The Advantages and Disadvantages of Protected Trust Deeds
15th November 2016
Tackling your debt may feel like a very complicated process. In this article we highlight some potential pros and cons associated with using protected trust deeds in Scotland. This may help to focus your thinking about whether a trust deed is right for you.
Because trust deeds definitely aren’t right for everyone, we’ve included comparisons against the alternative debt solutions. Every debt solution has advantages and disadvantages, so it’s important to consider which factors are most important for you. Analysing the strengths and weaknesses of each debt solution will help you to make an informed choice.
Damage to Your Credit Rating
Your credit rating will be damaged by entering into a trust deed. This is very likely to impair your ability to obtain credit in the future, though you can take steps to rehabilitate your credit rating once you have been discharged.
The trust deed itself will remain present on your credit file for six years (from when it began).
It’s sometimes presented that bankruptcy (sequestration) is more damaging than a trust deed for your credit rating. We’ve seen no evidence to support this claim. They’re both forms of personal insolvency and will both have a significant negative effect.
Debt arrangement schemes (DAS) and debt management plans (DMP) will be less immediately damaging to your credit rating, primarily because they are not forms of personal insolvency. However, these options are often scheduled to run for much longer than trust deeds, so the negative impact associated with them may apply for a much more extended period.
Protecting Your Home
If you’re a homeowner an assessment will be made about whether there is any equity in that home. If there’s equity, you may be required to “release” it before your trust deed can be completed. This helps to repay more of what’s owed to your creditors.
This may be considered a disadvantage in comparison to DAS or a DMP. Neither of these options takes your assets into direct account.
There might be some advantages for homeowners in using a trust deed instead of becoming bankrupt. You’ll be able to agree how any equity will be dealt with in advance with your trustee. This will not be possible with bankruptcy (unless you’re in a position to appoint your own trustee) so your continued ownership and residence may be much less secure.
Help Dealing with Your Creditors
While you’re in a trust deed your trustee will take over correspondence with your creditors. This may be a significant benefit to you, not least if you have been subject to a lot of stressful debt collection activity.
Please be aware that this isn’t a unique advantage in comparison to the other debt solutions. Using any of the mainstream alternatives to a trust deed will also ensure that someone else takes over the communication with your creditors.
Legal Protection from Your Creditors
If your trust deed becomes protected your creditors will not be able to take additional action to recover money from you. This is also the case if you become bankrupt or use the debt arrangement scheme (DAS).
Exceptions in this respect are debt management plans. No guaranteed protection from creditors is provided by an informal DMP.
Make a Single Monthly Payment
Making a single monthly (or weekly) payment towards your debts is one of the most commonly cited advantages of entering into a trust deed. This may be much easier than trying to juggle repayments between numerous creditors.
The same benefit also applies with DAS, a DMP, or if you become bankrupt and can afford to contribute.
Some Debt May Be Written Off
If you complete your obligations to your trust deed, any debt that you haven’t repaid will be written off. You’ll have no further liability towards repaying them. This scenario also applies with bankruptcy.
DAS or a DMP are different in this respect. These arrangements continue until your debts are fully repaid. This might be a major disadvantage if the term required to complete this process will be very long.
Interest on Debts is Frozen
Interest on debts will generally be frozen by a trust deed. An exception is where you come into a lot of money before you’re discharged. In this situation some interest might be added to your debts again if it’s clear that you can now afford to pay it. This would also apply in the same circumstances with bankruptcy.
A major benefit of DAS is that no further interest will be added to your debts. It might however be added back onto the debts in the event that your DAS failed.
A DMP provides no guarantees that your creditors will freeze the interest on your debts. This is a significant disadvantage in comparison to the alternatives, though in reality most creditors do make interest concessions for customers who are using debt management plans.
Details Held on a Public Register
One of the cons associated with statutory debt solutions is that your details will be placed on a public register. For protected trust deeds and bankruptcy, the Register of Insolvencies is where the information is stored.
Users of the debt arrangement scheme are added to a different public register.
By contrast, one of the pros associated with using an informal debt management plan is that no public register of users exists.
Fees are Payable
If you enter a trust deed there will be fees charged by your insolvency practitioner (the “trustee”). These are collected from the payments that you are making each month. There should be no upfront application fee to pay, but Scottish trust deeds are never provided for free.
Such fees only truly become a disadvantageous in the event that your trust deed fails, or if you came into a large amount of money prior to your discharge.
If you want to become bankrupt you will first have to pay an application fee. Further fees might also be charged in the event that you are deemed able to make further payments towards the associated bankruptcy costs (and towards your debts).
For either DAS or a DMP, you can select between free and commercially provided services.
A Change in Your Circumstances
Another disadvantage of trust deeds in Scotland is the potential implications of becoming unable to make your payments. This could result in the failure of your trust deed, with consequences ranging from being reunited with your debts, right up to and including being made bankrupt.
If you became unable to make payments while bankrupt the arrangement cannot fail in the same way. This bankruptcy option may therefore be advantageous if there is a real risk that your financial circumstances are likely to worsen in the near future.
As DAS and DMPs rely upon fully repaying your debts, a negative change in your circumstances might result in the arrangement quickly becoming unaffordable.
Your Continued Employment
Most people can enter into a trust deed in Scotland without jeopardising their employment. This might not be the case if you work in the professionals however, perhaps as a solicitor or financial adviser for example.
Some people working in disciplined professions like police officers, prison officers, or members of the armed forces, might have advance employer disclosure requirements.
Everyone should check their contract of employment before signing a trust deed (or becoming bankrupt) just in case there is a restriction. For example, we understand that nurses are generally free to enter trust deeds, but this might not remain the case (contractually) if they are responsible for managing a budget as part of their working duties.
Employers do seem to view bankruptcy more negatively (on average at least) though this may be as a result of unjustified prejudice rather than any particularly logical position. It is the case that trust deeds do not prevent people from acting as company directors (unless the rules of that company say otherwise) but this is not possible as an undischarged bankrupt.
Users of DAS or a DMP are much less likely to face employment issues connected to their debts, but they should still always make appropriate checks before they go ahead.
Creditor Acceptance is Required
A trust deed will not become protected if there is a significant level of creditor objection. By contrast, an advantage of bankruptcy is that the creditors cannot prevent it from going ahead provided that you meet the appropriate criteria.
DAS also cannot go ahead if there is enough opposition from your creditors. In this instance however you do have the advantage of a “fair and reasonable” test potentially being applied externally to any such objections.
Debt management plans do not explicitly require the support of your creditors. However, creditors may continue to charge interest and/or take recovery action against you if they don’t consider that they’re being treated appropriately.
Repeated Use of Debt Solutions
It is possible to enter a second (or even a third) protected trust deed in Scotland. So long as you have been discharged from your last one, it’s possible to propose another trust deed in the future to address any new debts.
If you have become bankrupt within the past five years, it’s not currently possible to become bankrupt again.
Further Advice and Assistance
If you’d like professional advice about your debt solution options, please get in touch. Our qualified and friendly advice team is ready to assist you. They’ll tell you which debt solutions you qualify for and further explain the advantages and disadvantages associated with each of them.
If you have a further question that isn’t answered in this article, please visit our online forum. A panel of experts will share their knowledge and insight with you.
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