A Protected Trust Deed is a solution for people who are struggling to meet their payment obligations for debts. They are an alternative to sequestration (the Scottish equivalent to bankruptcy) which allows you to keep your assets. Trust Deeds are only available to people living in Scotland, so if you live in England or Wales an Individual Voluntary Arrangement (IVA) is a similar solution which could be right for you.
In a Trust Deed, you agree to make a single, affordable payment towards your debts each month for a set amount of time – usually four or five – after which your remaining debts are written off. As long as you make the agreed-upon payments, your creditors are, legally, no longer able to contact you, meaning you will be free from the harassing phone calls, letters, and bailiff visits which can have a huge impact on mental health.
Trust Deeds are a possible solution for people with more than one creditor, who are unlikely to be able to pay off their debts in full.
What debts can be included in a Trust Deed?
All unsecured debts can be included in a Trust Deed. This means that rather than making multiple payments to each individual creditor, you will make only one payment, which is then distributed among them. The following types of debt can be included in a Trust Deed:
- Credit card debt
- Store card debt
- Personal loans
- Payday loans
- Council Tax arrears
- Money owed to HMRC
- Benefit overpayments
- Rent arrears (usually only if you are no longer living in the property)
- Child Maintenance arrears (continuing payments must still be made)
- Outstanding parking charges
- Shortfall on mortgages or hire purchases, after repossession
Only a few types of debt cannot be included in a Trust Deed. These are:
- Mortgages, hire purchases, or other secured loans
- Court fines
- Student loans
- Debts obtained by fraud
- Crisis loans from the Department for Work and Pensions
How Does a Trust Deed in Scotland Work?
Only a licensed Insolvency Practitioner (IP) can set up a Trust Deed. By discussing your financial circumstances, including the number of creditors and level of debt you have, your IP will work out whether a Trust Deed is the best solution for you. If it is, they will work with you to calculate how much you could afford to pay towards a Trust Deed each month. This is based on your income and expenditure alone, and is tailored to be affordable for your individual circumstances.
This proposal is then taken to your creditors. If creditors representing two thirds of your debt agree to the terms of the Trust Deed, it becomes ‘Protected’. This means that all of your creditors are bound by its terms, even if they voted against it, and can no longer demand payment beyond what you put towards the Trust Deed. At this point, all interest and fees associated with your debt is frozen. Your creditors have five weeks to either agree to or reject the proposal.
Creditors usually agree to Trust Deeds because, even though it means they will not be repaid in full, they are likely to be repaid more of their money than they would if you went through sequestration. Receiving stable payments over a number of years is usually more profitable than being given a share of sold assets as would happen with sequestration.
Assuming you make the agreed upon payment each month, your creditors will cease to contact you, and every payment you make will go towards clearing your debts. At the end of the four or five years, the remainder of your debt is written off.
An Example of a Scottish Trust Deed
Bob has £21,017 of debt, split between a number of credit cards, personal loans, and council tax arrears. He currently struggles to meet repayments of £441 each month. He has no assets.
After speaking to an IP, she suggests a Trust Deed, and they agree that Bob could reasonably afford to pay £160 each month towards his debts after essential expenses. These payments will be made each month for four years.
Bob’s creditors agree to the proposal because they will be repaid 14p for each £1 they are owed. This is a better return than they would get by petitioning to have Bob sequestered, because he has no assets to sell.
Bob saves £281 per month, and no longer has to deal with the stress of problem debt.
Who is Eligible For a Trust Deed in Scotland?
To be eligible for a Trust Deed, you must:
- Have lived in Scotland for 12 months or more
- Have at least £6,000 of debt
- Have more than one creditor
- Have a steady income, enabling you to make monthly payments reliably
You can take this quiz to find out if you are eligible.
- Only one monthly payment makes keeping track of your finances easier
- Your payments are based on what you can afford, after essential expenses
- Creditors stop harassing you – no more nasty phone calls and letters
- Your debt is written off in a relatively short space of time
- Interest and fees on your debt is frozen, so every penny paid goes towards clearing your balance
- You can retain your assets, including your home and vehicle
Like every debt solution, Trust Deeds should not be entered into lightly. There are a few risks to consider before deciding if it is the right solution for you:
- Trust Deeds are recorded by the Accountant in Bankruptcy, and published online
- The record of a Trust Deed will remain on your credit file for six years from its start date. This can make getting credit in the future more challenging and will likely have a negative effect on your credit score
- You may not be able to act as company director, or work in certain finance industry jobs whilst in a Trust Deed
- If you frequently miss payments, your creditors may petition to have you sequestered
You can find out more about different debt solutions, and which might be right for you, here.