A Trust Deed is a formal debt solution that can help you write off a portion of your unsecured debt in exchange for making regular payments towards what you owe.
However, while you’ll be required to cut back on non-essential expenses, you may be wondering whether there will be room in your budget to treat yourself to a holiday if the opportunity arises.
There are certain things you can and can’t do while you’re in a Trust Deed but as long as you’re able to meet your monthly payments and stick to the terms of your arrangement as agreed, there’s no reason why you can’t go on holiday.
What is a Trust Deed?
A Trust Deed is a legally binding agreement between you and your creditors (the people or businesses you owe) to repay your unsecured debts through a series of monthly repayments based on your income and expenditure.
Most Trust Deeds last four years, although your term can be extended by a further 12 months if your circumstances change (e.g. you fail to release equity or have missed payments).
When you enter a Trust Deed, you’ll be expected to hand your assets over to an Insolvency Practitioner (IP) who will go on to become the Trustee of your arrangement.
Their job is to oversee your financial affairs and communicate with your unsecured creditors to ensure they are paid accordingly.
Once you’ve made your final payment, your remaining unsecured debt will be written off and you’ll be free to move on with your life.
What is a Protected Trust Deed?
Once your Trustee has drafted a proposal of your Trust Deed, they will send it to your creditors and give them five weeks to decide whether they agree or disagree with the proposed terms.
As long as more than 50% of your creditors or the creditors that account for at least a third of your debt agree to the terms of your arrangement, it will become a Protected Trust Deed.
However, if none of your creditors respond, this technically means no objections have been raised and your arrangement will go ahead as if 100% of your creditors agree.
Under a Protected Trust Deed, your creditors won’t be able to contact you about the debt, take legal action against you, or add further interest and charges to the debt.
How does a Trust Deed work?
The Trust Deed process is fairly straightforward with just a few simple steps involved.
Here is a guide to what you can expect when you apply for a Trust Deed:
Review your finances
The first stage in the Trust Deed process is reaching out to a licensed Insolvency Practitioner (IP) to discuss your financial situation.
They will conduct a review of your income and expenditure and determine whether a Trust Deed is the best option for your circumstances.
They will then use this information to calculate how much you can reasonably afford to pay towards your debt each month.
Sign your proposal
Once an IP has reviewed your finances, they will draft a Trust Deed proposal outlining the details of your payment plan.
The proposal will clearly explain how much you can afford to pay each month, how payment will be made, and how your assets will be dealt with.
This information must be carefully read and signed to ensure you fully understand what to expect from your arrangement.
The proposal will then be sent to your creditors for review.
Wait for creditor approval
Once your creditors have received your proposal, they will have five weeks to state whether they agree or disagree.
However, as long as the majority of your creditors agree, you’ll be granted protection status and both you and your creditors will be bound to the terms of the proposal.
Remember, creditors who don’t respond before the five-week deadline will be treated as if they have agreed.
Start your arrangement
From the date your arrangement starts, you’ll be protected from creditor contact, legal action, and further interest and charges.
This will give you peace of mind while you repay your debts so you can concentrate on making payments without any unnecessary distractions.
Most arrangements last four years, but your payment term can be extended by an additional 12 months if you miss payments or can’t release equity from your home.
Only your disposable income will be used to pay your creditors and you’ll never be asked to pay more than you can reasonably afford.
Will a Trust Deed affect my credit rating?
Unfortunately, being in a debt solution will almost always affect your credit rating and it’s typically very difficult to borrow further credit while you’re in a legally binding agreement to repay your debts.
Trust Deeds stay on your credit file for a total of six years. During this time, your credit rating will be damaged and lenders are unlikely to approve you for a loan or a mortgage.
Because most Trust Deeds last four years, this also means that your credit score is likely to remain affected for another two years after you’ve been discharged.
However, the good news is that your credit score will continue to improve as time goes on as long as you’re making debt repayments in full and on time.
There are also various steps you can take to boost your credit score after you’ve left your arrangement, such as registering to vote, checking your credit file for errors, and avoiding further credit.
What can and can’t I do while in a Trust Deed?
Like most formal debt solutions, there are certain things you can and can’t do while you’re in a Trust Deed.
Here is a quick guide to some of the things that you should and shouldn’t do:
Borrowing further credit
Technically, there is nothing stopping you from applying for further credit, like a mortgage or a credit card, during your arrangement if you feel like you’re struggling financially.
However, this isn’t recommended and you’ll find it difficult to find a lender willing to lend to you while you’re still in a formal debt solution.
Furthermore, it’s important to note that an existing Scottish Trust Deed agreement doesn’t cover debts incurred after you started your arrangement and must be dealt with another way.
Remember, your monthly repayments are based on a review of your income and expenditure and loan repayment isn’t a factor that’s typically taken into consideration.
This means that, once you’ve paid your bills and made your monthly debt repayment each month, you’ll have very little money left over for anything else.
Saving money
There is also nothing stopping you from saving money if you feel like you’re in a position to do so and would like to put some spare cash aside for a financial emergency.
However, while most arrangements contain a ‘contingency allowance’ to help you manage irregular costs, this is typically limited to 10% of your disposable income.
Because a significant chunk of your disposable income will be required to go towards your arrangement, it’s also unlikely that you’ll have enough spare money left over to allow you to build a substantial emergency fund.
Breaking your terms
From the moment you enter into your arrangement, you must agree to stick to the terms of your proposal as per your proposal.
If you break the terms of your arrangement (e.g. by missing payments or hiding key information), it will fail and you’ll need to find another way to repay your debts.
This will also remove any protections you had, which means you’ll need to pay interest and charges again and could potentially be taken to court and served with legal action.
Hiding assets
Before you enter a Trust Deed, you must declare all assets (items of value) and hand them over to your Trustee who can sell them to repay your debt.
If, for whatever reason, it’s discovered that you’re hiding assets, this is considered a breach of your arrangement and it will more than likely fail as a result.
Remember, just because you’re required to declare assets, it doesn’t necessarily mean they’ll be sold to recover the debt and you may still be able to keep them.
Communicating with your Trustee
The key to a successful Trust Deed is being open and honest with your Trustee for the duration of your arrangement.
This includes informing them of any changes to your financial circumstances (e.g. if you lose your job, get a wage increase etc.).
By ensuring they’re kept in the loop, they can let you know what your options are and work with you to find a solution that all parties can agree on.
Keeping your home
Unless your home has been excluded or you have little or no equity, you’ll typically be asked to release equity during the final year of your arrangement.
The aim of releasing equity is to ensure your creditors receive as much of the debt owed as possible.
This can be done by making a one-off payment or by extending your payment term by an additional 12 months – taking it from 48 to 60 months.
Because only unsecured debts are covered by a Scottish Trust Deed, any existing secured loans (e.g. mortgages) can’t be included and must be repaid another way.
Section 2.8 of the Accountant in Bankruptcy’s Trust Deed Guidance contains further information about how your home will be dealt with in a Trust Deed.
Can I go on holiday while in a Trust Deed?
Trust Deeds are generally considered to be more flexible than other debt solutions, including a Debt Arrangement Scheme (DAS).
This means there are no strict rules stating that you can’t go on holiday or can only spend your money on certain things.
Put simply, as long as you can still afford to make payments towards your debts as agreed, you should be able to go on holiday with no problems – especially if you booked the trip before you entered into your arrangement.
However, it’s highly unlikely that you’ll be granted an expenditure allowance to cover something like a holiday so you’ll need to fund the trip yourself by cutting back on other expenses.
Will my spending be scrutinised while I’m in a Trust Deed?
Before you start your Trust Deed, your income and expenditure will be reviewed to determine how much you can afford to pay towards your debts each month.
This is to let creditors know how much they can expect to receive after your living expenses (e.g. utility bills, rent or mortgage, and groceries) have been met.
When you’re in a Trust Deed, you’ll also be expected to attend an annual review for each year of your arrangement.
This may sound daunting, but unless there’s been a substantial change that means you can no longer meet your repayments as agreed, your payments are unlikely to change.
For your annual review, you may be asked to supply recent wage slips and bank statements to prove that your financial circumstances haven’t changed.
Conclusion
Before you enter into a Trust Deed, it’s important you understand what you can and can’t do and how your life may potentially change after you start your arrangement.
Generally, Trust Deeds tend to be more flexible than other debt solutions. This means you should have no problem going on holiday as long as you can still afford to make your monthly debt repayments and pay your bills.
While you’re on holiday, you must continue to spend within your means and ensure you have enough money left over for upcoming expenses.
