What is a trust deed?

A ‘trust deed’ is a voluntary agreement with your creditors (the people you owe money to) to repay part of what you owe them. It is less formal than bankruptcy and may also avoid some of the legal restrictions which follow from being made bankrupt. Although it’s a voluntary agreement it can be legally binding. A trust deed may involve transferring valuable things that you own (known as your ‘assets’) to a trustee so that they can be sold to raise money to pay to your creditors. A trust deed will often involve you making a contribution from your income. This will usually be over three years, but can be for four or five years. After this time you will no longer be liable for the debts included in the trust deed. This is called being ‘discharged’. Providing it meets certain conditions, a trust deed may be recorded in the Register of Insolvencies as a ‘protected trust deed’. This prevents your creditors from taking further action against you to get their money back, as long as you stick to the terms of the trust deed.

What are the advantages of a trust deed?

• If a creditor agrees to the terms of the trust deed, the debt you owe them is ‘frozen’ at the start of the arrangement. As long as you keep to the terms of the trust deed, no further interest will be added to the debt. Once the trust deed has been set up, they should direct most correspondence to the trustee rather than to you.

• You can still have a bank account. This is usually an instant access account, where you can use a cash card, but you do not get a cheque book, cheque card or an overdraft facility.

• You can still continue to be employed in most cases. (It is always a good idea to check your contract of employment to make sure that a trust deed will not affect your job.)

• You may still be able to hold public office, although some public bodies may have their own rules preventing this.

• Any monthly payments you have to make based on your earnings may be increased or decreased if your circumstances change.

• You may be able to enter into a trust deed without putting your home at risk.

What are the disadvantages of a trust deed?

• Only the creditors who agree to the terms of your trust deed are bound by the arrangement, unless it becomes ‘protected’.

• If you do not cooperate with the trustee, they can try to make you bankrupt.

• You cannot continue to be the director of a limited company unless your trustee agrees and unless the rules of the limited company allow you to enter into a trust deed.

• Some public bodies, such as councils, may have rules that prevent you from holding office with them.

• Your credit reference file will be affected. This could make it more difficult to take out further credit during and after the trust deed.

• A trust deed cannot include certain debts.

What debts cannot be included in a trust deed?

A trust deed cannot include debts such as:

• fines, penalties, compensation and forfeiture orders imposed by any court;

• any debt that has been incurred through fraud;

• student loans;

• any obligation to pay maintenance to an ex-spouse due under a court order (not child support agency arrears); and

• money owed to a creditor whose debt is secured on your property (such as a mortgage or secured loan).

How is a protected trust deed different from a trust deed?

Only those creditors who agree to the terms of the trust deed are bound by it. This means that those creditors who do not agree could still take further action against you, such as applying to make you bankrupt. However, if your trust deed becomes protected, even those creditors who do not agree to its terms cannot take further action against you.

Can I apply for a trust deed?

There is no minimum or maximum amount of debt or number of creditors that you must have before you are allowed to apply for a trust deed. However, some insolvency practitioners have their own rules about this. You should always seek impartial advice to find out what the best options are for dealing with your debts.

Does the trust deed have to include all my assets?

For a trust deed to become protected, it must transfer everything you own, except certain essential items and your current income, to the trustee. You will usually be able to keep basic household items. You may also be able to keep a car that you reasonably need. Property which is transferred to the trustee may be sold whenever it is in the interests of your creditors to do so. If you meet certain criteria, you can propose a trust deed to your creditors where your home will not be treated as an asset. This type of trust deed is known as a ‘section 10’ trust deed.

A section 10 trust deed will be possible where:

• there is at least one secured creditor (like a mortgage or secured loan) on your home; and

• before the trust deed is granted the secured creditor agrees not to make a claim for any of the money you owe them.

You will not be discharged from your secured debts and will still need to pay them in the usual way. If you do not keep up these payments, the secured creditor can try to make you bankrupt, which could put your family home at risk. A section 10 trust deed can become protected in the normal way. However, if your home has equity in it and you exclude it as an asset, creditors may be more likely to object to the trust deed becoming protected. If your trust deed fails to become protected because you have excluded your home from the proposal, you can put forward another proposal in which your home is included as an asset.

Will my home be affected if I cannot get a section 10 trust deed?

If you cannot get a section 10 trust deed and you live in mortgaged accommodation, your home could be at risk of being sold. To prevent this, a third party, such as a family member or friend, may be able to buy out your ‘interest’ in your home from the trustee. Alternatively, you may be able to arrange to re-mortgage your home. If these options are not available and your spouse lives in the family home, he or she must agree to the sale. If one of your children lives in the family home, you must agree to allow the sale. If agreement is not given, the trustee has to apply to the sheriff court for an order allowing your home to be sold. The court can either:

• grant the order (possibly with conditions);

• refuse to grant the order; or

• postpone granting an order for up to three years to allow you and your family to find somewhere else to live.

Can I have a trust deed even if I have no assets?

It is possible to have a trust deed even if you have no assets. You will need to be able to make regular payments from your monthly income. These payments will need to be high enough to persuade your creditors to agree to the terms of the trust deed.

What if my circumstances change during the trust deed?

Check the terms and conditions of your trust deed. The terms and conditions will usually tell you what may happen if your income goes up or down, or if you gain new assets.

If your income goes up, your trustee may ask you to pay more money into the arrangement. If your income goes down, the trustee may allow you to reduce or stop making your payments for a temporary period. If you gain new assets, your trustee may be able to sell them to raise money to pay your creditors.

Will my credit rating be affected?

If the trust deed becomes protected it will appear in the ‘Register of Insolvencies’, which is the public register. Credit reference agencies hold information about trust deeds and protected trust deeds for a period of six years. This can make it difficult or more expensive to get further credit.

This information only provides a brief overview, it should not be considered as full trust deed advice. If you believe that a trust deed is likely to be the best option to help you with your debts it would be vital to seek impartial advice from one of the debt advice charities such as the Citizens Advice Bureau, Stepchange or ourselves. Some local councils can also provide free, impartial debt advice.

Further information:

Our full trust deed fact sheet can be found HERE

Further trust deed information via the Account in Bankruptcy in Scotland