A Trust Deed is a popular debt solution designed to help people in Scotland who are struggling with unaffordable debt and can afford to pay something towards their outstanding balance every month.
However, it’s just one of the many options that can help you deal with your debts and is by no means suitable for everyone.
All debt management solutions carry benefits and drawbacks depending on your circumstances.
Whether a Trust Deed is right for you depends on a variety of factors, such as your debts, income, and affordability.
By familiarising yourself with Trust Deed pros and cons, you can be confident you’ve made the right decision.
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What is a Trust Deed?
A Trust Deed or Scottish Trust Deed is a formal debt solution that allows you to consolidate your unsecured debts into a series of affordable monthly payments.
When your repayment term comes to an end, the remainder of your debt will be written off.
Trust Deeds are only available to people living in Scotland. If you live in England, Wales, or Northern Ireland, there are other debt solutions available, such as an Individual Voluntary Arrangement (IVA).
When you enter into a Trust Deed, your financial affairs will be looked after by an Insolvency Practitioner (IP) or ‘Trustee’ who will communicate with your creditors (the people or businesses you owe money to) and distribute your monthly payments.
Most Trust Deeds last four years but your arrangement can be extended in certain circumstances.
During this time, your credit rating will be negatively affected and you’ll struggle to obtain further credit, such as a mortgage, loan, phone contract, or bank account.
What is a Protected Trust Deed?
Trust Deeds can be protected or unprotected, and it’s important to know the difference between them if you’re planning to enter into a debt solution in the foreseeable future.
Put simply, a Trust Deed becomes a Protected Trust Deed when your creditors vote in its favour.
Before a Trust Deed can become protected, however, at least 50% of your creditors or the creditors that represent at least a third of your total debt must agree to the proposed terms and conditions within five weeks of receiving the proposal.
If, for whatever reason, none of your creditors respond, it will be assumed that there are no objections and your Trust Deed will proceed as if they have agreed.
Once a Trust Deed is protected, your creditors won’t be able to take legal action against you and all interest and charges on the debt will be frozen.
This can give you peace of mind to repay your debts safe in the knowledge that you can’t be taken to court or asked to pay more than you can afford.
How does a Trust Deed work?
The Trust Deed process can seem daunting, but it’s fairly straightforward when you break it down into easy, manageable steps.
Here is a quick guide to what you can expect when you apply for a Trust Deed:
Review your financial situation
The first stage in the Trust Deed process is working with your Trustee to carry out an in-depth review of your finances, including your income, outgoings, savings, investments, and assets.
With a clearer picture of your financial circumstances, your Trustee will be better equipped to calculate a monthly payment amount that you can comfortably afford and determine how your assets will be treated.
Sign off on your arrangement
If you are happy to go ahead with a Trust Deed, your Trustee will draft a proposal outlining what to expect from the process, including how long it takes and what can happen if you stop making payments as agreed.
Once you are satisfied with your proposal, you will sign off on your arrangement and arrange your first payment date, which will fall on the same date each month.
Obtain creditor approval
The next stage involves your Trustee sending your proposal to your creditors. They will then have five weeks to voice their objections.
If no objections are made, the Trust Deed will go ahead as if your creditors have agreed.
However, if over 50% of your creditors or the creditors to which you owe over a third of your total debt reject your proposal, your arrangement may still go ahead but you won’t be protected from legal action, interest, or charges.
Register your arrangement
Once your Trust Deed has been approved, it will be registered on the Accountant in Bankruptcy (AIB) website where your creditors can access it whenever they wish.
Your details will also be added to an online database known as the Register of Insolvencies (ROI) for up to a year after your arrangement ends. This is a public register that contains information about all personal and business insolvencies currently registered in Scotland.
Which debts can be included in a Trust Deed?
Most unsecured debts can be included in a Trust Deed. Unsecured debts are debts that have not been secured to an asset (e.g. your home or car), meaning your belongings can’t be sold if you stop making payments.
Examples of debts that can be included are:
- Personal loans
- Credit cards
- Catalogues
- Payday loans
- Overdrafts
- Store cards
- Council tax arrears
Examples of debts that can’t be included are:
- Student loans
- Court fines
- Mortgages
- Secured loans
- Debts obtained fraudulently
- Hire purchase agreements
How will a Trust Deed affect my credit rating?
Like most debt solutions, a Trust Deed will affect your credit rating in several ways.
From the date your Trust Deed is approved, it will be visible on your credit record for six years.
During this time, your credit rating will be affected and you’ll struggle to be approved for further credit.
Because most Trust Deeds last four years, your arrangement is likely to remain on your credit file for another two years after you’ve been discharged.
This means that, even if you’ve made your final payment, you won’t always be able to borrow further credit and may still find it difficult to access a loan or a mortgage.
However, there are various things you can do to improve your credit rating after a Trust Deed, such as registering to vote, making payments in full and on time, and checking your credit report for errors.
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What are the advantages of a Trust Deed?
Here are some of the most common advantages of a Trust Deed:
Fixed payment term of four years
A Trust Deed typically lasts four years (48 monthly payments). This means you could become free of your unsecured debts in just a few short years.
Pay only what you can afford
Payments are based on your circumstances and what you can reasonably afford to pay each month after your essential expenses have been met.
This is worked out through a review of your income and expenditure.
Your unsecured debts could be written off
If you have made your final payment and fulfilled the terms of your arrangement, your remaining debts will be written off.
This can allow you to have a fresh start much sooner than if you were in a Debt Management Plan or Debt Arrangement Scheme in which all of your debts need to be paid back.
Creditor contact will stop
Once your Trust Deed becomes protected, your Trustee will contact your creditors and they will no longer be allowed to request payment or take legal action against you.
Your creditors are afforded a three-month allowance to update their records to reflect your Trust Deed.
If they continue to contact you after this period, you should contact your Trustee who will write to them on your behalf.
You can keep your assets
Entering sequestration or bankruptcy means you more often than not you will have to sell your home, car and other valuable belongings in order to pay off your debts.
However, with a Trust Deed, selling your assets is not a method used to pay your creditors.
You may be asked to remortgage your home if you have over a set amount of equity in the property, but you will never be asked to sell it.
No hidden charges or application fees
Your Trustee is only ever paid using your monthly contributions.
Some providers may charge you for the costs associated with setting up a Trust Deed – especially if your Trust Deed is rejected – but this isn’t the norm and we will never do this.
All interest and charges will be frozen
Dealing with debt can be difficult enough without extra interest and charges being added to your outstanding balance.
However, when your Trust Deed becomes protected, all interest and charges will stop and your debt level won’t increase any further.
What are the disadvantages of a Trust Deed?
Here are some Trust Deed disadvantages you should know about:
Your Trust Deed may not achieve protected status
Your Trust Deed can only gain protected status if the majority of your creditors agree with the terms outlined in your proposal.
However, there is no guarantee of this there is always a risk they might vote against it.
You may have to sell or remortgage or sell your assets
It is a possibility that creditors will want to utilise any valuable assets for payment alongside your monthly affordable payments.
However, unlike sequestration and bankruptcy, you will not be asked to sell your property and won’t be asked to remortgage if you have little or no equity in the property.
If your car is valued at more than £3000, you will likely be asked to trade it in for a less expensive model and add the profits from the trade into your Trust Deed, but you will never be left without a car.
It will impact your credit rating
When you enter into a Trust Deed, it will negatively affect your credit rating as you are placed on the Register of Insolvencies which will be noted on your credit file.
This will make it more difficult to take out credit in the future, but your credit score should be improved after six years.
Your Trust Deed is entered into a public register
All Trust Deeds must be recorded by law on an insolvency register which is available to view by the public.
However, this is generally only used by financial professionals and lenders and it’s highly unlikely your friends or family would find out unless they go specifically looking for the information.
Your employment can be affected
Some professions restrict whether or not you can to enter into a Trust Deed, such as the police, and you may be unable to act as the director of a company whilst you’re in a Trust Deed.
It’s a good idea to check your employment contract to see if there are any stipulations against entering a Trust Deed as this can prevent you from losing your job and having to find alternative employment.
Only unsecured debts can be included
Only unsecured debts can be included in a Trust Deed.
This means that, if you have secured debts, such as a mortgage or hire purchase agreement, they won’t be covered by your arrangement and you will have to find another way to repay them.
Here’s an example of how a Trust Deed can help
Let's say you owe...
Bank Loans
£11,152
Short Term Loans
£2,226
Phone Bills
£302
Credit Cards
£2,395
Store Cards
£648
Payday Loan
£1,408
Overdraft
£172
Total amount owed:
£18,303
Customer monthly repayments before and after taking a Trust Deed.
Reduced by 70%
Monthly payments are based on individual financial circumstances
How will a Trust Deed impact other aspects of my life?
A Trust Deed can have significant implications for your personal and professional life. While it can provide relief from the stress of unmanageable debt and stop creditor harassment, offering you a path towards financial stability, it can also negatively impact your credit rating and limit your access to credit for some time.
For those working in certain sectors, it can also affect your employment. Therefore, it’s crucial to consider all the implications and seek reliable advice before deciding on a Trust Deed as your chosen debt solution.
How can I know if a Trust Deed is right for me?
A Trust Deed can help you repay a portion of your debts and write off any remaining debts left at the end of your arrangement, but knowing whether it’s the right debt solution for you can be easier said than done.
For example, if you live in Scotland, have debts of over £5,000, and have a regular income that allows you to make monthly payments towards what you owe, a Trust Deed may be a suitable solution for you.
Before you apply, you must carefully consider how a Trust Deed is likely to impact your personal, financial, and professional life.
Whether you want to purchase your first home or work in legal or financial services, entering into a Trust Deed is not a decision that should be taken lightly.
Remember, Trust Deeds are only available to people living in Scotland. If you live in England, Wales, or Northern Ireland, an IVA is a popular alternative that is often compared to a Trust Deed and can also help you write off your remaining debts and become debt-free.
