Sequestrations and Trust Deeds are two of the most popular debt solutions available to residents of Scotland, but while both could potentially help you deal with your unaffordable debt in a way that’s more manageable for you, it can be useful to know which is better suited to your individual circumstances.
Like all debt solutions, there will always be one that is more suitable for you than any other. Because of this, it can often be useful to seek expert advice from a professional money adviser to reassure you that you’re making the right decision for your financial future.
What is sequestration?
Sequestration is a formal debt solution that’s often compared to bankruptcy. It’s a way for eligible individuals to deal with the debts they can’t afford to pay by granting a period of relief from the people they owe money to (creditors) for 12 months.
During your arrangement, a trustee will be appointed to manage any valuable assets you own (e.g. properties and vehicles) and all interest and charges will be frozen to allow you to improve your financial affairs without any distractions.
However, if your financial situation allows it, you might be asked to make regular payments for up to four years under something called a Debtor Contribution Order (DCO) to ensure your creditors recover some of what they are owed.
Once the sequestration process comes to an end after 12 months, all the included debts will be written off and you won’t be asked to pay them again.
Because of the long-term impact of sequestration on your credit score, it should only ever be considered after all other debt solutions have been ruled out and you can prove there is no other way you could pay your debts. It can also affect some job roles, but this is usually only the case if you work in the law, accounting, or personal finance industry.
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What is a Trust Deed?
A Trust Deed is a formal debt solution designed to help eligible individuals consolidate their unaffordable debt into monthly contributions they can easily afford over a fixed period (four to five years).
Only a licensed Insolvency Practitioner can administer a Trust Deed. They will then go on to become the trustee of your arrangement, responsible for reviewing your financial situation to determine how much you can realistically afford to pay towards your debt each month and taking any assets into account that could be sold to raise money for your creditors.
If the creditors that you owe the majority of your debt to agree with the terms outlined in your proposal, it will become a Protected Trust Deed. This binds your creditors to your arrangement and prevents them from adding extra interest or fees and taking further action against you to collect the debt.
Once you’ve made your final monthly payment, any debt included in the arrangement but not paid off will be written off and your creditors will stop contacting you about repayment.
What are the similarities between sequestration and Trust Deeds?
Sequestrations and Trust Deeds are two very different debt solutions, but they still share some similarities.
Here are some of the things sequestrations and Trust Deeds have in common:
Formal debt solution
Sequestrations and Trust Deeds are both legal solutions that provide a structured method of dealing with your unaffordable debt.
This means that your creditors won’t be able to take you to court to initiate legal proceedings against you for the duration of your arrangement. In fact, being in a Trust Deed prevents your creditors from petitioning for your sequestration against your wishes.
Write-off of unsecured debts
Sequestration offers the chance for you to write off your debt at the end of your 12-month sequestration period. However, this usually only happens if your financial situation hasn’t improved at any point during your arrangement.
When your Trust Deed comes to an end, any remaining debt not repaid through the arrangement will be written off, giving you the chance to make a fresh financial start.
Credit impact
Unfortunately, both sequestration and a Trust Deed will negatively impact your credit rating and your ability to obtain credit for several years. Sequestration, for example, will remain visible on your credit file for six years and on the Register of Insolvencies for five years.
Similarly, a Trust Deed will also stay on your credit report for six years and the Register of Insolvencies for at least five years. This can make it difficult to get approved for further credit, such as a loan, mortgage, or credit card, even after you’ve completed your arrangement.
Four years of payments
If you’re in a position to pay something towards your debt at any point during your sequestration, you might be asked to make payments for up to four years. This means that, if your sequestration only lasts 12 months as standard, you could still be making payments for another three years after your arrangement ends.
With a Trust Deed, you make affordable monthly payments every month until you’re discharged (typically after four years). However, because the payments are set at an amount you can reasonably afford and only last for a period of four years, you’ll only need to repay a portion of your total debt over the course of your arrangement.
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What are the differences between sequestration and Trust Deeds?
While sequestration and Trust Deeds are similar in some ways, they are also very different.
The main differences between sequestrations and Trust Deeds are:
Duration
Sequestration lasts 12 months, after which time the included debts will be written off and you won’t be contacted about the debt again.
Trust Deeds, on the other hand, usually last four years, during which time you’ll make regular payments towards what you owe before the remainder is written off.
Assets
When you’re sequestrated, your trustee will manage your assets and might sell them to raise money for your creditors. However, they won’t be allowed to seize items you need to maintain a reasonable standard of living, such as essential household furniture and work or educational tools up to a certain value.
When you’re in a Trust Deed, you’ll still need to inform your Insolvency Practitioner of any assets you own, but they won’t necessarily be sold. Instead, if you’re a homeowner, you’ll be expected to release equity from your home towards the end of your arrangement to ensure your creditors are repaid as much of the debt as possible.
Fees
Sequestration requires an application fee of £150, which must be paid in full before you can start your arrangement. However, it might be possible to pay it in instalments or waive it completely if you’re in receipt of certain benefits or have no surplus income.
A Trust Deed doesn’t require an application fee and any trustee fees will be taken directly from your monthly payments. Essentially, instead of you paying more in fees, your creditors cover the cost by agreeing that deductions can be made from their monthly payments.
Eligibility
To qualify for sequestration, you must owe at least £5,000 in unsecured debt and must not have been sequestrated in the last five years. In addition, you must be able to prove you’re insolvent, which means you can’t pay back what you owe because your debts exceed your assets.
For a Trust Deed, you must have unsecured debts of at least £5,000 and have enough surplus income to make regular payments for at least four years.
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Sequestration vs Trust Deed: How do I choose?
Even after you’ve done your research, it can be difficult to know whether sequestration or a Trust Deed is the right option for you. For example, would sequestration be too risky for how many assets you own? Or could a Trust Deed put further strain on your monthly outgoings?
Here are some of the main points you should consider before choosing between sequestration and a Trust Deed:
Your homeownership status
If you own your home, it will be at risk when you enter a period of sequestration and very likely could be sold off to raise enough money to repay your debt. However, your home will typically be safe with a Trust Deed unless you have a significant amount of equity in it, making it the better option for homeowners looking for a formal solution to deal with their unmanageable debt.
Your future plans
Sequestration is generally viewed more negatively than a Trust Deed, especially when it comes to your credit and assets. This is because it often involves the sale of your belongings and a greater loss of control over your finances. A Trust Deed, on the other hand, tends to offer more flexibility and provides the opportunity to keep your assets.
Your repayment period
Sequestration only lasts for 12 months but can have a more severe impact on your credit score while a Trust Deed will take four years to complete but will have less of an impact on your credit rating as it ages. If you’d rather be debt-free in a short timeframe, sequestration may be the better option for you.
Your job
While a Trust Deed should have no impact on your job and your employer generally won’t be informed, sequestration can put your job at risk if you work in the law, financial, accounting, or debt industry and you won’t be able to hold public office. It’s therefore worth checking your employment contract before choosing between sequestration and a Trust Deed.
Is a Debt Arrangement Scheme better than sequestration and a Trust Deed?
Sequestration and Trust Deeds are both popular debt solutions that could help you tackle your debt problems for a brighter future, but they aren’t the only choices available to you. Another popular debt solution available in Scotland is the Debt Arrangement Scheme (DAS).
The DAS is a government-led scheme that lets you repay your debt in manageable instalments without the threat of legal action from the people you owe money to. Under the DAS, you make a regular payment into a Debt Payment Programme (DPP) before it is divided among your creditors.
During the DAS, your creditors won’t be able to contact you or add additional interest or charges to the debt. This allows you to repay your debt at a pace that suits you.
However, one of the biggest things that differentiates the DAS from sequestration or a Trust Deed is how long it takes. Because you’ll be expected to repay your debt in full, it can last anywhere from a few years to over a decade.
There are various other debt solutions in the UK, such as Individual Voluntary Arrangements (IVAs), but they are unavailable to residents of Scotland. Whether you need help choosing a debt solution or you’re looking for financial advice tailored to your individual circumstances, don’t hesitate to reach out to one of our debt experts.
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Conclusion
Choosing between sequestration and a Trust Deed isn’t a decision that should be made lightly. However, by doing your research and comparing the advantages and disadvantages of each option, you can be confident you’ve made the right choice.
Sequestration offers the chance to be debt-free in as little as 12 months, but it can have a serious and long-lasting impact on your credit score and assets. A Trust Deed, on the other hand, requires four years of payments but won’t affect your credit rating quite as much.
Regardless of which debt solution you choose, it’s important to stick to the terms you originally agreed to. Failure to make payments as agreed or follow the rules set out in your proposal could result in further action being brought against you.
