Protected Trust Deed – Scotland

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.

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A Trust Deed is a debt solution in Scotland that offers relief to individuals struggling with unaffordable debt. They’re backed by the Scottish Government, and 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. We'll also look at the different options available to Scottish residents facing the challenge of unaffordable debt.

What is a Trust Deed?

A Trust Deed, also known as a Scottish Trust Deed, is a formal legally-binding agreement designed to help individuals in Scotland who are struggling with unaffordable debt. 

It involves working with an Insolvency Practitioner - a licensed debt professional - who acts as a trustee to manage your finances. 

Through a Trust Deed, you make affordable monthly repayments based on your financial circumstances. These payments last for a set period, which is typically four years.

During this payment term, the trustee will distribute 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 remaining debts will be written off.

What's the difference between a Trust Deed and a Protected Trust Deed?

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:

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, however 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. 

When Trust Deeds become protected, it means that all creditors are legally bound by the arrangement, even those who did not agree to the terms. 

Protected Trust Deeds offer added legal protection and ensure that creditors cannot take legal action against the individual, providing you with more security throughout the repayment period.

Who qualifies for Trust Deeds in Scotland?

In order to qualify for a Trust Deed in Scotland, you will need to meet the following criteria:

Residency: To qualify for a Trust Deed in Scotland, you must be a resident 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 Trust Deed. 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.

What debts can be included in a Trust Deed?

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.

Eligible unsecured debts

  • Credit card debt
  • Personal loans
  • Payday loans
  • Store cards
  • Overdrafts
  • Catalogue debt
  • Utility bills
  • Council tax arrears

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.

What debts can't 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.

Ineligible secured debts

  • Mortgages
  • Car loans
  • Hire Purchase Agreements
  • Logbook loans

If you do have secured loans, 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.

How to apply for a Trust Deed in Scotland

Applying for a Trust Deed in Scotland involves going through a structured application process. Here are the key steps:

Get professional debt advice

Seek 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.

Set up a Trust Deed proposal with an Insolvency Practitioner

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.

Get the permission of your creditors

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.

Your Trust Deed becomes protected

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 creditor actions.

Make your monthly payments

Once your Trust Deed is protected, 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.

What happens at the end of a Trust Deed?

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 unsecured debt at the end of your arrangement. 

Your Trustee will issue a Certificate of Completion 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.

Advantages and disadvantages of Trust Deeds

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.

Advantages of a Trust Deed

  • Trust Deeds offer a structured path to resolve unaffordable debts and regain financial stability
  • Legal protection provided by Trust Deeds shields you from legal action
  • Monthly payments are tailored to your financial situation to make them affordable
  • Assets like your home and car should be protected from creditors
  • At the end of a Trust Deed any remaining unsecured debts are legally written off

Disadvantages of a Trust Deed

  • Trust Deeds will have a negative impact on your credit rating
  • Your Trust Deed becomes a matter of public record when listed on the Register of Insolvencies
  • Trust Deeds are subject to the approval of your creditors
  • The arrangement typically last four years and comes with financial restrictions
  • There is a risk of bankruptcy if you fail to meet the terms of your Trust Deed

Who will know about my Trust Deed?

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.

Accountant In Bankruptcy (AIB)

The Accountant In Bankruptcy, a government agency in Scotland, supervises and administers insolvency processes, including Trust Deeds. They will be aware of your Trust Deed as part of their oversight.

Credit reference agencies

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.

Future lenders

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.

Employees in certain industries

In some cases, particularly in industries where financial responsibility is critical (e.g., finance, 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 and family, won't know you're in a debt solution unless you choose to let them know.

Can a Trust Deed affect your credit rating?

As with all debt solutions, entering into a Trust Deed will affect your credit rating. 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 over time.

What happens to my assets if I enter into a Trust Deed?

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:

Your home

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, and it's often structured to protect your home as your primary residence.

Your car

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 contribute to 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.

Can I borrow money during a Protected Trust Deed?

During a Protected Trust Deed, you can borrow money, however there are restrictions on borrowing an 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. 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 debt while focusing on your repayment plan.

Can you get a mortgage with a Trust Deed?

Getting a mortgage while you are in an active Trust Deed in Scotland will be very challenging. A Trust Deed can have a significant negative 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 gradually improve over time. 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.

Can Trust Deeds be used for joint debts?

Trust Deeds in Scotland can be used for individual debts, but they are typically not designed for joint debts. Joint debts are those for which two or more individuals are jointly responsible, such as joint 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 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 sign a Trust Deed, the other person will become responsible for making payments towards that debt.

How long do Trust Deeds last?

A Trust Deed in Scotland typically has a standard duration of four years. This means you will make regular monthly payments towards your unsecured debts for the agreed-upon period. 

In exceptional cases, where it is determined that you cannot make the agreed-upon payments in four years, a Trust Deed may be extended beyond the standard four-year term to allow creditors to recover more money.

Can I end a Protected Trust Deed early?

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. 

Keep in mind that ending the Trust Deed early 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.

What happens if a Trust Deed fails?

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 funds. 

Additionally, creditors may pursue legal actions against you, such as wage arrestments or asset seizures, 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.

Are there Trust Deed alternatives if I owe money to creditors?

If you don’t think a Trust Deed is suitable for you, there are several debt relief solutions available in Scotland if you owe money to creditors. Here are some options to consider:

Debt Arrangement Scheme (DAS)

The DAS allows you to repay your debts through a Debt Payment Programme (DPP), which consolidates your debts and sets up affordable monthly payments. It offers a more flexible approach while protecting you from legal actions by creditors.

Minimal Asset Process (MAP)

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.

Sequestration

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 as a last resort.

 

Key Takeaways

  • A Trust Deed is a debt solution that helps people in Scotland deal with unaffordable debt
  • Trust Deeds consolidate various unsecured debts into a structured repayment plan
  • A typical Trust Deed lasts for a fixed term, typically four years
  • It's established by working with a licensed Insolvency Practitioner (IP) in Scotland
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