Trust Deeds are a solution for people struggling with debt who live in Scotland. They can be a great solution for problem debt, but, of course, are not suitable for everyone. With so much written about Trust Deeds on the internet, it can be hard to separate the fact from the fiction, and decide whether a Trust Deed is the right solution for your circumstances.
Below we address some of the most common misconceptions about Trust Deeds, so you can make an informed decision about whether one is right for you.
How do Trust Deeds work?
A Trust Deed is a formal, legally binding solution to problem debt, which allows you to make reduced monthly payments to your creditors for a set amount of time (usually four years), after which your remaining debts are written off.
To enter into a Trust Deed, you must speak to a licensed Insolvency Practitioner (IP). They will ask you about your income and expenditure, allowing them to work out how much you could afford to pay towards your debts each month. The IP will then get in touch with your creditors to propose this repayment plan. If they accept the proposal, the Trust Deed becomes ‘protected’. This means that creditors can no longer contact you, or take legal action against you. They must instead communicate through the IP handling your case.
Once the Trust Deed has become protected, your monthly payments will continue for the agreed-upon length of time, after which any remaining debt you owe is written off. During this time, any interest and fees on your debt is also frozen. If you are a homeowner, you may have to remortgage your property towards the end of the Trust Deed, but this is not always necessary, and you can instead keep up your monthly payments for an extra year.
Misconceptions about Trust Deeds
Because the Trust Deed process varies from person to person, some myths about the solution naturally appear. Below we explain some of the most common Trust Deed misconceptions.
- Trust Deeds put your Home at risk
If you are a homeowner, your property is not put at risk by entering a Trust Deed. In fact, Trust Deeds can be a good alternative to sequestration because they do not depend upon the sale of assets to repay creditors. In some cases, you will be asked to release equity as part of your Trust Deed, but you will never be asked to sell your home – unless you would actually prefer to, and suggest this yourself.
- Trust Deeds are exactly the same as IVAs
IVAs (Individual Voluntary Arrangements) are a debt solution available to people in England and Wales. They take a very similar form to Trust Deeds – both are an alternative to the more extreme solutions of bankruptcy or sequestration and involve making reduced monthly payments – but there are some key differenced to consider:
- IVAs usually last for five years, but Trust Deeds typically last for only four
- To be eligible for an IVA, you usually have to have around £6,000 of debt, whereas for a Trust Deed, you need a slightly lower £5,000 of debt
- IVAs require you to have at least two creditors, but to be eligible for a Trust Deed, you need only have one
- Trust Deeds are always the best Debt Solution
Some companies are keen to encourage people to take on a Trust Deed, even if it might not be the best solution for their circumstances. Of course, Trust Deeds can be a huge help for many people struggling with debt but, for some, sequestration or a debt management plan would actually be a better fit.
- All of your Creditors have to agree to a Trust Deed for it to become Protected
Your creditors do have a say in whether your Trust Deed can begin, however, not every creditor has to vote in favour of it. If creditors who hold two thirds of your debt accept the proposal, all your creditors are bound by it. Creditors have five weeks to respond to your Trust Deed proposal, and if this time elapses and they do not respond, it is automatically assumed that they accept the Trust Deed.
- You must tell your Employer if you have a Trust Deed
For the majority of jobs, having a Trust Deed will have no effect on your employment, and if you prefer not to, you need not tell your employer. There are some exceptions: you may not be able to hold certain positions in the financial industry, and if you work for the Police, Fire, or Prison service you may be obliged to disclose your Trust Deed to your employer. If you are unsure, check with your HR department or your contract. You should be aware that all Trust Deeds are published online on the Register of Insolvencies, but it is highly unlikely that anyone you know would stumble across your details, since they would have to know to search for your name specifically.
Who should consider a Trust Deed?
Choosing a debt solution which does not suit your circumstances can cause more problems further down the road – it is vital to ensure that the solution you choose is sustainable.
To be eligible for a Trust Deed, you must:
- Live in Scotland
- Have £5,000 or more worth of debt
- Be able to afford a monthly contribution (Creditors will expect to receive at least 10p for every £1 you owe over the term of the Trust Deed)
- Be unable to pay back your debts at your current rate
If you think you could manage to pay off all of your debts, given a longer repayment term and lower monthly payments, a debt management plan might be a more suitable alternative. This is an informal solution, so will not appear on a public register or have such an adverse effect on your credit score. With a DMP, you will have to repay everything you owe, and creditors might not agree to help you by freezing interest payments or fees.