When you enter into a Trust Deed, it’s important to familiarise yourself with the various ways in which it could impact other areas of your financial life, such as any existing current or savings accounts you hold.
For example, while not always necessary, you may be required to switch banks before you make your first payment to prevent the bank from freezing your account and forcibly taking the debt owed – a process that is completely legal and is often done with no warning.
The key to successfully navigating a Trust Deed is preparing your financial affairs ahead of time. From how a Trust Deed works to how your bank account will be dealt with in a Trust Deed, always do your research before agreeing to anything.
What is a Trust Deed?
A Trust Deed, or Scottish Trust Deed, is a legally binding agreement between you and your creditors (the people you owe money to) to repay a portion of your debt over a set period.
They are only available to residents of Scotland and you’ll be asked to provide evidence that you’ve lived in the country for at least six months when you submit an application.
Most Trust Deeds last four years – equivalent to 48 monthly payments – although your term can be extended by another 12 months if your circumstances change during this time.
Trust Deeds can only be administered by an Insolvency Practitioner (IP) who will go on to become the Trustee of your arrangement and liaise with your creditors to ensure they receive your monthly payment.
Once you’ve made your final payment, you’ll be discharged and any remaining debts will be written off. This means you’ll no longer owe anything towards the debt and won’t be asked to make any further payments.
Trust Deeds will stay on your credit file for six years after they’ve been approved. During this time, your credit rating will be negatively affected and you’ll find it difficult to obtain credit, including a personal loan, mortgage, or phone contract.
What is a Protected Trust Deed?
If you’ve been researching formal debt solutions, you’ve probably wondered if a Protected Trust Deed is different from a Trust Deed.
However, a Protected Trust Deed is simply the name given to a Trust Deed that has been approved by the majority of your creditors.
Put simply, if over 50% of your creditors or the creditors that account for over a third of your debt agree to the terms of your Trust Deed, it will become a Protected Trust Deed.
Under a Protected Trust Deed, your creditors won’t be able to contact you, chase you for payment, take legal action against you, or add further interest and charges to your debt.
This will give you the flexibility and peace of mind to deal with your debts without your creditors contacting you or hassling you for payment.
How does a Scottish Trust Deed work?
The Trust Deed process is fairly straightforward with just a few simple steps required.
Here is what you can expect when you apply for a Trust Deed:
Meet with an IP
When you apply for a Trust Deed, you’ll meet with an IP who will review your income and expenditure and determine if a Trust Deed is the best option for you at this time.
They will then use this information to calculate how much you can reasonably afford to pay towards your unsecured debt each month.
Sign a proposal
Once your IP has a better understanding of your income and expenditure, they will draft a proposal outlining your debts and predicted payment schedule.
This must be carefully reviewed and signed to ensure you understand exactly what is expected of you during your arrangement.
Wait for creditor approval
The proposal will be sent to all your creditors who will have five weeks to agree or disagree with the proposed terms.
Remember, as long as the majority of your creditors agree, your arrangement will go ahead and you’ll be protected from further contact, legal action, and interest and charges.
Does a Trust Deed affect my bank account?
The effect of a Trust Deed on your bank account depends on which debts you owe and whether any of them are owed to your bank.
For example, if any of the debts included in your Trust Deed are owed to your bank (e.g. a credit card or overdraft), you may need to switch bank accounts.
However, because your credit score will be damaged, you’ll likely be refused for any bank account other than the most basic from each bank.
Furthermore, your Trustee won’t advise you which bank account to open so you’ll likely need to navigate the process of finding a new one on your own.
Do I need to switch bank accounts before a Trust Deed?
Though not always necessary, it’s advisable to transfer your current account to another bank before you start your arrangement.
This is because, if you owe money to your bank, they’re allowed to forcibly take money from your account to repay your debts under something called the ‘right to set-off’.
Because any money you owe to your bank (e.g. through an overdraft facility, credit card, or personal loan) is likely to be included in your arrangement, switching banks can allow you to focus on repaying your debts and start afresh with your finances.
Even if you’ve not been told to switch bank accounts, not doing so is extremely risky and there’s a good chance you’ll lose your money – especially if your wages are paid into that account.
This is also the case for other debt solutions where you owe money to your bank, such as a Debt Arrangement Scheme (DAS).
How will my bank use my money to offset my debts?
When you owe money to your bank, they are entitled to settle the debt by taking the funds directly from one or more of the accounts you hold with them.
This is a completely legal process but can come as a surprise if it’s never happened to you or if you weren’t expecting it.
One of the biggest dangers of having money taken from your account is that you might not be able to pay your bills or repay your debts as you originally agreed.
However, as well as losing control over your finances, this will also leave you vulnerable to further legal action if it means you’re no longer able to meet the terms of your original credit agreement.
Can my bank account be forcibly shut down while I’m in a Trust Deed?
Another risk of not switching bank accounts is that any current or savings accounts you have can be closed unexpectedly with no warning.
This can happen if your bank suddenly discovers that you’ve entered into a Trust Deed. However, because all formal debt solutions are publicly advertised, it’s unlikely that they won’t find out about it before this.
Without a bank account, you can be left in a situation where you have debts and bills to pay but have no money to pay them with.
Most banks also won’t inform you that they’re doing this, meaning you might not find out until you go to withdraw cash and realise that you no longer have the option to do so.
Can I open a new bank account during a Trust Deed?
Most banks have strict qualifying criteria you must meet before you can successfully open a bank account.
This means that, if you have a Trust Deed, you’ll likely be excluded from opening all but the most basic accounts – even if you’re an existing customer.
However, while this will limit your choice of bank accounts, some banks offer a basic account specifically designed for people who have a history of debt or poor credit.
Furthermore, before opening a basic bank account, you must ensure they accept customers in your financial position and remember to transfer any existing standing orders or direct debits to ensure you don’t miss a payment.
This can help you continue to meet any existing financial obligations you have and start afresh with your finances.
Can my bank account be frozen if I stop paying my Trust Deed?
Your monthly Trust Deed payments will be calculated based on what you can realistically afford and you’ll always be given an opportunity to disagree with any payments you think might not be affordable for you.
However, if a change in circumstances means you can no longer afford your repayments, you must inform your Trustee to explain the situation as soon as possible.
Failure to do so could lead to them taking legal action against you and this could involve freezing your bank account or petitioning for your sequestration (bankruptcy).
Conclusion
Before entering into a formal debt solution like a Trust Deed, it’s important to do your research to ensure you know exactly what you’re signing up for.
If any of the money owed is to your bank, for example, your bank may take the funds directly from your account and you’ll no longer be able to spend your money as normal.
This could lead to you missing other essential expenses, like utility bills or other debt repayments, and you could face further legal action as a result.
By knowing how a Trust Deed affects your bank account, you can take the necessary precautions and avoid further financial problems.
