Protected trust deed
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A trust deed is a voluntary but formal arrangement that is used by Scottish residents where a debtor (who can be a natural person or partnership) grants a ‘trust deed’ in favour of the trustee which transfers their estate to the trustee for the benefit of creditors. It can be a way for people to deal with debt problems. It will protect the debtor from the legal enforcement of debts which are included in the trust deed, but only once it has become protected. It will not reverse any action that has been taken prior to the trust deed, such as earning or bank arrestments, although the trustee may negotiate the lifting of any arrestment. Many people who enter trust deeds are able to keep their homes, but where there is equity, that equity will normally have to be realised to swell the estate. This can be achieved by third party buy outs or remortgaging, but in extreme cases may be through the sale of the debtors home.
Benefits of the trust deed
Provided certain may be registered as “protected”, thereby preventing creditors from petitioning for the debtor’s sequestration. The main advantage of entering into a trust deed is that all correspondence is directed to the trustee, who handles all of the communication with the creditors. There is NO court involvement, unless the debtor refuses to cooperate with the trustee. It does not appear in the local paper.
Negatives of the trust deed
The main disadvantage of a trust deed is that existing enforcement action, such as earning and bank arrestments may continue to be effective and home owners will be required to deal with equity in their home. This can normally be dealt with without selling, although where there is an excessive amount of equity the debtor may be required to sell the property. Normally, equity can be dealt with by remortgaging, or extra monthly payments.
The Trust Deed does not stop you being self-employed. While in the Protected Trust Deed, a person may not incur debt of more than £500. A common misconception is that you can continue to use credit while in a Trust Deed. When entering a Trust Deed a default will be placed on the debtor's credit file which will last for six years. Some people are unable to sign a Trust Deed because of their contract of employment states they cannot enter an insolvency solution.
You may, also, not be able to act as a director of a limited company unless the company's articles of association allow it.
Securing a trust deed
Granting a trust deed is both less formal than the main alternative of sequestration (bankruptcy) and may also avoid some of the legal disabilities which follow from being made legally bankrupt.
Provided it meets certain conditions, a trust deed may be recorded in the Registrar of Insolvencies as a ‘trust deed’. This prevents a creditor from petitioning for the debtor’s sequestration (bankruptcy) so long as the person granting the trust deed abides by its terms.
Creditors have 5 weeks to object to a trust deed becoming protected. As long as fewer than the majority of creditors in number, and creditors representing not more than a third of the value of all the debts, object, the trust deed becomes protected.
Upon completion of the 36 month period and assuming all aspects of dealing with the debtor’s assets are complete, the Trustee appointed will adjudicate on creditor claims and then proportionally distribute the remainder of the ingathered funds to the creditors. The debtor will then receive a letter of discharge. Any balance of debt is written off and creditors cannot pursue you for interest or the balance.
The debt is frozen at the date the trust deed was granted provided it becomes protected. On protection of the trust deed the interest and charges are frozen. However, if the debtor fails to maintain payments to their trust deed then the interest and charges will be backdated to the date the trust deed was protected.
Granting a trust deed is a voluntary act but once a person has signed a trust deed, the person in debt, the trustee and the creditors are legally bound by it.
In England, Northern Ireland and Wales there is a similar alternative to bankruptcy called an Individual Voluntary Arrangement (IVA).
Obligations of entering into a trust deed
When you agree to and enter into a trust deed, you take on the responsibilities and obligations of a regular legally binding contract to repay your debt. As such when you agree to the terms of the Trust Deed you commit to:
- Full cooperation with the trustee
- To pay the agreed monthly contribution on time
- To not enter into any additional credit agreements
- To advise the trustee of any unexpected windfalls or payments or that your financial circumstances change
Where, however, you experience a change in circumstances during your Trust Deed, such as unemployment, the Trustee should review your finances to assess what is an appropriate level of contribution. This may mean you will only have to pay a reduced contribution or no contribution. Likewise, if during a Trust Deed your circumstances improve, you may be required to pay an increased monthly contribution.
Where your circumstance change for the worse and you cannot maintain your level of contribution, although you may be allowed to pay a reduced contribution or no contribution, you will still need to make arrangements to realise any equity in your property.
Where a Trustee refuses to discharge the debtor at the end of the Trust Deed for failing to cooperate with the Trustee, it may still be possible for the debtor to appeal to the Sheriff for a discharge, especially where it can be shown they either didn't refuse to cooperate or couldn't reasonably be expected to.
Advice on Protected Trust Deeds
The arrangement is likely to lessen issues from creditors while all the associated interest and charges from unsecured debts ( in the Trust Deed) are frozen. After 3 years your remainder of the debt can be written off. Only disposable income is used to pay creditors. You can negotiate to save your home.
Credit rating is affected. You may have to remortgage your property to release some equity. Only unsecured debts covered Your trust deed is advertised in the Edinburgh Gazette - a public record. Heavy penalties for missing a payment. Taking new debts becomes difficult.
- Official website of Executive Agency of the Scottish Government
- The Accountant in Bankruptcy, the Scottish Government Agency responsible for supervising Protected Trust Deeds
- Official Debt Arrangement Scheme website
- "Trust Deed Guide by Accountant in Bankruptcy". http://www.aib.gov.uk. AiB. Retrieved 19 December 2012.
- "Scottish Government to improve Protected Trust Deeds scheme that helps people deal with debt". Daily Record. Retrieved 15 December 2013.
- "The Protected Trust Deeds (Scotland) Regulations 2013". UK Government. Retrieved 15 December 2013.
- "Changes to protected trust deeds". The Scottish Government News. Retrieved 15 December 2013.