Can Homeowners Enter Trust Deeds in Scotland?
16th September 2016
Homeowners frequently enter a trust deed and the majority complete it without any real problems. For many, a protected trust deed helps to protect their house or flat while they’re tackling their debts.
Be aware however that any “equity” in your home is considered to be an asset. Once you’ve signed a trust deed, your assets pass into the control of your insolvency practitioner.
Your trustee (the insolvency practitioner) is obliged to consider whether (or how) these assets might be used to repay more to your creditors. Depending upon your circumstances, the worst-case scenario is that your home is placed at risk of being sold in the future.
Please fully read this article to find out whether this risk applies to you.
Assets and Trust Deeds
You’ll agree a monthly payment if you enter a protected trust deed. This is an amount calculated by taking your monthly income and then subtracting your bills and other household expenses. It’s a regular payment funded from your income.
You’ll also agree that your assets will “vest” in your trustee. You’re effectively passing over these assets to the control of your trustee in case they can be used to help repay your creditors. This includes things you own now (e.g. a home with equity, valuable car, or savings) and things you might come to own later during your trust deed (e.g. an inheritance or lottery win).
Your income payments and your assets are treated separately.
Working Out the Equity in Your Home
The equity in your home is the value of your home minus any mortgages secured upon it. If your home is worth £100,000, and your mortgage is £90,000, the total equity is £10,000.
You can contact your mortgage lender to confirm your mortgage balance. They’ll quickly provide you with a mortgage redemption statement.
If your home is similar to others nearby, you may already have a good idea of its value from recent local sales. Approximate valuations are also often available (for free) from websites like Zoopla.
If your home is owned jointly, you’ll normally be considered to own 50% of the equity.
Low Levels of Equity
If your home has very little equity (or is in negative equity) entering a protected trust deed may be fairly straightforward.
Some trust deed providers use an equity threshold of £5,000 for example. Equity of £5,000 or less may effectively be ignored because the costs of selling such a property would wipe out any profit.
The same applies with negative equity. Selling your property would only create a new debt (to the mortgage lender) so it’s normally in nobody’s interest for that to happen.
What if Your Property Increases in Value?
These days any equity in your property is “fixed” at the start of your trust deed. The trust deed provider will instruct a valuation. You’ll provide a mortgage redemption statement.
You should therefore be fully aware of whether there’s any equity in your home before you sign the actual trust deed documentation.
If there is some equity, you should fully discuss how this will (or will not) be dealt with if you go ahead. Good trustees will have no problem with confirming how much equity you have, and how it’s agreed that it will be dealt with, in writing before you commit. You can then feel more secure that the agreement will not change later.
Because the amount of equity has been fixed at the start, any future increase in the value of your home will make no difference (provided that you complete the arrangement).
How Can Equity Be Dealt With?
Your trustee may explain to you that there is an amount you’ll need to pay in lieu of the equity in your property. This will be in addition to any agreed monthly payments from your income.
Please remember that it’s highly unlikely that you’ll be able to obtain a new mortgage to release the equity in your home. A different option will usually need to be found.
You may be offered the opportunity to pay off the equity by entering a longer trust deed. For example, you might agree to extend the usual four year term to five years instead. The extra twelve monthly payments would contribute an additional sum to deal with the equity.
Some people are lucky enough to have a family member (or a friend) who agrees to pay in a lump sum on their behalf to deal with the equity. Trustees and creditors like this option because it brings the funds into an arrangement at an early stage.
You also have the option to sell the property if it isn’t your priority to remain there.
A Firm Is Telling Me That My Equity Can Be Ignored
Some providers are taking an approach whereby the full amount of equity in a property does not have to be paid into a trust deed.
With disclosure of the equity situation to creditors at the start, an agreement is reached whereby only some of the equity has to be paid over. This deal typically comes with an agreed extension to your monthly payments, for example the usual four year trust deed term being extended to five or six years instead.
Point 38 of the Statement of Insolvency Practice (Scotland) helps to explain why this may work. The trustee has formed a view that this type of arrangement could result in the best return for creditors. For example, if the debtor became bankrupt instead (with a forced sale of their home) the creditors might stand to receive much less of their money.
For many homeowners a trust deed on this basis is a very attractive option. The alternatives to a trust deed might include a DAS (debt arrangement scheme) or DMP (debt management plan) which is expected to last for many years.
This approach towards equity and Scottish trust deeds does, however, come with one particularly significant risk.
A Significant Risk for Homeowners with Equity
Agreements about equity are made right at the start of a trust deed. This can be very reassuring for someone who is worried about losing their home as a result of getting into debt.
These agreements are however conditional. You’re expected to complete the obligations (that you have voluntarily agreed to) throughout the full term of your trust deed.
If you fail to make your payments, or if you fail to cooperate fully with your trustee, your equity agreement may become null and void. The trustee may then become obligated to consider the sale of your home to help repay the money that you owe to your creditors. In practice, this might be accomplished by failing your trust deed and then petitioning for your bankruptcy.
Good firms will be careful to make you fully aware of this risk. If you’ve already spoken in detail with a firm that hasn’t clearly highlighted this risk to you, it’s not a good sign.
You should therefore carefully consider (in advance) the risk that you might not be able to complete your 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 had to find a new home?
If the level of risk feels too high, carefully consider alternative measures such as a debt arrangement scheme. DAS may help to protect your home by preventing any of your creditors taking legal debt recovery action against you. Equity isn’t taking into account at all with this type of debt solution.
Who Can Help a Homeowner to Set Up Their Trust Deed?
There are plenty of trust deed providers in Scotland. Each takes a slightly different approach when it comes to equity, so it’s very worthwhile to speak with more than one firm.
We recommend the firms represented on this website by Kevin Mapstone and David Tannock. You can get in touch with them via the contact forms on their profile pages. Kevin and David have helped many homeowner Trust-Deed.co.uk visitors over the years. We’ve received consistently great feedback about their services.
Got an equity question you’d like answered? You can add your questions to our forum where our panel of experts will share their knowledge and experience with you.
You can also contact the Trust-Deed.co.uk advice team directly via our Contact Us form or by calling 0141 2490416 or 0800 0437201. Each member of our own advice team is a professionally qualified debt adviser. They can answer your questions about equity and help you to decide whether a trust deed will meet your needs.
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