If you’re struggling with debt, you might have considered a debt solution to help you repay what you owe. There are many debt solutions available, but a Trust Deed is one of the most common in Scotland.
Trust Deeds are backed by the Scottish Government and offer a structured way for individuals to get back on the path to financial stability. They work by consolidating your debt into smaller monthly payments that you can comfortably afford.
This guide will outline everything you need to know about Trust Deeds, including what they are and how they work, and list various advantages and disadvantages so you can decide whether it’s the right option for you.
Trust Deed Overview
A Trust Deed (also known as a Scottish Trust Deed) is a voluntary agreement with your creditors (the people you owe money to) to repay a portion of your debt in monthly instalments over a fixed period. It is only available to individuals who live in Scotland or have lived in Scotland in the last 12 months.
During a Trust Deed, you make monthly payments based on what you can afford. Once you’ve made your final monthly payment, any remaining debt included in the arrangement will be written off and you won’t be asked to pay it again.
Trust Deeds can only be used to deal with unsecured debts, such as personal and payday loans, credit cards, overdrafts, store cards, utility arrears, council tax, and Buy Now, Pay Later (BNPL) agreements. You can’t include court fines, student loans, child support, and debts accrued through fraud in a Trust Deed.
You may need to pay additional fees to your Trustee (the person managing your arrangement) for setting up and managing your Trust Deed. These costs will be charged as a fixed fee as opposed to being charged at an hourly rate.
How does a Trust Deed work?
Applying for a Trust Deed requires you to adhere to a structured application process. We’ve provided a list of the key steps typically involved here:
Seek professional advice
Before applying for a Trust Deed, it’s crucial to seek free advice from a debt advisor. While you can apply for some debt solutions on your own, you can’t apply for a Trust Deed without the help of a third party.
They will review your financial situation and assess your eligibility for a Trust Deed. If they think another debt solution would be better suited for your circumstances, they will discuss alternative options for dealing with your unaffordable debt.
Create a Trust Deed proposal
If a Trust Deed is deemed the right solution for your financial situation, you must find a qualified Insolvency Practitioner authorised by the Insolvency Service to help you create a proposal. They will then act as your Trustee for the duration of your arrangement.
Your proposal will take several aspects of your financial situation into account, such as your debts, assets, and disposable income, to create a payment plan that reflects what you can realistically afford.
Get approval from your creditors
Once your Trust Deed proposal has been signed, your Trustee will send it to your creditors for approval. They will usually submit a vote on whether they accept or reject the proposed terms within five weeks.
It’s important to note that you don’t need approval from all of your creditors for your Trust Deed to be accepted. As long as it’s approved by the creditors who represent a majority of your total debt value, your Trust Deed can proceed as outlined and all your creditors will be included (even the ones who rejected it). If you disagree with the decision, you can appeal to your local Sheriff Court.
Begin your Trust Deed
If your Trust Deed proposal is accepted by the majority of your creditors by total debt value, your arrangement will be finalised. Usually, your first monthly payment will be due within four weeks.
Once your Trust Deed has officially begun, it will be recorded on the Register of Insolvencies. This is a public register that holds information on all individuals and businesses in insolvency solutions in Scotland.
What is a Protected Trust Deed?
If the majority of your creditors agree to the terms outlined in your Trust Deed proposal, your Trust Deed will become a Protected Trust Deed. This means that it is legally bound on all included creditors and you are protected from further legal action.
A Protected Trust Deed also puts a stop to any further interest and charges being added to your outstanding balance, meaning your debt level won’t increase for the duration of your arrangement.
If a Trust Deed fails to become a Protected Trust Deed, it can still go ahead but your creditors will be free to pursue legal action against you to recover the debt if they wish. In some cases, they can initiate bankruptcy proceedings against you.
How long does a Trust Deed last?
A Trust Deed typically lasts four years for a total of 48 monthly payments, but there are some factors that can affect the length of your payment schedule.
For example, if you own your property, your Trustee will consider the amount of equity you have (the property’s value minus the amount left to pay on the mortgage). If there’s a substantial amount of equity, it will likely be used to repay more of what you owe to your creditors. If the amount of equity in your home is minimal, there is unlikely to be any benefit to your Trustee of using the property as part of a settlement offer.
Similarly, if you decide to sell your home at any point during your Trust Deed and the amount from the sale would repay your creditors in full plus all interest and costs, you might be able to end your arrangement earlier than planned.
It’s important to note that, unlike some other debt solutions (e.g. bankruptcy), you’ll never be forced to sell your property during a Trust Deed. If your Trust Deed has protected status, it might also be possible to exclude your home from the arrangement. However, this is usually only possible if you have minimal or negative equity.
How does a Trust Deed affect my credit rating?
A Trust Deed will remain on your credit file for six years from the date it begins. During this time, your credit score will be damaged and lenders will be able to see that you are in or were recently in a formal debt solution.
This means that, even if you complete your Trust Deed in four years as standard, it will still be visible for another two years. Your Trust Deed will also be visible on the Register of Insolvencies until 12 months after your discharge date.
Having a debt solution on your credit file can make it extremely difficult to borrow credit as lenders will be worried that you’re not in a position to afford your repayments.
However, you will be free to apply for credit as you wish after this time and you won’t have to disclose your Trust Deed to a lender. There are also several steps you can take to improve your credit score upon completion of a Trust Deed to boost your chances of approval.
What happens after a Trust Deed?
Whether you’re in a Trust Deed or you’re still considering your options, it can be useful to know what to expect at the end of your arrangement. Here are some things that can happen when your Trust Deed comes to an end:
You are formally discharged
If you’ve stuck to the terms of your proposal and made all the required payments for four years, your Trustee will apply to the Accountant in Bankruptcy to formally discharge you from your Trust Deed.
Once your discharge has been approved, you will receive a certificate of discharge. This is essentially a document that confirms you have fulfilled your obligations and you are officially discharged from the debts included in your arrangement.
All included debts are written off
Any debts that were included in the Trust Deed but not repaid through your monthly payments will be written off at the end of your arrangement.
If you’re asked to pay any of these debts again, you should send the creditor a copy of your certificate of discharge to prove that you’ve successfully completed your arrangement and the debts are no longer owed.
Your entry is removed from the Register of Insolvencies
Once the Accountant in Bankruptcy has formally discharged you from your Trust Deed, they will ensure your entry is removed from the Register of Insolvencies 12 months later.
Remember, your Trust Deed will remain on your credit file for another year after it has been removed from the Register of Insolvencies.
Advantages of a Trust Deed
If you’re considering a Trust Deed, it can be helpful to know the various ways it could benefit you. Some of the key advantages of a Trust Deed include:
Affordable monthly payments
When you enter into a Trust Deed, your debt will be consolidated into monthly payments based on your current financial situation.
This can make it easier to manage multiple debts, giving you greater control over your debt repayment journey.
Legal protection
Once a Trust Deed begins, your creditors will no longer be able to contact you to recover payment of the debt. This means that they will stop writing to you, calling you, and sending you letters asking for payment.
They will also be prohibited from taking legal action against you, protecting you from a potential wage arrestment (when money is taken from your wages to repay a debt) or a charging order (when an unsecured debt is secured to your home).
Included debts
A Trust Deed can be used to deal with all unsecured debts. This means that, if all of your debts are unsecured, it can help you make a fresh financial start.
Debts owed to HM Revenue & Customs (HMRC) can also be included in a Trust Deed as long as they were accrued before your arrangement was approved. This includes income tax, VAT, and National Insurance arrears.
Frozen interest and charges
Your creditors are not allowed to add any further interest and charges to your debt once your Trust Deed has been finalised.
This keeps your monthly payments manageable and prevents your balance from increasing during your arrangement.
Debt write-off
One of the biggest advantages of a Trust Deed is the ability to have your remaining debt written off at the end of your payment period.
Once a debt has been written off, it will be treated as if it no longer exists as your creditor can’t chase you the money owed.
Disadvantages of a Trust Deed
A Trust Deed can help you deal with your unaffordable debt in a way that works for you, but it isn’t without its pitfalls. Some of the main disadvantages of a Trust Deed include:
Publicly listed
Your Trust Deed will be publicly listed on the Register of Insolvencies until 12 months after you’re discharged.
Anyone can access this register with basic search criteria (e.g. your name, address, arrangement start or end date), which means a friend, family member or colleague could find out that you are in a formal debt solution.
Equity release
If you’re a homeowner and there’s significant equity in the property (more than £5,000), you will be required to release it to raise money towards your debt. This will increase the amount your creditors receive and allow you to repay a larger portion of your debt.
If you’re unable to release equity or the level of equity in your home is too small, another valuation might be carried out by your Trustee at the end of your arrangement.
Relatively inflexible
Once you’ve started making payments towards your Trust Deed, it can be difficult to make changes to your monthly payments or payment schedule. Usually, only significant changes can be made if all of your creditors are in agreement, and this can be difficult to achieve.
If your circumstances change to the point where you can no longer make your monthly payments as agreed, your Trust Deed may fail and you will become liable for the debts again. Any legal protection will also be lifted, leaving you at risk of enforcement action and, in some cases, bankruptcy.
Effect on credit rating
Your credit score will suffer for six years from the date your Trust Deed begins and lenders will know you’re dealing with debt problems if you apply for most forms of credit, such as a loan, mortgage, phone contract, or bank account.
Even if you’re able to find a lender willing to give you a loan, this will likely be at the added expense of a higher interest rate and less favourable terms.
Job limitations
In most cases, your job won’t be affected by a Trust Deed and you’ll be able to continue working in your current role and hold public office without any disruption. However, if your role requires you to deal with other people’s money and you work in the financial services, accounting, or law industries, your job might be at risk.
Generally, you won’t be able to continue your role as a company director of a limited company or carry on running your own business.
What else should I know about Trust Deeds?
A Trust Deed is a formal debt solution that can help you repay what you owe in smaller, more manageable instalments, but it’s not a decision that should be made lightly. Here are some key considerations you should think about before applying for a Trust Deed:
Seek advice if you need it
Whether you’re already in a Trust Deed or you’re considering your options for dealing with your unaffordable debt, don’t hesitate to reach out for expert advice or support. A money advisor can review your financial situation and advise you on the best course of action for your circumstances.
Think about future plans
A Trust Deed typically lasts four years. During this time, it can be difficult to find a lender willing to give you anything from a payday loan to a mortgage. Therefore, you must be confident that you’re unlikely to need credit in the near future before you agree to enter into a four-year arrangement.
Consider an alternative solution
There are many debt solutions available in Scotland in addition to Trust Deeds. Depending on your circumstances, you may be better suited to a Debt Payment Programme (DPP) under the Debt Arrangement Scheme (DAS) or the Minimal Asset Process (MAP).
Conclusion
A Trust Deed is a formal debt solution that can help you repay your unaffordable debt by consolidating it into monthly payments based on your financial situation. It might be a suitable option for you if you if you live in Scotland, owe multiple creditors, and can afford to pay something towards your debt each month.
Knowing the various advantages and disadvantages of a Trust Deed can help you know the benefits and risks involved. For example, while it can write off all included debts after four years, it will damage your credit score for six years.
It’s important to seek professional advice from a debt advisor before applying for a Trust Deed. They will review your financial situation and determine if it’s the right option for you or if another solution would be better suited for your circumstances.
