How Does a Trust Deed Work – Everything You Need to Know
What is a Trust Deed?
A Trust Deed or a ‘Protected Trust Deed’ is a formal debt solution for people who are struggling with unsecured debt. It is only available to residents living in Scotland, so if you live in England or Wales an Individual Voluntary Arrangement (IVA) or Debt Management Plan (DMP) might be the right solution for you.
A Trust Deed is an agreement between you and a licensed Insolvency Practitioner (IP) who acts as a Trustee and is for the benefit of your unsecured creditors.
When you apply for a Trust Deed an assessment of your affordability will be carried out to work out what you can reasonably afford to pay each month. This will be your income minus your day to day living expenses e.g. rent, bills, travel to work etc.
You will make these monthly installments for a minimum of 4 years, and the debt remaining after this period will be written off. Whilst in a Trust Deed, any interest and fees will be frozen and your creditors can no longer legally contact you or take legal action against you – as long as you stick to the terms of your agreement.
A Trust Deed and Your Assets
Significantly valuable assets with a lot of equity may need to have the equity released to be added to the Trust Deed. Unlike sequestration (bankruptcy) this doesn’t mean your assets will have to be sold.
For example, your home may have equity released by remortgaging your property. If your car is valued at over £3,000 you may have to trade it in for a cheaper model. If you have a car on hire purchase this can’t be included in the Trust Deed, but their monthly payment will be factored into your monthly expenditure costs.
If you have any savings before entering into your Trust Deed, it’s likely you will need to pay them into the Trust Deed to pay your creditors.
When calculating your affordable monthly payments, a ‘contingency’ allowance of up to £20 a month is often taken into account as well as an allowance for irregular expenses, such as MOTs and household repairs.
If you have a pension fund, this will not be counted as an asset in your Trust Deed. You may also need to reduce the monthly payments you are making into a pension fund to free up more income for your Trust Deed.
If you are currently drawing from a pension, this will be counted as part of your monthly income.
What debts can be included in a Trust Deed?
Any unsecured debts can be included in your Trust Deed Including:
- Credit Cards
- Payday Loans
- Store Cards
- Council Tax Arrears
- Rent Arrears
- Personal Loans
- Outstanding Car Parking Charges
- Overpaid Tax Credits due to HMRC
- Overpayment of DWP benefits
Creditors of these debts are paid by your Trustee, using the affordable monthly payments that are paid into the Trust Deed based on the proportion of the overall debt that was owed but the debtor. Most provider’s fees are taken from the monthly payment, so there are no extra or hidden fees.
Joint Debt and Trust Deeds
Whilst it is possible to include joint debts into a Trust Deed, it’s important to note that joint Trust Deeds don’t exist. Meaning if one party enters into a Trust Deed, the other person is still liable for the full amount of the debt – unless both enter into separate Trust Deeds.
The Trust Deed Process
A Trust Deed can be confusing when deciding if this is the right debt solution for you. We have broken the process down into 7 steps to explain how it works.
- We will discuss an in-depth review of your financial circumstances and agree on a realistic, affordable monthly payment and agree how your assets will be treated.
- Once you have decided you are happy to go ahead with a Trust Deed, your Trustee will go over the terms and agreements of the arrangement and once you are 100% satisfied with the terms you will sign it off.
- After you have signed your Trust Deed, your Trustee will then make a proposal, on your behalf, to your creditors. It will advise them of your income an expenditure and how much you can realistically afford to pay each month.
- Your Trust Deed is then registered on the Accountant in Bankruptcy (AiB) Website where your creditors can access it.
- Your creditors are sent the proposal within 7 days of the Trust Deed advert. They are then given 5 weeks to review the proposal and either accept or reject the terms. They must contact your Trustee as creditors at this point can’t directly contact you.
- If the majority of your creditors accept the proposal then the Trust Deed will gain protected status. If your creditors fail to respond, it is believed that they have agreed to the proposal.
- Once your Trust Deed is registered as protected, your creditors can no longer take any legal action against you to recover any debts and any interest and charges on your debts are frozen.
Can I borrow money whilst in a Trust Deed?
Whilst in a Trust Deed we advise that you don’t take out any further credit, however, there may be some circumstances where you need to. Before you do so it is vital you speak to your Trustee. As your credit rating is affected, you will most likely find it difficult to take out more credit and if you are able to this will probably come with a high interest rate.
Any credit that you take out after you have entered into a Trust Deed will not be included in your debt plan so you will need to continue to make the monthly payments. If you fall behind on these repayments, these debts won’t be protected by your Trust Deed so lenders are within their rights to add fees & charges and pursue any debt recovery action against you.