A Protected Trust Deed is a legally binding voluntary arrangement that commits you to paying down your debts in affordable payments to your creditors. This is usually over a period of 4 – 6 years. After that period, any outstanding amounts that you owed prior to your Trust Deed are simply written off, and you are left debt-free from these.
This is a major advantage over solutions such as a DAS that require you to pay back the full amount over a period that can be anything up to 10 years. However, unlike a PTD, a DAS is not a form of insolvency, it is a repayment programme.
Another alternative is to declare yourself bankrupt. You can do this if you owe more than £1,500 and have not been bankrupt in the previous 5 years. This is viewed as a more radical solution and one that comes with implications. It allows you to be discharged from your debts within a matter of a year or so, but can have implications for your life and your employment/business.
Being in a PTD ringfences your assets from your creditors for the duration of the PTD. Essentially, your assets are handed over - conveyed - to a Trustee for the period of the Deed. This safeguards your assets and prevents your creditors from taking action to recover their debts against them.
In a conventional Trust Deed, it is only those creditors who agree to it, who are bound by it. That means that the others can, if they so decide, take court action against you. This could even mean that they can apply to sequestrate your assets or make you bankrupt.
That all changes with a PTD. The benefit here, is that even those creditors who do not agree cannot then take further action.
The Trustee writes to all of your creditors to advise them that the Trust Deed is to become protected. After a notification period of 5 weeks, this will normally go ahead, unless there are objections from at least half of your creditors and/or there are objections from creditors who together hold at least one-third of your total debt.
The only other person who can prevent your Trust Deed from becoming protected is the Accountant in Bankruptcy (AiB) who deals with all personal insolvency matters in Scotland. This will happen only in exceptional circumstances, such as, your own outgoings being deemed to be excessively high.
Trusts Deeds apply to people who are resident in Scotland. To be considered for a Trust Deed, your debts need to be £5,000 or more.
Trust Deeds are an effective way of dealing with unsecured debts such as store cards, credit cards, personal loans, and utility bills. They represent a high risk for lenders who cannot recover an asset if you default on a debt. The only way they can recover some or all of the debt is to take court action against you.
Unsecured debts are essentially loans that have been entered into without providing any security or surety for the lender; in other words, the loan is not made against an asset such as your house or an item of value that you own. Trust Deeds can include all such debts and remove the threat of any action against you by the lender.
Signing a Trust Deed is entering into a form of insolvency. Generally, unsecured debts (store cards, electricity bills, council tax arrears, personal loans and store card debts) will be greater than the value of your assets. For most people, such assets will be a house or a vehicle, but they could include other items such as equipment or machinery.
In the case of a house where you are still paying a mortgage, your share of it (or your equity) is the amount that you would have if you were to sell the house (its' market value) minus the amount you still owe the lender.
So, for example, if you have a mortgage of say £250,000 and your house is valued at £300,000, and you have already paid £150,000 of your mortgage, your equity is £200,000 (£300,000 estimated market value less £100,000 you still owe the lender).
If you have high levels of unsecured debt that you are struggling to pay each month then a PTD could be the right solution for you. You may, for example, also be finding it hard to meet your day-to-day living expenses and having to ‘rob Peter to pay Paul’ in order to meet repayments on your loans.
PTDs work well for people in such circumstances. If you have a mortgage and/or Hire Purchase Agreement(s), your Trustee will seek confirmation from the lenders that they are content to continue to accept your monthly payments towards the accounts.
If, however, defaults occur, they will have the right to repossess/uplift the goods and claim any shortfall balances in the PTD.
Trust Deeds are not ideal for people with irregular incomes, this is because you have to commit to regular payments. Failure to make payments could endanger your assets, as the Trustee could begin sequestration or bankruptcy proceedings against you. This is clearly the last thing that anyone wants.
Your PTD is set up for you by an Insolvency Practitioner (IP). They become your Trustee and manage your affairs in relation to all your creditors – so you don’t have to. It’s important that you choose someone to be your Trustee who you feel comfortable with.
You will have to disclose all your assets and income to them, and this can be awkward and embarrassing, but having a good understanding and rapport with your adviser can make the whole process much easier.
Your IP works out how much you can afford to pay each month based on your circumstances. They then put the proposal forward to your creditors to reach an agreement.
A Fixed Administration Fee and additional fees based on a percentage of funds ingathered to the estate will be declared to you and your creditors at the outset. These fees will be taken from the Trust Deed estate when funds are available.
A Trust Deed will look at the equity in your home (the money you would have after paying off any mortgage) but will usually not require you to sell your home. You can also generally keep assets such as cars, depending on their value.
All of these things are included in your Trust Deed and will be discussed and agreed upon with your IP.
Your main obligation is simply to keep paying the assessed sum that you have agreed to pay each month as part of your PTD. This will be less than the payments that you have been struggling to make to your creditors.
The whole purpose is to ensure that whatever you pay is affordable and sustainable. This gives certainty to your creditors too as they know that you will be making regular payments to pay down your debts for the period of the PTD.
The good news is that you and your assets are protected from your creditors as a result of being in a PTD. Your creditors may, however, not update their systems immediately with regards to your PTD, which will mean that you may continue to receive correspondence from them in the short term.
Rest assured though, your creditors can’t add any more interest or further charges to the debts that you owe, and they also can’t resort to court action. The key thing to maintaining all of this, is you continuing to make payments as agreed.
You will still be able to have a bank account, but you will not be able to get overdraft facilities.
When you sign a Trust Deed, your details are entered into the public Register of Insolvencies. In reality though, it’s extremely unlikely that anyone will find out that you are on the Register unless you yourself tell them.
There are consequences of entering into a Trust Deed. One of the most obvious is the inability to get credit. A PTD will appear on your credit file for a period of approximately six years from the time when you signed it.
It will mean that it will be almost impossible to get further credit whilst you are in the Trust Deed. In reality, however, you will almost certainly not want to get further credit anyway.
One further point to mention is that you will have to budget very carefully, having no credit to fall back on means that you have no ‘safety net’ for unexpected events. Things like booking tickets and hiring vehicles, will have to be done using your debit card for example.
When you come to the end of your PTD, it’s a good idea to apply for a credit card to build your credit profile once again – using it for small amounts that you completely pay off each month.
As a Trust Deed is a form of insolvency, it could affect your employment and could lead to disciplinary action or even dismissal in some jobs. It’s important to check and understand all the implications.
A good place to start is your own contract of employment. Such contract terms are likely to apply especially, but not exclusively, to roles within the financial services industry and legal profession.
It might be a good idea to speak to your HR team to clarify the position if you are in any doubt – or to check with your trade union representative (if you have one) in your workplace.
The standard term is 4 years, although the term can be longer. During the period of the Trust Deed, you are obliged to make monthly payments as set out in the terms of your Trust Deed.
The good news is, that after the period of the Trust Deed has elapsed, any remaining debts are simply written off – so you have nothing more to pay and are now debt-free.
We would be delighted to answer any questions you have on Trust Deeds.
We offer a free initial discussion to find out how we can help you. One of our advisers can call at a time suitable for you, or if you prefer, we can meet privately at our offices, your home or at a local coffee shop.
To arrange a free confidential consultation, please contact us today here.
About the author
Richard Gardiner
Richard is Head of our Corporate Recovery and Debt Solutions Department.
He is a licensed Insolvency Practitioner with the Institute of Chartered Accountants of Scotland.
He manages a large team of managers and support staff who offer the complete spectrum of personal and business debt solutions available under Scottish legislation.