Trust deeds in Scotland
Coronavirus - more protection from action by creditors
If you're worried about creditors taking enforcement action against you or you are thinking of applying for Bankruptcy (sequestration), a Protected Trust Deed or the Debt Arrangement Scheme (DAS) you can apply for a moratorium, which prevents creditors taking action whilst you seek advice. The moratorium protects you for six months but it does not stop interest or charges building and may impact on your credit rating.
If you are worried remember that creditors and sheriff officers should be reacting sympathetically to Covid 19 related financial hardship and you should ask them to treat you fairly as per the Financial Conduct Authority’s rules. If this does not work and your creditor has sent you a document called a “Charge for Payment for Money” giving you 14 days to pay your debt in full, then you should apply for a moratorium.
You can apply for a moratorium yourself but it is recommended you only do this after getting advice. Once you have applied for a moratorium bear in mind that if you do not get advice within 6 months, and make an application for either DAS, protected trust deed or bankruptcy, then it will expire and your creditors can take action again. Read more about protection from action by creditors on the Accountant in Bankruptcy website.
What is a trust deed
A trust deed is a voluntary agreement between you and the people you owe money to (also called your creditors). You agree to pay a regular amount of money towards your debts and at the end of a fixed time the rest of your debts will be written off.
All your belongings and property (your assets) are passed to someone who will look after your financial affairs. They are called your trustee. The trustee aims to pay your creditors as much as possible of the debt owed to them. This may involve some of your belongings or property being sold so that the money raised can be paid to your creditors.
A trust deed can become 'protected' if the majority of creditors are happy with the terms of the trust deed. This means that the trust deed is binding on all creditors and they cannot take any steps to recover the money owed to them.
If a trust deed is not 'protected' then it will not be binding on all of your creditors and they could still take action to recover the money you owe them.
A trust deed is only one of the options available to you if you have debt problems. You should get advice from a money adviser to help you decide what is the best option for you. You can find your nearest money adviser on the 'find an adviser' page on Scotland's Financial Health Service website.
If you owe money to people or companies in the EU
Any debts you owe to people or companies in the EU might not be covered by a trust deed.
Your creditors could keep asking you for money, for example by calling you or sending you letters. If you live in the EU, they could take you to court in the EU.
From 1 January 2021, EU creditors have to sue in the UK rather than in the EU, even if they have an existing judgment. The UK will recognise EU judgements entered or started before 31 December 2020.
If you live in the UK but have a home in the EU with a mortgage from an EU lender, the lender could take you to court in the EU.
Get legal advice if you have creditors in the EU.
When a trust deed might be an option for you
A trust deed might be an option for you if you have:
- debts - you have debts of £5,000 or more
- enough money to make regular payments - you have enough money to make a regular contribution towards your debts. You can't set up a trust deed if your only income is from benefits
- belongings and property - you have belongings and property (assets) such as savings, investments, a car or a house. These can be sold so that the money raised can be paid to creditors.
Advantages of protected trust deeds
The advantages of protected trust deeds are:
- no contact from people you owe money to - the people you owe money to (your creditors) can no longer contact you and instead have to deal with your trustee
- no more enforcement action - if you are thinking of setting up a trust deed, you can apply to the Accountant in Bankruptcy to stop your creditors taking any steps to recover the money you owe them. This is called a 'moratorium' and it lasts for 6 weeks. This will mean that your creditors can no longer take steps such as arresting your bank account. You can also apply for a moratorium if you are thinking of applying for bankruptcy or a debt payment programme under the Debt Arrangement Scheme. You can only apply for one moratorium in any one 12 month period
- ability to pay bills - you don’t have to show that you are unable to pay your bills as they fall due. This is sometimes called 'apparent insolvency'. You have to be able to show this in order to apply for bankruptcy (called sequestration in Scotland)
- employment and public office - you are not barred from certain types of employment or public office as you would be under bankruptcy (called sequestration in Scotland)
- borrowing money – you are not legally stopped from borrowing money (obtaining credit) like a mortgage or a credit card, although this may be difficult to get in practice
- debts wiped out – your trust deed will usually come to an end after 4 years (called discharge). Most of your debts will be wiped out and you will not have to pay them back.
Disadvantages of protected trust deeds
The disadvantages of protected trust deeds are:
- paying regular contributions – you will have to pay contributions towards your debts for at least 4 years
- credit rating – having a trust deed will affect your credit rating for 6 years from the date the trust deed begins. This can make it harder to get credit like a mortgage or a loan in the future
- selling your belongings and property – you may have to sell some of the things you own (your assets) such as your home
- you can't be a company director – you can’t be the director of a limited company unless the terms of your trust deed allow it
- self-employment - you might not be able to carry on running your own business. The trustee might arrange for someone else to run the business or they might sell the business
- new money or property - if you receive any new money or property within 4 years of the start of your trust deed, these can be claimed by your trustee. Examples include PPI compensation or an inheritance
- cooperation - if you don't cooperate with your trustee, they can apply to make you bankrupt.
Other things to consider about trust deeds
If you are considering setting up a trust deed, you will need to think about how much income you have to make contributions, what might happen to your home and the costs of a trust deed.
How much income do I need
You will usually need to have enough income left over after you have paid for essentials (called disposable income) to make a contribution towards your debts.
Disposable income is assessed by working out your usual income and expenditure over a month. Then you can see if you have any income left after you have paid for all your essentials.
If you don’t have any assets, such as savings, or property such as a car or a house, then you will need to have enough disposable income to pay towards your debts during the existence of your trust deed.
If you have enough disposable income to be able to pay off your debts in full in less than 4 years, then you will not be able to set up a protected trust deed. A Debt Payment Programme under the Debt Arrangement Scheme may be a more suitable option in this situation.
What will happen to my home
If you own your own home and you set up a trust deed, you may have to sell it in order to raise money to pay towards your debts.
In some cases, if you have little or no equity in your home, you may be able to set up a type of protected trust deed which does not include your home. (The equity in your home is the amount of money that you would have left after selling your home and paying off the mortgage.) You can only exclude one home from your protected trust deed and it must be the only or the main place that you live.
If your trust deed does include your home, you have family living with you and your trustee does want to sell the home, you can apply to the sheriff court to ask for the sale to be refused or delayed for up to 3 years.
What happens to joint debts
If you share a debt with someone else this is called 'joint and several liability'. If you take out a trust deed the other person can be pursued for the whole debt. The joint debt is listed in the trust deed but no payments are made towards it by the trustee. It is possible for you both to have a trust deed but you should both discuss with the trustee whether or not this would be advantageous.
If the relationship has broken down then joint debts are one of the issues that should be discussed as part of all the financial circumstances of the relationship.
What are the costs of a trust deed
If you decide to set up a trust deed, you will need to see a licensed insolvency practitioner.
The insolvency practitioner will become the trustee for your trust deed. They will charge you a fee for setting up and running the trust deed. They are not allowed to charge their fees at an hourly rate. Instead they have to charge a single, fixed, upfront fee plus a percentage of the assets that they gather in as part of the running of the trust deed.
Insolvency practitioners’ fees vary and can be expensive. You might want to check the charges of a number of different insolvency practitioners before you decide which insolvency practitioner to use.
Alternatives to a trust deed
Trust deeds are not the only option to help you sort out problems with debts. Other options include:
- a debt payment programme under the Debt Arrangement Scheme (DAS) - this may suit you if you can afford to pay off your debts in full from your disposable income in less than 4 years. There is more information about DAS on our DAS page
- bankruptcy (called sequestration in Scotland) – this may suit you if your financial situation has become intolerable because you can’t pay your debts as they fall due. You can apply for standard bankruptcy if you have debts of £3,000 or more. Alternatively you can apply for 'Minimal Assets Process' (MAP) bankruptcy if you have debts of £1,500 or more and you have little or no disposable income or assets that can be used to raise money. There is more information about bankruptcy on our bankruptcy page
- voluntary agreement direct with your creditors – this is where you set up an informal repayment schedule with your creditors. It means that you are in control of your finances but it does also mean that you have to negotiate with all your creditors and if you aren’t able to keep to your repayment plan there is nothing to stop them taking action to recover the money you owe them
- debt consolidation – this is where you borrow money to pay off existing debts. This is also called re-financing. This may mean you pay back interest at a higher rate and for a longer time than for some of the other options. You must take independent financial advice if you are thinking of doing this. There is more information about debt consolidation on our page about options for dealing with debt.
If you are considering any of these options, you should get advice from a money adviser. You can find your nearest money adviser on the 'find an adviser' page on Scotland's Financial Health Service website.
There are free sources of advice, such as Citizens Advice Bureaux, money advice centres and law centres. There are also freephone helplines such as the National Debtline and the Stepchange Debt Charity helpline.
More information about trust deeds is available on the Accountant in Bankruptcy's website. The Accountant in Bankruptcy has also produced a guide about trust deeds which is available on its website.