The decision to enter into a formal debt solution isn’t one that should be taken lightly, especially if you’re a homeowner.
The most important and expensive asset most people will ever own, or hope to own, is their home. But while it’s crucial you understand how something designed to help your financial situation could potentially impact your living situation, you shouldn’t let the fear of what could happen to your home hold you back from finding financial support.
This guide will examine four of the most common myths we heard about home ownership and Trust Deeds.
What is a Trust Deed?
Before delving into the most common myths around Trust Deeds and homeownership, it can be useful to define what a Trust Deed is.
Not to be confused with a Deed of Trust, which is a legal agreement that specifies how a property is shared when co-owners own a home jointly, a Trust Deed is a legally binding agreement that allows you to repay your debt through regular payments you can reasonably afford over a set period (usually four years).
Trust Deeds can only be managed by a licensed Insolvency Practitioner, who will go on to become the trustee of your arrangement and communicate with all your creditors (the people you owe money to) and distribute your payments on your behalf.
As long as a creditor agrees to the terms of the arrangement as outlined in your proposal, the debt you owe them will be frozen at the beginning of your arrangement. During a Trust Deed, no further interest and fees will be added and your creditors won’t be able to contact you over repayment of the money owed or take enforcement action against you.
However, there are some restrictions you’ll need to stick to for the duration of a Trust Deed. For example, while you’ll be safe from legal action, you can’t be the director of a limited company and might not be able to continue running your own business or holding public office.
I’ll be forced to sell my home if I enter a Trust Deed
This is one of the most common concerns we hear from homeowners searching for a solution to deal with their debts.
Your home is likely the most important and biggest asset you’ll ever own, so it’s important to be aware of how any debt solution could affect this. The good news is, you won’t be forced to sell your home if you enter a Trust Deed.
However, you should be aware that you may need to release some of the equity held in your property for your creditors. The equity in your home is the difference between the value of the property and the mortgage secured on it.
When you begin a Trust Deed, the level of equity will be calculated and fixed. If the equity is over a certain threshold (usually £5,000), you may be asked to release some of it for the benefit of the people you owe money to without being asked to sell your home. If you have little or no equity, it likely won’t be worth releasing it to repay your debt, as the bulk of it will be taken up by legal fees.
There are several ways you can release the equity without selling your home, including:
- Extending the payment period (typically by a year or two, depending on the level of equity)
- Accepting third-party payments from a friend, family member, or business associate
- Remortgaging
Further information about how a Trust Deed can affect your assets can be found here.
My Trust Deed will fail if my housing circumstances change
Most Trust Deeds last four years. During this time, it’s rare that your financial circumstances will stay the same.
However, it’s important to note that a Trust Deed can be more flexible than other debt solutions. This means that, if your debt problems have escalated to the point where you could lose your home, your trustee might be willing to come to an arrangement with you.
You must inform your trustee as soon as possible if you’re struggling financially. They will assess the situation and adjust your arrangement accordingly, whether that means decreasing your payments for a set period or even granting a temporary payment break until you get back on your feet.
Some of the changes you must inform your trustee about include a decrease in income, a job loss, or the acquisition of new assets.
I won’t be able to move home if I owe money to a Trust Deed
Although it may seem like an unlikely choice, it’s important to be aware that moving home during a Trust Deed isn’t completely out of the question.
However, it’s important to note that selling your property will require the consent of the trustee handling your arrangement. If you fail to obtain their consent, the sale can’t proceed. The solicitors involved in the house sale will contact the trustee to ensure the sale can proceed.
You must also be aware that the trustee will require 100% of the profits from your property purchase. This will then be used to raise money to repay the debt you owe.
If you’re considering selling your property during the course of your Trust Deed, you might also find it difficult to afford the deposit for a new home and could struggle to find a mortgage lender willing to offer products prior to your discharge.
I’ll never get a mortgage in the future if I’ve been in a Trust Deed
One of the biggest concerns among people living with debt is the ability to borrow money in the future.
A Trust Deed is a legal document that typically lasts four years, during which time you’ll make a single, affordable, monthly payment towards your debt. While this is a positive step to managing what you owe and the start of taking control of your finances, a Trust Deed does impact your credit rating and will stay on your credit file for six years.
This means that you’ll struggle to get a loan, credit card, bank account, phone contract, and a mortgage. However, you still shouldn’t let this put you off making plans to buy a home in the future.
Your Trust Deed will also be visible on the Register of Insolvencies, which is a legal record of all individuals in insolvency solutions in Scotland. The register is publicly available, but is usually only accessed by lenders when you apply for credit.
Remember, if you’re considering a Trust Deed as a way to manage your debt, it is likely that your credit rating has already been affected by being in debt in the first place.
Entering a Trust Deed offers the opportunity to write off a percentage of the unsecured debt you owe through regular financial contributions and get a fresh start to rebuild your credit rating. While it is possible to get accepted for a mortgage or secured loan after your Trust Deed ends, you may be better off rebuilding your credit rating to help you access better rates.
You can find out more about rebuilding your credit rating here.
If you’re considering a Trust Deed, don’t hesitate to reach out for free debt advice.
There are many other debt solutions available to help you deal with your unaffordable debt and put a stop to further action. Depending on your circumstances, you could be better suited to a Debt Payment Programme under the Debt Arrangement Scheme or sequestration.
