Which Way for Over-Indebted Homeowners

7th July 2010

A couple of years ago a Scottish Trust Deed was often a fairly straightforward affair for homeowners with equity in their homes. Reaching the end of their Trust Deed they would seek a remortgage to release any equity held in the home (to be paid into the Trust Deed), and hence conclude the arrangement.

Given the generous availability of mortgages at the time, even for those with imperfect credit scores, this posed few problems for most people.

In the post credit-crunch world this situation has changed dramatically with virtually no mortgage availability for those in current Scottish Trust Deeds. Without the option to remortgage any equity that exists, the risk is the home might have to be sold in order to release the equity.

Of course some people are lucky enough to have supportive friends or family to step-in and provide the funds, but it’s really not something many of us could rely upon, or would even wish to ask for.

For those homeowners (with equity in their homes) facing up to unmanageable levels of unsecured debts the options have reduced. Both the Debt Arrangement Scheme and Debt Management Plans provide some potential to deal with the debts without the home being affected. However, both largely depend on creditor acceptance and both can be extremely long affairs.

This situation contrasts drastically with the rest of the UK. Outside of Scotland the IVA (or Individual Voluntary Arrangement) has similarities to a Scottish Trust Deed. A protocol has been established between Insolvency Practitioners handling IVA’s and creditors to deal fairly with situations where equity cannot be released via remortgage.

Typically if the equity cannot be released by remortgage the IVA will simply be extended by a period of one year. This allows for further monthly contributions to be made towards the debts, which benefits the creditors. This also allows for the debtor to keep their home. All of which seems to be a very fair and balanced solution for those involved.

It’s to be hoped that the current investigation into Scottish Trust Deeds by the Protected Trust Deed Working Group can initiate a similar compromise north of the border.

Until then homeowners who have equity, but who don’t have rich and generous friends or family, may conclude that a Scottish Trust Deed will simply solve one problem while creating another.

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