practitioner who will act as your Trustee. They will help you create a Trust Deed proposal that fits your unique financial circumstances, taking into account your assets, debts, and disposable income.
Your Trustee will present the Trust Deed proposal to your creditors. It's important to note that you do not need the agreement of all your creditors. The Trust Deed can proceed as long as it is accepted by creditors representing a majority of your total debt value.
If your proposal is accepted by the required majority of creditors, the Trust Deed becomes protected. This means that all creditors, including those who did not agree to the proposal, are legally bound by its terms. This protection offers security from enforcement action.
Once your Trust Deed begins, you will make regular monthly payments, as outlined in the proposal, to your Trustee. They will then distribute these payments to your creditors according to the agreed-upon terms.
If you successfully make all the agreed-upon monthly payments and meet the Trust Deed's terms, you will be relieved of the legal obligation to repay any remaining money owed at the end of your arrangement.
Your Trustee will issue a Certificate of Completion after they're confirmed your final payment to formalise the process and mark your credit report as "satisfied." With your obligations fulfilled, you can begin rebuilding your credit and working towards a more stable financial future.
It's important to be aware of the pros and cons of using a Trust Deed before you enter the arrangement. Here are some of the main advantages and disadvantages.
Once it comes into effect, your Trust Deed will be listed on the Register of Insolvencies, a publicly accessible database in Scotland.
This means that your Trust Deed becomes a matter of public record, and its details may come to the attention of certain parties.
The Accountant in Bankruptcy, a government agency in Scotland, supervises and administers insolvency processes, including Trust Deeds. They are the equivalent of the Insolvency Service in other parts of the UK and will be aware of your Trust Deed as part of their oversight.
Credit reference agencies collect and maintain credit information. Your Trust Deed will be included in your credit report, which can be accessed by lenders and others who check your credit history, such as landlords and employers.
When you apply for credit or loans in the future, lenders will review your credit report, which will include information about your Trust Deed. This can impact your ability to obtain credit.
In some cases, particularly in industries where financial responsibility is critical (e.g., finance, law, and banking), employers may conduct financial background checks that could reveal your Trust Deed.
While parties like the above will be able to search for your Trust Deed, it's important to note that people in your life, like friends, family, and colleagues, won't know you're in a debt solution unless you choose to let them know or they search the register for whatever reason.
As with all debt solutions, your credit rating will be adversely affected by a Trust Deed. The Trust Deed is recorded in your credit file, which will have a negative impact on your credit rating.
This may make it more challenging to access new credit, get a loan, or open a new bank account. If your Trust Deed is approved, you might face higher interest rates due to the perceived risk associated with your credit history.
However, this impact is not permanent. With responsible financial management and the successful completion of your Trust Deed, you will be able to move on from the debts included in your arrangement, and your credit rating will gradually improve.
How much debt do you have?
When you enter into a Trust Deed in Scotland, the treatment of your assets, including your home and car, can vary depending on your individual circumstances and the agreement with your creditors. Here's a general overview:
If you have equity in your home, you may be required to release some of that equity to contribute to your Trust Deed. This typically involves remortgaging your property or making additional payments.
However, you won't be forced to sell your home in most cases (e.g. if you have negative equity), and it's often structured to protect your home as your primary residence.
Your car may also be affected. If your car has a significant value, you may be asked to release some of the equity by selling it and using the proceeds to raise money toward your Trust Deed. In some cases, if the vehicle is essential for your work or daily life, it may be exempted.
The treatment of assets can vary based on the terms negotiated with your creditors and your specific financial situation. It's essential to discuss any concerns with your Insolvency Practitioner beforehand.
During a Protected Trust Deed, you can borrow money. However, there are restrictions on borrowing any amount over £500 without the permission of your Insolvency Practitioner.
These restrictions are in place to ensure responsible financial management and compliance with the terms of your Trust Deed.
If you need to borrow money, it's essential to discuss it with your Insolvency Practitioner first. They will assess your financial situation, the purpose of the loan, and how it aligns with your Trust Deed's repayment plan.
If they grant permission, you can proceed with borrowing, but it's crucial to be transparent with the lender about your Protected Trust Deed status, and you should always consider the potential impact of taking on new credit agreements while actively repaying on your repayment plan.
Getting a mortgage during your Trust Deed period will be very challenging. A Trust Deed can have a significant impact on your credit rating, and mortgage lenders will consider your credit history when evaluating your mortgage application.
As someone with an active Trust Deed, lenders may view you as a higher credit risk, and even if you're accepted for a mortgage, it's likely they will expect you to put down a higher deposit and pay higher interest in order to protect their investment.
After your Trust Deed has been successfully completed, however, your credit rating should start to improve. This means it will be easier to obtain a mortgage at a more affordable rate.
It's essential to consult with a mortgage advisor or financial expert who can provide guidance on the specific requirements and options available to you based on your financial situation.
Trust Deeds in Scotland can be used for individual debts, but they are not designed for joint debts. Joint debts are those for which two or more individuals are jointly responsible, such as joint bank loans or joint credit cards.
If you and another individual are both responsible for a joint debt, you will share ‘joint and several liability' for that debt. That means that, if one party fails to repay the debt, the other party can legally be pursued for 100% of what is owed.
According to the Scottish Government, if you share a debt with someone else and you enter into a Trust Deed, the other person will become responsible for making payments towards that debt for the duration of your arrangement.
You can end a Protected Trust Deed early by making a lump sum payment to cover the remaining debt.
If you come into a sum of money, receive an inheritance, or have access to funds that allow you to repay the outstanding debt in full, you can approach your Trustee to discuss the possibility of ending the Trust Deed before its scheduled completion date.
Your Trustee will work with you to calculate the amount required to clear the remaining debt and facilitate the necessary steps to conclude the Trust Deed early.
Keep in mind that ending the Trust Deed in this way can be beneficial in terms of credit recovery, but it's essential to ensure all obligations are met in order to successfully terminate the arrangement.
If a Trust Deed fails because the individual was unable to meet the agreed terms, it can lead to significant consequences.
You will go back to being responsible for repaying the debts included in the arrangement, and if you're unable to do so, creditors may decide to initiate sequestration (forcibly make you bankrupt) in order to recover the funds.
Additionally, creditors may pursue further action against you, such as a Wage Arrestment, if Trust Deed obligations are not met.
Communicating openly with your Trustee is essential to mitigate the risk of your Trust Deed failing. If you ever feel that you might be unable to meet a monthly payment, you should contact your Insolvency Practitioner immediately.
If you don't think a Trust Deed is suitable for you, there are several other debt solutions available in Scotland if you owe money to creditors. Here are some Scottish debt solutions to consider:
The DAS allows you to repay your debts through a Debt Payment Programme (DPP), which consolidates your debts into one affordable monthly payment. It offers a more flexible approach to debt repayment while protecting you from legal action by creditors.
The Minimal Asset Process (MAP) is designed for individuals with low income and minimal assets. It may be able to offer a quicker route to discharge from unmanageable debts when compared with a Trust Deed, making it a useful option for those who meet the criteria.
Similar to bankruptcy in other parts of the UK, sequestration is the process of declaring yourself insolvent, with your assets and income used to repay creditors. It's an option when you can't make debt repayments, but it has significant financial implications, so it should only ever be considered after you seek advice and as a last resort.
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