What is a trust deed
A trust deed is a voluntary, legally binding agreement between a client and their creditors, operated by and through an insolvency practitioner.
It is insolvency in the wider sense, but not bankruptcy as such. It is governed in much the same way and there are more similarities than differences, as many of the same rules apply across all insolvency solutions.
A trust deed can be unprotected or obtain protected status and become a protected trust deed (PTD).
Under a PTD, creditors cannot pursue the debts owed to them, giving the client the same protection from creditors as bankruptcy. This is the main reason to have the trust deed protected. A PTD is suitable for a client that cannot pay their debts within a reasonable timescale and wishes to exclude the family home, although that is not always possible.
Voluntary trust deeds for creditors are covered in Part 14 of the Bankruptcy (Scotland) Act 2016.
All the forms used in a PTD can be found at legislation.gov.1 Some advantages of a protected trust deed
It is not bankruptcy and might be more useful to a client whose job excludes them from being bankrupt.
Your client can discuss the terms of the trust deed and come to an agreement with the trustee before they sign. This can be useful in working out how disposable income is to be assessed, how assets are to be realised and specifically if the family home is to be excluded.
The trustee deals with all creditor correspondence and queries.
All interest and charges on the debts are frozen on the date the trust deed is signed.
Your client makes one affordable monthly payment, normally for 48 months.
Once the trust deed is given protected status, no further action can be taken against the client by their creditors.
After completion of the terms of the trust deed, the client is discharged from their debts and all included remaining debt will be written off.
Some disadvantages of a protected trust deed
Your client must pay contributions towards their debts for at least 48 months.
Having a trust deed will affect your client’s credit rating for six years from the date the trust deed is signed.
Joint trust deeds are not possible.
If the client’s situation changes, there is no zero contribution available (as there is in bankruptcy). Therefore, it may last longer than 48 months.
The creditors may not agree to the terms and the trust deed may not gain protected status, and the client may have to look at bankruptcy as a result.
Secured creditors may still take action to take possession of a debtor’s home if they fall behind with mortgage payments.
If any new debts are taken on after a trust deed is signed, the debtor is not protected from legal action by these new creditors. Servicing new debts may affect the debtor’s ability to maintain the agreed monthly contributions.