Debt Advice Lines

0800 043 7201

0141 249 0416

 

Scottish Trust Deeds for Homeowners

Assets and Trust Deeds

Working Out the Equity in Your House or Flat

Low Levels of Equity

 

Your home may have little equity. This situation is usually quite simple. Some trust deed providers use an equity threshold of £5,000. Equity of £5,000 (or less) may effectively get ignored. This is because the selling costs for this property would wipe out any profit. Other firms use an equity threshold considerably higher than £5,000.

Negative Equity

You're in negative equity if your mortgage balance is higher than the value of your home. If you have negative equity, no asset vests in your trustee. Selling your home wouldn't raise money for your creditors.

 

A Written Plan for Your Equity

Before you proceed with your trust deed, the equity gets assessed. You provide mortgage redemption figures to the trustee. These details are easily obtained from your mortgage provider. Your trustee instructs a valuation of your property. This process is unlikely to involve a valuer coming inside your home.

 

If there is significant equity, you’ll agree with your trustee how it will be dealt with. The plan to deal with it is recorded in writing. There are several ways the equity could be dealt with:

 

• Extra Payments. You may agree to a repayment term lasting longer than four years. The extra payments are your contribution towards the equity in your home. This is the most common scenario.

 

• Third Party Payment. A relative might make a payment to the trustee. This could be a lump sum or regular monthly payments. Their money becomes your contribution for the equity. If you’re a joint-owner, your partner could make this payment.

 

• Sale of Property. Most people prefer to remain in their current home. However, you do have the option to sell it instead. Your share of the sale profit gets paid into your trust deed. A joint-owner would keep their share of the equity.

 

• Mortgage. It’s very unlikely that you’ll get a new mortgage during a trust deed. Raising equity from a new (larger) mortgage isn’t likely to be viable.

 

What if Your Home Increases in Value?

 

Equity in your property is “fixed” at the start of your trust deed. If the value of your property increases before you get discharged, it makes no difference. Your equity position remains fixed. The original agreement to deal with your equity remains in place.

 

Property Abandonment Fees

 

Some firms charge a “property abandonment fee”. This fee gets charged if there is very little equity in your home when your trust deed begins. The fee varies by firm, but some charge £500 or £550. This money has to be paid in addition to your other payments.

 

You don’t need to pay this fee. Plenty of firms do not charge it and you gain no particular benefit from paying it. We can introduce you to excellent providers that do not charge this fee.

 

Can Your Equity Get Ignored?

 

You may get told that your full equity doesn't have to be paid over. With creditor disclosure, it’s agreed only part of the equity gets paid. Payment may come from an extension of your monthly payments.

 

A trustee has formed a view that this option is best for the creditors. For example, if the debtor became bankrupt the creditors would receive less. This is because both bankruptcy and forced house sale costs are high. This may seem an attractive option. The alternatives could be long-term plans like DAS or debt management.These debt solutions run until the debts are fully repaid.

 

This approach towards equity come with one big risk…

 

If Your Trust Deed Fails

 

Equity agreements get made at the start of your trust deed. This is reassuring if you’re worried about losing your home because of your debts. These agreements are however conditional. You’re expected to complete the obligations you agreed to. These obligations last until your discharge.

 

If your protected trust deed fails, your equity agreement becomes null and void. This could happen if you fail to make your payments. It could happen if you don't cooperate with your trustee. If either happen, your trustee might consider the sale of your home. They can force a sale in these circumstances by bankrupting you. Forcing the loss of your home is (of course) a last resort option.

 

Firms aren’t compelled to bankrupt you if your Scottish trust deed fails. They must consider the best interests of your creditors though. You should get told about this small risk of losing your home at the start. If a firm hasn’t mentioned this to you, it’s not a good sign.

 

What’s your risk of failing to complete a trust deed? Is your job secure? Are you in good health? If you’re self-employed what’s the financial outlook for your business? Would you and your family be OK if you did lose your home? If these risks feel too high, consider different debt solutions. DAS may help to protect your home. Your unsecured creditors cannot take legal action against you. Your equity isn’t taking into account by the debt arrangement scheme.

 

Selling Your Home During Your Trust Deed

 

What happens if you want to sell your house or flat prior to discharge? You can only sell your home if your trustee consents. Solicitors involved in a house sale will contact your trustee. They will have found the legal inhibition that your trustee has put in place. If the trustee doesn’t consent to a sale, the sale won't happen.

 

The written equity agreement for your property ceases to apply. The trustee will require all of the profit from the sale. This will be used to help repay your creditors. Trust deed equity agreements don't apply if your home actually gets sold.

 

Without any sale profits, you will have no deposit for a new purchase. In any case, we’re unaware of any mortgage lenders offering products to people before their discharge. You may therefore have to move to rented property. If you are moving house for work reasons, consider renting your home out instead. You are allowed to rent out your home while using a trust deed in Scotland.

 

Repossessions from Before Your Trust Deed

 

If your home got repossessed, you may have a mortgage shortfall debt. A shortfall on your mortgage is an unsecured type of debt. The lender might not press for immediate repayment. However, they’ll look for payment in the future. This could occur many years in the future. Collection might be outsourced to a debt collection agency. The debt might be sold to a debt purchaser.

 

Mortgage shortfall debts get included in Scottish trust deeds. If you complete the arrangement, any unpaid mortgage shortfall amount gets written off.

 

Repossession During Your Trust Deed

 

You may be subject to current repossession action when signing your trust deed. You may expect a mortgage shortfall debt, but don’t yet know how much it will be. It’s not necessary to know the exact amount owed before you go ahead and sign.

 

This is called a “contingent debt”. You expect a new debt, but you don’t know how much it will be yet. Contingent debts get included in trust deeds in Scotland. The lender will need to submit a claim to your trustee. They’ll receive a dividend, like your other creditors do.

 

This applies even if you did not know this debt would arise. Provided the mortgage existed when your debt plan began, it gets included. The new shortfall will become an included creditor.  The balance owed gets written-off if you complete your trust deed.

 

Remember to pay your mortgage payments during your protected trust deed. If you don't, the mortgage lender may seek to repossess your home.

 

Repossession After Your Trust Deed

 

Your home might get repossessed after you’ve been discharged. Did the mortgage exist when your trust deed began? If so, any liability for a future shortfall debt likely got included. This usually applies even if your trustee is no longer involved in your case.

 

It might be too late for the mortgage lender to make a claim on your trust deed. This isn't your problem. You shouldn't usually be liable for the new shortfall debt. The mortgage lender may take some time to recognize this status. You may have to make a case to them explaining this situation. Get legal advice and representation if necessary.

 

Your Equity If You Become Bankrupt

 

What if you become bankrupt rather than entering a trust deed? Bankruptcy may offer less flexibility to deal with assets like your home. This applies in particular if you get made bankrupt as a result of creditor action. You’ll get assigned a trustee who will determine what happens with your home. If you cannot raise the equity by other means, a forced sale is likely.

 

There may be more flexibility if you appoint your own bankruptcy trustee. You’ll have an advance opportunity to discuss and agree a plan for your equity. It might be possible to arrange an equity plan that avoids the loss of your home.

 

Get Advice

 

Different insolvency firms address property equity in different ways. If you’ve taken advice already, we recommend getting a second opinion. You may get offered a better solution, such as a shorter trust deed.

 

We’ve been helping homeowners to start trust deeds since 2007. For expert confidential help, please get in touch.

 

 

Author: Andrew Graveson

Qualified Debt Adviser & Trust-Deed.co.uk Founder

 

Page Last Updated: 16/12/2019

 

 

 

 

(c) Bright Oak Limited. Company Number: 06774006. Data Protection Registration: Z1657982.

Telephone calls may be monitored or recorded. Authorised and regulated by the Financial Conduct Authority.

Trust-Deed.co.uk, Clyde Offices, 2nd Floor, 48 West George Street, Glasgow, G2 1BP. Tel: 0141 2490416.

 

 

 

(c) Bright Oak Limited. Company Number: 06774006. Data Protection Registration: Z1657982.

Telephone calls may be monitored or recorded. Authorised and regulated by the Financial Conduct Authority.

Trust-Deed.co.uk, Clyde Offices, 2nd Floor, 48 West George Street, Glasgow, G2 1BP. Tel: 0141 2490416.