If you are deeply in debt, you may find it difficult to envision a path out. Perhaps you are unsure whether you will be able to repay the money you owe. Perhaps you are concerned about having to sell your home, or perhaps your creditors are threatening legal action.
A protected trust deed is one option, but they are only available in Scotland. If you live in England, Wales, or Northern Ireland, you may wish to consider an Individual Voluntary Arrangement, which functions similarly.
What is a Trust Deed?
A trust deed is a voluntary agreement between you and your creditors to return a portion of what you owe them.
It conveys your ownership rights to a trustee, who may sell them to pay your creditors a portion of what is owed to them. A trust deed will typically include a payment from your income for a period of four years.
A qualified insolvency practitioner must serve as your trustee (IP). Insolvency practitioners are subject to legal oversight and must be members of a recognised governing organization.
An ordinary trust deed does not bind creditors unless they agree to its terms. Before the trust deed can be protected, your creditors must consent to it.
What is a Protected Trust Deed?
Once your creditors have consented to the plan, a trust deed becomes a protected trust deed. To proceed, the proposal must be accepted by at least half of your creditors, or by creditors representing at least two-thirds of your entire debt. If a creditor does not respond, it is assumed that the offer has been accepted.
Once the trust deed is protected, your creditors will be unable to recover the debt, including by following you for payments or filing a lawsuit. Instead of paying your creditors directly, you’ll make a payment to the trustee in charge of the protected trust deed, who will then distribute it to your creditors on your behalf.
How Trust Deeds Works
In a real estate transaction, such as the purchase of a home, a lender lends money to the borrower in exchange for one or more promissory notes secured by a trust deed. This deed conveys legal title to the real property to an unbiased trustee, generally a title company, escrow business, or bank, who retains it as security for the promissory notes. The borrower retains full use and responsibility for the property, as well as equitable title (the right to achieve complete ownership).
This sequence of events will persist throughout the loan’s repayment tenure. The trustee keeps the legal title until the borrower pays the debt in full, at which point the borrower’s title to the property is transferred to him. If the borrower fails to repay the debt, the trustee seizes possession of the property.
The Benefits of Protected Trust Deeds
The following are the benefits of protected trust deeds:
- No contact from people you owe money to: people you owe money to (your creditors) are no longer able to contact you and must instead deal with your trustee.
- No further enforcement action: If you are considering establishing a trust deed, you can apply to the Accountant in Bankruptcy to prevent your creditors from taking any action to recover the money you owe them. This is known as a moratorium,’ and it lasts for six months (it has been temporarily extended to 6 months because of the coronavirus).
- This means that your creditors will no longer be able to pursue actions such as freezing your bank account. You can also ask for a moratorium if you are considering filing for bankruptcy or entering into a debt payment plan under the Debt Arrangement Scheme. In any 12-month period, you may only request one moratorium.
- Ability to pay bills: You do not need to demonstrate that you are unable to pay your debts when they become due. This is known as ‘apparent insolvency.’ You must be able to demonstrate this in order to file for bankruptcy (called sequestration in Scotland)
- Employment and public office: Unlike in bankruptcy, you are not restricted from specific sorts of work or public office (called sequestration in Scotland)
- Borrowing money: You are not legally prohibited from borrowing money (obtaining credit), such as a mortgage or credit card, though this may be difficult to obtain in practise.
- Debts discharged: Your trust deed will normally expire after four years (called discharge). The majority of your debts will be forgiven, and you will not be required to repay them.
Disadvantages of Protected Trust Deeds
The following are the downsides of protected trust deeds:
- Paying regular contributions: you must contribute to your debts for at least four years.
- Credit rating: Having a trust deed will have an effect on your credit rating for 6 years from the start date of the trust deed. This may make it more difficult to obtain credit in the future, such as a mortgage or a loan.
- Selling your possessions and property: You may have to sell some of your possessions (assets), such as your home.
- You cannot be a company director. You cannot be a director of a limited company unless the provisions of your trust deed permit it.
- Self-employment: you may be unable to continue running your own firm. The trustee may appoint someone else to operate the business, or they may sell it.
- New money or property: If you obtain any new money or property within four years after the start of your trust deed, your trustee may claim it. PPI compensation and inheritance are two examples.
- Cooperation: If you do not comply with the trustee, they may file a bankruptcy petition against you.
What are the Costs associated with a Trust Deed?
If you wish to create a trust deed, you must consult with a licenced insolvency practitioner.
The insolvency practitioner will take over as trustee for your trust deed. They will charge you a fee to set up and administer the trust deed. They are not permitted to charge an hourly rate for their services. Instead, they must charge a single, fixed upfront fee plus a percentage of the assets gathered as part of the trust deed’s operation.
Fees for insolvency practitioners vary and might be prohibitively expensive. Before deciding which insolvency practitioner to use, you should compare the fees of several different insolvency practitioners.
Other things to think about when it comes to Trust Deeds
If you are thinking about establishing a trust deed, you should examine how much money you have to contribute, what might happen to your home, and the costs of a trust deed.
#1. The Cost of the Trust Deed
You will normally need to have enough money left over after paying for necessities (referred to as disposable income) to contribute to your debts.
Working out your regular income and expenditures over a month yields your disposable income. After you’ve paid for all of your necessities, you can see if you still have any money left over.
- If your primary source of income is benefits, you cannot establish a trust deed.
- If you have other sources of income in addition to benefits, any contributions you make to your debts cannot include any money from your benefits.
- So, if you don’t have any assets, such as savings or property, such as a car or a house, you’ll need to have enough disposable income to pay off your debts while your trust deed is in effect.
- If you have enough disposable income to pay off your debts in full in fewer than four years, you will be unable to establish a protected trust deed. In this case, a Debt Payment Programme under the Debt Arrangement Scheme may be a better choice.
#2. What will become of my house?
If you own your own house and put up a trust deed, you may be forced to sell it in order to pay off your debts.
If you have little or no equity in your property, you may be able to set up a sort of protected trust deed that does not include your home in some instances. (Your home’s equity is the amount of money you would have left after selling it and paying off the mortgage.) You can only exclude one home from your protected trust deed, and it must be your only or primary residence.
If your trust deed includes your home, you have relatives living with you, and your trustee wishes to sell the home, you can petition the sheriff’s court to have the sale refused or postponed for up to three years.
#3. What happens to jointly held debts?
When you share the debt with someone else, this is referred to as ‘joint and several liabilities.’ If you take out a trust deed, the other person might be sued for the whole amount of the debt. The joint debt is mentioned in the trust deed, but the trustee makes no payments towards it. It is feasible for you both to have a trust deed, but you should both discuss this with the trustee to see if it would be beneficial.
If the partnership has ended, one of the concerns that should be discussed is joint debts as part of the overall financial situation of the relationship.
Mortgage vs Trust Deed
Trust deeds and mortgages are both used to create liens on real estate in bank and private loans, and both are normally recorded as debt in the county where the property is located.
A mortgage, on the other hand, involves two parties: a borrower (or mortgagor) and a lender (or mortgagee). A trust deed, on the other hand, involves three parties: the borrower (or trustor), the lender (or beneficiary), and the trustee. The trustee owns title to the lien for the benefit of the lender; if the borrower defaults, the trustee will commence and complete the foreclosure procedure at the request of the lender.
Contrary to popular belief, a mortgage is not a loan to purchase a property; rather, it is an agreement that pledges the property as security for the debt.
Trust Deeds and Foreclosures
Foreclosure procedures differ between mortgages and trust deeds. A judicial foreclosure is a court-supervised process that occurs when a lender files a lawsuit against a borrower for mortgage default. The procedure is time-consuming and costly.
In addition, if the foreclosed-property auction does not raise enough money to pay off the promissory note, the lender may file a deficiency judgement against the borrower and sue for the difference. Even after the property is sold, the borrower has the right of redemption: they can repay the lender and obtain the property title within a certain time frame.
A trust deed, on the other hand, allows the lender to initiate a faster and less expensive non-judicial foreclosure, avoiding the court system and following the procedures provided in the trust deed and state law. If the borrower fails to make the loan payments on time, the property is auctioned off at a trustee’s sale.
Following the sale, the trustee’s deed transfers title from the trustee to the new owner. If no buyers attend the trustee sale, the property reverts to the lender via a trustee’s deed. The borrower has no right to redemption once the property has been sold.
Furthermore, after the sale is completed, a trustee is responsible for paying the funds to the borrower and lender. The trustee will pay the lender the amount remaining on the loan and the borrower anything that exceeds that amount, allowing the lender to purchase the property.
Alternatives to a Trust Deed
Trust deeds are not the only option for resolving debt concerns. Other alternatives include:
#1. A debt payment plan under the Debt Arrangement Scheme (DAS)
This may be appropriate for you if you can pay off your debts in full with your disposable income in fewer than four years. More information on DAS can be found on our DAS page.
#3. Bankruptcy (also known as sequestration in Scotland)
This may be an option for you if your financial condition has become intolerable due to your inability to pay your debts when they become due. If you owe £3,000 or more, you can file for regular bankruptcy. If you have debts of £1,500 or more and little or no disposable income or assets that can be utilised to raise money, you can file for ‘Minimal Assets Process (MAP) bankruptcy. More information regarding bankruptcy can be found on our bankruptcy website.
#4. Direct voluntary arrangement with creditors
This is where you establish an informal payback schedule with your creditors. It means you have control over your finances, but it also means you must negotiate with all of your creditors, and if you are unable to adhere to your repayment plan, there is nothing stopping them from pursuing legal action to reclaim the money you owe them.
If you are contemplating any of these choices, you should seek financial guidance. Check with your local Citizens Advice Bureau to see if you can chat with a money consultant.
Trust Deed FAQ’s
Is trust deed a good idea?
Trust deeds can be a useful tool for financial security, but they are not for everyone. They are best suited for people with a steady income and the ability to make regular payments.
Can you get a mortgage if you have a Trust Deed?
A mortgage can be obtained after a Trust Deed, but it will take some time and planning. Once discharged, you’ll need to stick to a strict budget that includes saving for a down payment, avoiding more debt, and rebuilding your credit rating.
What happens at the end of a Trust Deed?
When your Trust Deed expires, your Trustee will issue a ‘letter of release.’ Any unsecured debt that you were unable to repay throughout your Trust Deed period will be written off at the conclusion of your Trust Deed term. You will now be able to enjoy life beyond debt.
