What Is a Trust Deed?

November 6, 2014

Luke-Notley small (Custom)A trust deed is a form of debt management, much like an IVA, but only available to residents of Scotland. A common alternative to bankruptcy, the deed is a voluntary agreement between a debtor and their creditors which can last for four years.

How Does a Trust Deed Work?

A trust deed is an agreement between a debtor and their creditors, which determines a set repayment process better suited to the financial situation of the debtor. An insolvency practitioner, also known as the trustee, is necessitated to determine a suitable repayment budget dependent upon the income and outgoings of the debtor. This single payment will replace all debt repayments currently paid.

Any debts which still remain at the end of the four year period (or alternative time period, originally agreed upon) will be written off.

Can I Qualify for a Trust Deed?

Trust deeds are only available for residents of Scotland and for debtors with unsecured debts of more than £8,000. Trust deed applicants must have lived in Scotland for at least six months prior to their application.

What is the Process for a Trust Deed?

The trustee will determine a realistic budget for the debtor and produce a repayment plan based upon these figures. The trustee will then approach all creditors with the new repayment plan, seeking their agreement. Creditors have five weeks to reject or agree to the proposal (failure to respond is considered an agreement).

If a creditor who is owed more than 33% of the total debt rejects the proposal, the trust deed cannot continue and alternative methods need to be considered and the trustee will offer further advice.

Once a trust deed repayment plan is agreed upon, the debtor is protected from creditors pursuing the debt outside of the trust deed. The debtor will be required to make the agreed upon payments.

At the conclusion of the agreed upon term, if all payments have been made: a discharge letter will be issued and the debtor will no longer be required to pay the debts included in the trust deed.

Why Should a Debtor Choose a Trust Deed?

If a debtor has unsecured debts of more than £8,000 and cannot afford the repayments, a trust deed can help align the repayments to a more suitable rate. After a trust deed has been agreed upon, creditors can no longer pursue the debtor for the outstanding amounts owed.

Additionally, a sizeable amount of the total debt can be wiped out at the conclusion of the trust deed.

Why Should Creditors Accept a Trust Deed?

It may seem puzzling why creditors would make an agreement which could see them only recoup a percentage of the debt they are owed. However, the creditor needs to measure the trust deed against the possibility of receiving no repayment on the debt owed. If the debtor chose to pursue bankruptcy rather than a trust deed, the creditor may receive no contribution towards the debt if the debtor had minimal or no assets.

If a creditor can see the trust deed as the most viable method of receiving a significant amount of the debt, they will be more likely to accept the proposal.

Disadvantages of a Trust Deed

Like most forms of debt management and debt solution, there are a number of disadvantages to pursuing a trust deed.

  • Homeowners may be required to release any equity in their home to pay creditors.
  • Creditors can refuse the trust deed proposal or can vote against a protected trust deed.
  • Certain professional bodies prevent members from signing trust deeds.
  • A trust deed can have negative impact upon an individual’s credit rating.

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