Last updated: 23/07/2020 | Estimated Reading Time: 5 minutes
What is a trust deed?
Setting up a trust deed could be a solution if you have serious debt issues and are unsure of what to do next. Having a trust deed could help you save money by helping you avoid bankruptcy. However, they are only available in Scotland, so if you live in England, Wales or Northern Ireland, you may want to look into an Individual Voluntary Arrangement, which work much in the same way as trust deeds.
In This Guide:
- What is a trust deed?
- Who can apply for a trust deed?
- What are the advantages of trust deeds?
- Are there any disadvantages to trust deeds?
- How do I appoint a ‘trustee’ and how do I pay them?
- What debts cannot be included in a trust deed?
What is a trust deed?
Trust deeds are an alternative to declaring bankruptcy for people with serious debt problems. It is a voluntary agreement with the people that you owe money to (your creditors) to repay part of what you owe them. A trust deed can involve transferring your valuable possessions to a trustee, so that their sale can be used to generate money to pay your creditors. You may also have to contribute some of your income.
A trust deed lasts for around 4 years. After this time, you won’t be obliged to pay the debts included in the trust deed - you will be ‘discharged’ from them. If your trust deed meets certain conditions, it can be recorded in the Register of Insolvencies as a ‘protected trust deed’ This stops your creditors taking further action against you to get you to pay up.
Who can apply for a trust deed?
You must owe a minimum of £5,000 to all your creditors before you can apply for a trust deed. If you would like to be referred to an insolvency practitioner by the National Debtline, you normally need the following:
- A minimum of £8,000 in debt, comprised of at least two different debts.
- A minimum of £150 per month disposable income to pay into the trust deed.
- You must be able to pay back at least 10% of what you owe.
- If your income comes solely from benefits, you can’t apply for a trust deed.
- If you work but also receive benefits, the amount you pay into the trust deed can’t be more than your monthly salary.
What are the advantages of trust deeds?
- You would no longer have to deal with your creditors, and they will no longer be able to contact you to try and recover their money.
- Your debt becomes more manageable, as you only make one affordable monthly payment.
- If your creditors agree to the terms of the trust deed, your debt is frozen. If you stick to the terms, no more interest will be added to the debt.
- You can still have a bank account, though this is normally an instant access account. So, you can have a cash card, but you won’t get a cheque book, cheque card or an overdraft facility.
- In most cases, you can continue to be employed, but it’s always best to check your contract of employment to ensure a trust deed won’t affect your job.
- Your monthly payments to the trust deed based on your earnings will be adjusted if your circumstances change.
Are there any disadvantages to trust deeds?
- Only creditors that agree to the terms of the trust deed are bound to it, unless it becomes protected. It is easy enough for your trustee to ensure your trust fund is protected, unless the following happens:
- At least half of your creditors object.
- Creditors who between them hold 1/3 of your debt object.
- If you don’t co-operate with your trustee, they can attempt to make you bankrupt.
- You can’t continue to be the director of a limited company, unless your trustee allows you to do so.
- Some public bodies may prevent you from holding office with them.
- A trust deed remains on your credit file for six years, making it potentially more difficult for you to take out further credit during and after the trust deed.
How do I appoint a ‘trustee’ and how do I pay them?
Your trustee will decide whether you have met your obligations and whether you will be discharged from your debts after the trust deed ends, A trustee must be a qualified insolvency practitioner. The trustee will charge you fees for setting up and administering your trust deed. The fees are normally around £4,000. The fees will be paid out of the monthly instalments you pay, or through the sale of your valuable assets. Your trustee can’t charge you anything before the trust deed is set up.
The ‘Accountant in Bankruptcy’ (AiB) can check your trustee’s fees. They can make sure that the work you have been charged for was necessary and recorded properly. However, the AiB can’t change the hourly rate that your trustee charges you. If you are unhappy with your trustee, there are various steps you can take. The first thing you can do is raise your concerns with them personally, and it’s best to do this in writing. Then, if you aren’t happy with their response, then contact their professional body.
What debts cannot be included in a trust deed?
A trust deed only covers unsecured debts, such as credit cards and personal loans. Therefore, your trust deed can’t include the following debts:
- Any debt incurred through fraud
- Penalties, fines and compensation orders imposed by any court.
- Maintenance that you are obligated to pay to an ex-spouse under a court order
- Any money owed to a creditor, whose debt is secured on your property (for example, a mortgage or secured loan).