This article will explore the Scottish equivalent of an IVA in more detail, including how it works, how to apply, and how to know if its the right debt solution for you.
An Individual Voluntary Arrangement (IVA) is a popular debt solution that can help you write off a portion of your unaffordable debt in exchange for making regular payments towards what you owe.
But while an IVA can help you settle your debt for a brighter financial future, are they an option for people living in Scotland? And if not, what alternative debt solutions are available?
What is an IVA?
An Individual Voluntary Arrangement (IVA) is a formal debt solution where you repay your unsecured debts through a series of monthly payments based on your income and expenditure.
Most IVAs last five years, during which time you’ll be expected to make regular payments to an Insolvency Practitioner (IP) who will distribute the money among the people you owe money to (your creditors).
During an IVA, all interest and charges will also be frozen and your creditors will be instructed to stop contacting you about the debt. Having an IVA will, however, affect your credit rating for up to six years and you’ll find it difficult to get a lender willing to let you borrow.
Once your IVA comes to an end, any remaining debt not repaid through the arrangement will be written off and you’ll be officially declared debt-free if you don’t have any other outstanding debts.
Is an IVA available to people living in Scotland?
IVAs are one of the most popular debt solutions throughout the UK but unfortunately, they are only available to people who live in England, Wales, and Northern Ireland and have held residency there for at least 12 months.
Scotland, however, has it’s own version of an IVA that can also help you write off a portion of your unsecured debt and get relief from your creditors for a set period. This is known as a ‘Trust Deed’ or a ‘Scottish Trust Deed’.
Trust Deeds are extremely similar to IVAs and are often referred to as ‘Scottish IVAs’, but there are slight variations when it comes to minimum debt level, duration, and eligibility criteria.
What is a Trust Deed?
A Trust Deed is legally binding agreement between you and your creditors to repay your unsecured debt through a series of smaller, more manageable instalments.
Most Trust Deeds last four years, but they can take longer to complete if your circumstances change, you can’t release equity from your home, or you take a payment break during this time.
Like an IVA, your monthly payments will be based on your income and expenditure so you’ll never be expected to pay more than you can comfortably afford.
Managed by an IP, your payments will be distributed evenly among your creditors who won’t be able to contact you about the debt while you’re actively making repayments. Once you’ve made your final payment, any remaining debt will be written off and you’ll free to move on with your life.
What is a Protected Trust Deed?
When you apply for a Trust Deed, it must be sent to your creditors for approval and, if the creditors to which you owe the majority of your debt agree with the proposed terms, it will become a Protected Trust Deed.
This means that, the agreement is binding on all your creditors and they are prohibited from taking any action against you to recover the debt as long as you’re making regular payments to an IP.
However, if the majority of your creditors don’t agree with the proposed terms, it will proceed without protected status, which means that they can still take legal action to recover the money they are owed at any point while you’re actively making payments.
Essentially, Protected Trust Deeds provide greater protection against your creditors and can allow you to repay your debt without the added worry that you could potentially be taken to court over the money owed.
How do I apply for a Trust Deed?
The application process can differ slightly but most Trust Deed providers follow the same set of steps to set up your arrangement.
Because Trust Deeds are set up by an IP, they will do most of the hard work for you and will usually just require some simple information from you before getting to work drafting your application.
We’ve covered these steps in more detail below:
Seek free debt advice
The first thing you should do is to seek tailored advice from an approved money adviser. They will review your financial situation and determine whether you’re a suitable candidate for a Trust Deed.
They may recommend an alternative debt solution that is better suited to your circumstances, such as a Debt Arrangement Scheme (DAS) or Debt Relief Order (DRO).
Find an Insolvency Practitioner
The first step in the application process is finding a Insolvency Practitioner (IP) in your local area to help set up and manage your arrangement. This can be done by searching the Insolvency Practitioner Directory or your money adviser can help you.
They will review your income and expenditure, calculate your monthly repayment amount, and help you create a budget that you should be able to stick to going forward.
Draft a proposal
Once your IP has reviewed your income and expenditure, they will draft a proposal. This is essentially a document outlining how you plant to repay your debt.
Before the proposal is sent to your creditors for approval, you must ensure you’ve read it thoroughly and are happy with the terms proposed as this will be your last chance to make any changes.
Gain creditor approval
The next step in the application process is gaining the approval of the majority of your creditors.
Remember, a Protected Trust Deed can only go ahead if you gain the approval of the creditors to which you owe 75% of your debt. The timeframe for this can differ but they will typically be given a few weeks to make a final decision.
Make payments as agreed
Now that your arrangement has been approved, you’ll be informed of your first payment date and will be expected to make the same payment on the same date each month going forward.
These payments should be sent directly to your IP who will then distribute them evenly among your creditors.
What are the differences between an IVA and a Trust Deed?
There are a number of key differences between IVAs and Trust Deeds. We’ve outlined them below:
Eligibility
The main difference between an IVA and a Trust Deed is that IVAs are only available to people living in England, Wales, and Northern Ireland while Trust Deeds are only available to people who live in Scotland or have lived there in the last 12 months.
Because of this, it’s not uncommon for a person living in England, Wales, or Northern Ireland to enter a Trust Deed or continue a Trust Deed while living in these countries as long as they held residency in Scotland at some point in the last year.
Minimum debt level
There is no minimum debt level required for an IVA but IPs will usually recommend another debt solution if you have debts of less than £6,000 as most creditors will refuse to accept payments of less than £100 a month. Trust Deeds, on the other hand, typically require a minimum debt level of £5,000.
However, how much debt you have is just one of the many factors considered when you apply for either debt solution and doesn’t automatically indicate whether your application will be successful.
Duration
Most IVAs last five years, but they can last six years if you miss payments and need to make up the extra money owed (e.g. you miss payments or can’t release equity from your home). Trust Deeds don’t take as long to complete and typically last four years from start to finish.
Both debt solutions, however, will stay on your credit file for six years from the date of approval regardless of whether the debt is repaid during this time.
What are the similarities between an IVA and a Trust Deed?
IVAs and Trust Deeds are widely considered to be the same debt solution. We’ve some of the main similarities below:
Types of debt covered
Both debt solutions cover unsecured debts only. This means that you may need to find another debt solution to help you settle your secured debts (e.g. mortgage arrears, car loans, and certain credit cards).
Unsecured debts are debts that are not tied to an asset and won’t have any effect on your belongings if you don’t pay them, such as personal loans, credit cards, store cards, and catalogues.
Debt write-off
Regardless of which debt solution you choose, you can rest assured that any debt still unpaid at the end of your arrangement will be written off.
Once a debt has been written off, it essentially means it no longer exists and you won’t be required to many any more payments towards it.
Affordable monthly payments
With an IVA and a Trust Deed, an Insolvency Practitioner (IP) will base your monthly payments on your income and expenditure to ensure you can afford your debt repayments alongside any other financial obligations.
This reduces the chances of you not being able to afford your monthly payments and your arrangement failing.
Is a Trust Deed the right debt solution for me?
Before proceeding with a Trust Deed – or any debt solution – you must ensure you’ve done your research and are confident that it’s the most suitable option for your current financial situation. Even if you qualify for a Trust Deed, there may be another debt solution better suited to your circumstances.
Generally, a Trust Deed will be the right debt solution for you if you have multiple unsecured debts totalling £6,000 or more and can afford to make regular payments towards your outstanding balance each month.
Remember, you should never be pressured into entering a Trust Deed or any other legally binding debt solution without knowing all the facts beforehand and must reach out for free debt advice if you have any questions.
Conclusion
Individual Voluntary Arrangements (IVAs) and Trust Deeds are often considered to be the same, but there some differences that you should know about if you’re seeking a formal debt solution to help you settle your debts.
IVAs are only available in England, Wales, and Northern Ireland while Trust Deeds are only available in Scotland. IVAs also last between five and six years while Trust Deeds usually take four years to complete.
There are various debt solutions available depending on where you live and a money adviser should be able to discuss your options with you to ensure you make the right decision for you.
