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What are the Pros & Cons of A Trust Deed?
A Trust Deed is a formal debt solution available in Scotland that allows you to pay off your debts with an affordable monthly repayment, with the remainder of the debt being written off at the end of the repayment term. It usually lasts for 4 years, however, a longer period can be considered depending on your circumstances. A Trustee will act on your behalf and pay your creditors with your monthly contribution.
All debt management solutions carry various advantages and disadvantages and Trust Deeds are no different. It’s important to weigh up these pros and cons beforehand to make sure that a Trust Deed is the right solution for your situation.
The key advantages of a Trust Deed include:
Fixed payment term
A Trust Deed typically lasts for four years. This means you could become free of your unsecured debts in a just a few 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 bills have been paid.
Your debts are written off
At the end of the Trust Deed, once you have met the conditions and completed your payments 4 years the balance of your remaining debts will be written off. This allows you to have a ‘fresh start’ much sooner than if you were in a Debt Management Plan which all of your debts need to be paid back.
Creditor hassle will stop
Once your Trust Deed becomes protected, your Trustee will contact your creditors and they will no longer be legally allowed to request payment or take legal action against you. Your creditors are afforded an 8-12 week allowance to update their records to reflect your Trust Deed if they persist to contact you after this period you should contact your trustee who will write to them.
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. 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 it has equity in it, but you will never be asked to sell it.
No hidden fees, or application fees
Your Trustee is paid using your monthly contributions. Some providers may charge you for the costs associated with setting up a Trust Deed if your Trust Deed is rejected, we will never do this.
No more interest and charges
Many people struggle to pay their debts due to having high interest and charges added which leads to spiraling debt. When your Trust Deed becomes protected all interest and charges will stop – meaning your debt won’t increase any further.
Like any arrangement, there are also some risks with a Trust Deed.
The key disadvantages include:
Your Trust Deed may not achieve protected status
In order for your Trust Deed to gain ‘protected’ status, your creditors must approve it – there is no guarantee of this there is always a risk they might vote against it. You need a majority of your creditors to agree to the terms of your agreement and for those who object to own less than a third of your debt.
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, but you may need to remortgage and release its equity. If your car is valued at more than £3000 you will be asked to trade it in for a less expensive model and add the profits from the trade into your Trust Deed – you would never be left without a car, however.
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 mean it may be more difficult to take out credit in the future. However, six years after the beginning of your Trust Deed this will be removed.
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, 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 are able to enter into a Trust Deed, for example, the Police or you may be unable to act as the director of a company whilst 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.