What is a Trust Deed?
A Scottish Trust Deed is only available to residents of Scotland and is fairly similar in nature to an Individual Voluntary Arrangement (or ‘IVA’).
A Trust Deed is entered into on an entirely voluntary basis and enables repayments to be made to creditors through just one arrangement. This arrangement will usually last for a period of four years although they can last longer, depending on individual circumstances.
Once the arrangement comes to an end then all remaining debt is written off and the debtor becomes completely debt free; which means they can then start to rebuild their credit rating in a much more positive light.
Whilst, in essence, a Trust Deed might seem to be a ‘negative’ way of dealing with outstanding debt, some lenders actually appreciate the fact that at least some steps have been taken to address a given situation; rather than the debtor simply burying their head in the sand and hoping that it all goes away – which, invariably, it doesn’t.
What happens throughout the arrangement?
A formal Deed must be set up by a qualified Insolvency Practitioner. After an initial consultation, this person will collate all the details relating to a person’s debt, ascertain how much they’re reasonably able to afford in terms of repayment and will then contact all relevant creditors.
Once a Deed is entered into it becomes legally binding and must be adhered to. During the subsequent four-year period, creditors are not then able to contact the debtor regarding repayment terms, nor must they apply any additional costs or interest. These will all be frozen and eventually, written off at the end of the arrangement term. This therefore offers a great deal of relief for most debtors since it means that creditors can no longer phone them, write to them or attend at their home chasing payment.
Can all types of debt go into a Trust Deed?
No. Only certain types of debt can be incorporated into a Trust Deed (usually ‘unsecured debts’) and these include debts such as:
- Credit cards
- Unsecured loans (including payday loans)
- Mail order debts
- Store cards
- Council tax arrears
- Benefit overpayments
- Credit Union debt
- HMRC debt
- Mortgage arrears
- Car finance
- Debts owed to family or friends (although evidence of this may be required)
Debts that can’t be incorporated into a Trust Deed usually include:
- Mortgage repayments
- Rent arrears
- Log book loans
- Guarantor loans
- Personal guarantees
This is because these debt types are ‘secured’ and therefore not capable of being incorporated into a Trust Deed.
Does everyone qualify for a Scottish Trust Deed?
In order to enter into a Scottish Trust Deed each applicant must meet certain criteria. This usually includes the following:
- The debtor must be resident in Scotland (and be able to evidence this)
- There must be debts totalling at least £5,000.00 to two or more creditors (or alternatively, have at least two lines of credit with one lender – for example, an overdraft and car loan with the same finance company)
- An ability to repay at least £100.00 towards the debt – any proposal less than this amount is likely to be rejected.
How much does it cost to enter into a Trust Deed?
There are no upfront fees and any costs will simply be incorporated into the arrangement. This means that you’ll contribute towards the cost of it with your monthly repayments.
Will a Scottish Trust Deed affect my credit rating?
Yes. By entering into a Trust Deed you’ll generate a negative effect on your credit rating – however, if you find yourself having to consider such an arrangement, the chances are that you already have a poor credit score.
Whilst you remain in the four-year arrangement you won’t be able to apply for any further credit; although lenders will usually consider applications 60 months after the start date. Remember, a lot of lenders also see these arrangements as a positive way of addressing debt and might be prepared to give a debtor another chance to rebuild their credit rating more positively. Very often this can be achieved through the use of a guarantor, although each lender will have their own criteria regarding this so it’s important to shop around when the time comes to rebuild a better financial future.
What are the main advantages of a Trust Deed?
The main advantages of entering into a Trust Deed are as follows:
- All debts are consolidated and managed by a third party. This means that once the Deed has entered into it, they no longer have to worry about the ongoing administration or repayments. They simply have to pay a set amount per month and this should be affordable, taking into account any other financial commitments, such as mortgage or rent repayments etc.
- Once the Deed has been entered into it becomes legally binding. This means that creditors can no longer chase repayments; nor can they change the repayment terms or add additional interest. This is a great advantage since the debt is completely capped and won’t increase, thus providing greater peace of mind for the debtor.
- At the end of the arrangement any remaining debt is completely written off and can’t then be pursued by creditors. This leaves the debtor free to rebuild their financial future, safe in the knowledge that past debts can never be brought back into the mix.
- One of the biggest advantages for debtors is that the Deed prevents creditors from contacting them about the debt, either by phone, letter or via home visits – something which most people naturally find quite distressing.
What are the disadvantages?
- As we’ve already seen, a Trust Deed can’t cover certain types of debt. For this reason it’s always advisable to seek professional advice before entering into an arrangement – particularly if the majority of debt can’t be covered.
- A Trust Deed will also affect a debtor’s credit rating which might make it difficult to obtain credit in the future. What’s more, credit can’t be applied for during the arrangement (although many debtors see this as a distinct advantage).
There are some very distinct advantages as to why a debtor might want to enter into a Trust Deed but this should never be done without professional advice and careful consideration. However, for many, they can certainly provide the ideal solution and help a debtor get firmly back on track.