A protected Trust Deed is completely different from bankruptcy. Think of it as a particular type of personal insolvency which is designed to help individuals manage their debts. It’s a voluntary process and a licensed insolvency practitioner works with you to deal with the outstanding debts.
Individuals like you grant a Trust Deed when they are unable to repay the outstanding debts in a reasonable time period. See more about Trust Deeds and finding out your eligibility here.
How does it work?
If you’re unable to pay back your loan, and you decide to make use of a Trust Deed, you will find an insolvency practitioner and transfer all your possessions to the practitioner. An undertaking is then given by the trustee to the creditors that he/she will use these possessions to pay off the debts. In lieu of this, you have to agree to make payments for a period of 48 months. The payments are limited to what you can afford to pay.
A proposal is made by the trustee to the creditors where they are asked to agree to make your Trust Deed protected. If nobody objects, the Trust Deed will be protected. Your outstanding debts will be written off at the end of the four-year period in case you work with the trustee. The period is normally four years but can be extended to five years in case you have home ownership.
What’s the process of a Trust Deed becoming protected?
Not all Trust Deeds become protected. In case a creditor(s) who owns more than 1/3 of the outstanding debt doesn’t like the proposal, it will prevent the Trust Deed from becoming protected. For instance, if your outstanding debt is £12,000 and creditors who own more than £4000 of that debt don’t like the proposal, the proposal does not succeed.
In case more than 50% of the creditors object, the proposal fails. For instance, if 4 out of 7 creditors object, the Trust Deed does not get protection.
Creditors are given five weeks to raise objections and if they do not respond, the deed becomes protected.
Who is eligible for a Trust Deed?
Anyone with an outstanding debt of more than £5000 and living in Scotland is eligible to apply for a Trust Deed. They can’t be bankrupt to be eligible for the application. In case they have been bankrupt, they as well as their trustee should be completely discharged.
What happens when a Trust Deed becomes protected?
A Trust Deed becomes protected when it is registered by the Accountant in Bankruptcy which is a government agency. It happens when the five week notice period is complete. In practical terms, a protected Trust Deed achieves the following:
No bank or wage arrestments can be made for the debts that are part of the Trust Deed
48 monthly contributions need to be made by you as agreed when signing the Trust Deed
If you do everything required by you as part of the Trust Deed, a discharge will be given at the end of the Trust Deed.
What is the status of your car?
The future of your car depends on the terms agreed by you with the trustee as part of the Trust Deed. Your car isn’t considered an asset in case its value is below £3000 and you’re able to show that you need it. In case the value is about £3000, it gives some discretion to the trustee regarding how he/she chooses to deal with it.
It simply means that they have the option to sell your car to repay outstanding debts. In case the trustee decides to sell the car, it is likely that they must have discussed it with you in advance before granting the Trust Deed.
The trustee also has the option of valuing it at the end of the Trust Deed.
This option means that the car will go down in value during the Trust Deed and become less valuable. If the value of the car is below £3000 and you still need it, the trustee may choose to do nothing.
Is a necessity for the trustee to sell the car?
You might come to an arrangement with your trustee to make additional payments equivalent to the surplus value over £3000 once the Trust Deed ends. Another option could be getting a friend or a family member to buy out the interest in the car by making necessary installments during the Trust Deed.
What happens to cars bought with car finance?
If you have used a personal contract purchase agreement or a hire purchase agreement for buying a car and some payments are still outstanding, you are not the owner of the car. If that is the case, the trustee might ask you to return the car to the finance firm.
In this case, this debt will also form part of the Trust Deed. Another option is termination of the agreement by the finance firm as you agreed to sign a protected Trust Deed. They might ask you to give the car back.
If you can prove that there are reasonable requirements for you to keep the car and you are able to contribute to the PTD, you might be able to keep the car. Don’t think that it will stop your payments to the finance firm. You need to keep making the payments for your car.
How is your home treated in a protected Trust Deed?
It depends on home ownership. Your home isn’t affected in case you are renting. However, things might be different in case the Trust Deed also includes rent arrears. There is a possibility that you might be evicted by your landlord. It is important for you to discuss things in detail with your landlord and your trustee before agreeing to sign the Trust Deed as there is no protection offered by Trust Deed in this situation.
If you are a home owner, things are not as simple and you should discuss things in detail with the trustee.
What if you are a homeowner?
If you own a home but you have almost no equity or just a minimum amount of equity, nothing is likely to happen and the trustee will normally ask you to make a one-time payment of £500. In such cases, they normally discharge their interest in the home. This amount of £500 can be made either by a third party during the Trust Deed or you can choose to pay it on your own, at the end.
In case you own significant equity in the home, you might be asked by the trustee to buy it out at the end. In short, you will have to make additional payments.
Signing a Trust Deed shouldn’t always result in loss of your home but there is a real risk there. This is why you should always discuss home ownership status in detail with the trustee before agreeing to grant a Trust Deed.