What are Trust Deeds?
Trust Deeds are a form of debt management
system that is used in Scotland. This solution is often viewed as a viable alternative to bankruptcy and most closely resembles the IVA (Individual Voluntary Arrangement) that is used for similar purposes in England, Northern Ireland and Wales. To qualify to apply for a Trust Deed you must have been resident in Scotland for at least 6 months.
If you take on a Trust Deed then you will commit to repaying certain regular sums and/or money from your assets towards the repayment of your debts. These agreements usually involve the freezing of debts/interest and once they are done (usually after 3 years) any remaining debts that you have remaining will be completely written off.
There are two basic types of Trust Deed – an ordinary Trust Deed and a Protected Trust Deed. Ordinary Trust Deeds are not legally binding for your creditors unless they agree to the terms you outline. Protected Trust Deeds are legally binding for creditors and, as such, they have to commit not to chase you for your debts as long as you stick to the terms of your scheme.
How do Trust Deeds work?
If you want to apply for a Trust Deed then you’ll need the help of a Trustee who will usually be some kind of qualified Insolvency Practitioner. At the beginning of the process here you will work with your Trustee to set out a budget that takes into account your assets, your income and your essential outgoings (such as your mortgage, essential living costs and bills). This will then show the assets that you have that could be used for repayment purposes and surplus income that could be used as a contribution.
To start off the Trust Deed process your Trustee will advertise your intent in the Edinburgh Gazette, a paper that is used by the financial industry. He/she will then have to write to all the creditors you have and inform them that you have signed a Trust Deed.
The aim here is to get a high enough percentage of them to agree to your taking this route. If this happens then your Trust Deed will be formally accepted. It will be given Protected status unless creditors holding one third of the value of your debts vote not to award the Deed. Once your Trust Deed is protected then creditors will have to abide by its terms.
Once your Trust Deed has been set up then your Trustee will arrange to make the necessary payments to your creditors. Bear in mind that the Trustee’s cost must be met first before any payments are made to your creditors but this is normally done from the money you raise to pay towards the Trust Deed itself.
This money can be raised either from the disposal of your assets and/or from your income. So, you may have to get rid of certain high-ticket items that you own to repay some of your debts and may also have to pay a specific sum every month until the Trust Deed period is over. This may involve releasing equity that you have in your home and in some cases actually selling the property to release this money.
During the course of the Trust Deed your debts will be frozen and any that remain when you come to the end of the process will be written off.
What are the advantages to using a Trust Deed?
What are the disadvantages to using a Trust Deed?
- With a Protected option here your creditors are not allowed to pursue you for money or to try and have you declared bankrupt.
- You can come out of the process completely debt free and see a lot of debts written off in just three years.
- You won’t have the same conditions attached as with bankruptcy and you may not find that your job suffers in any way and you may still be able to hold some public offices.
- Although your Trustee will be charged with disposing of your assets you will be able to hang on to certain key items and are less likely to lose your home completely than with bankruptcy, for example.
How do Trust Deeds compare with the English IVA system?
- It will appear on your credit record and may affect your ability to take out future credit products.
- You will lose assets at the discretion of your Trustee. This could see you have to release equity in your home and may also result in your having to sell it in certain circumstances.
- You will not be allowed to serve as a Director of a Limited Company in most cases.
- You can’t usually apply for different types of debt management such as bankruptcy and debt repayment programs whilst your Trust Deed is running.
Trust Deeds and IVAs have a lot of similarities in that both are used to avoid bankruptcy and both allow you to have debts wiped off after a period of repayment. There are, however, some differences between these products. For example:
- An IVA will usually last for around 5 years whilst a Trust Deed will normally not exceed 3 years.
- An IVA is usually recommended for debts totalling £15k+ whilst a Trust Deed has no minimum or maximum (although £10k is often used as a guideline figure).
Some Insolvency Practitioners organising an IVA will take an upfront payment rather than absorbing their costs from the payments made to creditors as is the case with a Trust Deed.