FAQs - Questions and Answers

1 What is a Protected Trust Deed?

A Scottish Protected Trust Deed is a legally binding and ‘voluntary’ agreement that provides an alternative to bankruptcy for people living in Scotland, and it forms part of the Bankruptcy Scotland Act 1985 which was amended in April 2008.

A Protected Trust Deed would typically be arranged between a person with substantial unsecured debts who can no longer afford to maintain their normal debt repayments, and the people they owe the money to, otherwise known as their creditors. The Protected Trust Deed forms a new arrangement, where a new affordable repayment is agreed and paid over a fixed repayment term – which is normally 3 years – after which time any unpaid debt is legally written-off.

During the Protected Trust Deed all interest and charges are frozen, and creditors forfeit the ability to take legal action against the Protected Trust Deed applicant.

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2 How does a Trust Deed become a Protected Trust Deed?

Protection needs to be applied for by the Trustee, once he is sure all the necessary conditions have been met by the application.

There is a procedure that must be adhered to, which gives creditors a fair warning of the proposed Trust Deed, under which creditors are invited to agree to its terms. After all, a Protected Trust Deed is a voluntary arrangement for both sides, so for a Trust Deed to become ‘Protected’ it is necessary to get creditors to agree.

Whether the Trust Deed becomes Protected or not will be decided by whether more than 33% of the creditors object to the Trust Deed’s terms.

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3 Who can apply for a Protected Trust Deed?

A Protected Trust Deed is only available to people who live in Scotland. Technically, there is no minimum or maximum debt level required to qualify, however, it is generally accepted that there should be an unsecured debt of at least £10,000 owed to at least 2 different creditors before a Protected Trust Deed becomes a viable option. The applicant can be employed or self employed, but being a company director is not allowed and therefore a company director would need to resign his directorship if he wanted to enter into a Protected Trust Deed.

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4 How much will my Protected Trust Deed payments be?

Payments into a Protected Trust Deed are calculated by assessing the personal circumstances of the individual in each case. The primary objective is to make sure the new payments are affordable to the applicant. However, there is a minimum payment level, determined by the size of the overall outstanding debt, that also needs to be considered. This minimum repayment must be reached in order for the Protected Trust Deed to be acceptable to creditors.

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5 Who pays the fees for my Protected Trust Deed?

It does cost money to administer a Protected Trust Deed. The Insolvency Practitioner will charge fees for administering the Protected Trust Deed and for acting as the ‘Trustee’ and he will deduct the fees from the Trust Deed fund. This is the fund the Trust Deed applicant makes payments into each month. The Insolvency Practitioner does this with the consent of the creditors. The fees for the Trust Deed are paid for by the Trust Deed applicant, but are taken out of his monthly contributions as part of the arrangement, therefore not adding further to the amount the Trust Deed applicant has to repay overall.

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6 How long does it take to set up a Protected Trust Deed?

The initial application process can be extremely quick. Drafting the Trust Deed itself can take quite literally a few hours, but in the majority of cases, due to the gathering of essential information by the Insolvency Practitioner, it is more likely a Trust Deed will be ready for signing within a week after the first contact call for help. There is then a further period of 5 weeks to wait before the Trust Deed reaches its ‘Protected’ status. It is after protection is granted that the agreement becomes legally binding, offering the applicant legal protection from his creditors.

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7 Can I do a Protected Trust Deed if I am self-employed?

Yes, a Protected Trust Deed is available if you are employed or self employed. You will still need to fit the other qualifying criteria, but so long as your personal circumstances qualify you for a Protected Trust Deed you will be able to apply. However, it is not possible to enter a Protected Trust Deed whilst being a director of a Limited company.

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8 Will I need to set up a new bank account for my Protected Trust Deed?

Not necessarily. If you do not have an overdraft with your regular bank and you do not have a credit card or a loan owing to that bank, then it’s not essential to open a new account. However, if you do have an overdraft, a loan or a credit card with your regular bank then it’s important you open a basic bank account with another ‘neutral’ bank i.e. a bank you have no debts with.

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9 How will my creditors react to my Protected Trust Deed?

Your creditors will have the opportunity to either accept or reject your Trust Deed as part of the process of gaining Protection. Each creditor has the right to vote on whether or not they agree to the Trust Deed. The strength of each creditor’s vote is proportional to the amount of debt he is owed as a percentage of the overall debt. You must gain the acceptance of at least half in number and a minimum of 66% in favour of the Trust Deed for it to become ‘Protected’. Once ‘Protected’ every creditors is bound by its terms and even those who voted against it lose the right to take legal action against the applicant.

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10 What happens if I have payment problems during my Protected Trust Deed?

It’s possible to adjust the payments into a Protected Trust Deed should circumstances of the applicant change. This adjustment can be both an increase in the repayment, should the applicant’s circumstances improve, or a reduction of the repayment, should the applicant’s circumstances deteriorate. The Trustee has the power to make adjustments to the repayments, or suspend them completely, without having to ask the permission of the creditors, but any reductions to, or suspension of, the repayments will be subject to regular reviews.

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11 Will a Protected Trust Deed affect my Credit Rating?

A Protected Trust Deed is a type of formal insolvency and the applicant should expect it to have an impact on their credit rating. Typically, a Protected Trust Deed will be recorded on the credit rating for 6 years from when the Trust Deed was signed. When the Trust Deed becomes protected it will be advertised in the Edinburgh Gazette and also logged on the ‘Register of Insolvencies’, which forms part of the public records. Credit reference agencies have access to these publications and also have direct links with creditors, so there are several different avenues through which they may become aware.

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12 How will a Protected Trust Deed affect the Equity in my Home?

We are sure any home owner who is suffering with a serious debt problem, who is considering whether a Protected Trust Deed is the answer to their prayers, will agree with us that establishing how a Protected Trust Deed will affect the equity in their home is possibly the most important question on this page.

So, due to the importance of this question, we have paid special attention to the answer.

We have put together a special free Protected Trust Deed guide with the sole intention of explaining as clearly as possible exactly how a Protected Trust Deed affects the equity in your home, and it’s ready for you to download now.

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13 What happens to my assets if I enter into a Protected Trust Deed?

As with bankruptcy, a detailed assessment of the applicants assets will be taken. The Trustee will take control over these assets as part of the Protected Trust Deed process and he’ll establish how best to deal with them for the maximum benefit of the creditors. If you acquire new assets during your Protected Trust Deed the Trustee will still have the right to include these assets as part of your Trust Deed arrangement and therefore it will be at his sole discretion what action is needed to best benefit the creditors.

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14 Protected Trust Deed or Bankruptcy?

The answer to this question should always be determined by the personal circumstances in each individual case, and the personal preferences of the person concerned.

A Protected Trust Deed offers people living in Scotland who have a serious debt problem an alternative to Sequestration, which is another term for Bankruptcy. There are many, many reasons why a person may want to avoid being made bankrupt, indeed, it is often argued that Bankruptcy should be considered a ‘last resort‘ debt solution.

While there are many similarities to be drawn between the two debt solutions, most people would accept a Protected Trust Deed would, in general, have a lower impact on the overall lifestyle of the applicant in the majority of cases. There are some differences which are obvious, such as possible bankruptcy restrictions the ‘Accountant in Bankruptcy’ might impose when it is considered the debt has been accrued through fraud, gambling or just irresponsible spending. A bankruptcy restriction can last anywhere between 2 and 15 years. Yet there are other differences which are not so obvious, for example, based in the personal opinions surrounding the ‘stigma’ that some people feel bankruptcy carries.

Whilst it is true to say that both debt solutions are administered by a Trustee in a similar way, Bankruptcy tends to feel more intrusive than a Protected Trust Deed and by nature of the fact that the Protected Trust Deed is a mutually agreed voluntary arrangement, it ought to offer more financial control to the applicant than he might expect in a Bankruptcy.

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15 Protected Trust Deed or Debt Management Plan?

The answer to this question should be determined by the personal circumstances of each case, the personal preferences of the applicant and what assets they have. However, in the majority of cases, a Protected Trust Deed offers significant advantages to the applicant when compared to a Debt Management Plan. This is due to two major factors. Firstly, the fixed term of the Protected Trust Deed being set at 36 month, with unpaid debt being written-off after the Protected Trust Deed completes. In a Debt Management Plan the repayments will continue until the debt is fully repaid, however long that takes. And secondly the legal protection that a Protected Trust Deed gives when compared to the Debt Management Plan, which as an informal arrangement offers no legal protection at all.

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16 Why is a Protected Trust Deed a legally binding agreement?

The Protected Trust Deed forms part of the Bankruptcy Scotland Act 1985 amended April 2008. A Trust Deed is legally binding on all creditors once it has become Protected and, therefore, all creditors are bound by the terms of the Protected Trust Deed even if they voted against it.

Once the Trust Deed has become Protected all creditors must:

• Freeze interest charges.
• Stop late payment charges.
• Cease writing to the applicant.
• Cease telephoning the applicant.
• Halt legal action against the applicant.

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17 What happens after my Protected Trust Deed finishes?

Initially, the applicant will be discharged from the Trust Deed, normally at 36 months, meaning they will be discharged from having to make further payments into the Trust Deed.

Next, the Trustee will seek to bring the Trust Deed to a close by making sure that all aspects of the agreement have been dealt with accordingly and the terms of the Trust Deed have been fully adhered to. Then, over the next few months, the Trustee will seek to be discharged as Trustee of the Trust Deed by the Accountant in Bankruptcy. Once this has happened the Trust Deed is formally over.

After the Protected Trust Deed has been completed and the Trustee has been discharged, any outstanding unsecured debts are written-off, leaving the applicant completely debt free.

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18 What debts can I include in my Trust Deed?

A Protected Trust Deed has the capacity to deal with ‘unsecured’ debts.

Unsecured debts are best described as debts provided without any pre-conditional requirement for the borrower to offer an asset as ‘security’ to the lender.

In the event of the borrower failing to maintain repayments, the lender does not have any ‘secured’ asset to sell to recover his money. In this situation the creditor’s only option would be to take diligence against the borrower and seek repayment through the courts.

A Protected Trust Deed offers the chance to put a ‘best offer’ to creditors in order to seek agreement with them before they take diligence to enforce recovery. This is why a Protected Trust Deed can only deal with ‘unsecured’ debts.

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19 What debts can’t I include in my Trust Deed?

A Scottish Protected Trust Deed cannot include ‘secured’ debts.

Secured debts, by definition, are debts which the are only provided by a lender when the borrower agrees to offer an asset as ‘security’.

This means that, should the borrower default on the agreement, the lender can call in his security and sell the asset to recover the debt.

The creditor, therefore, has the assurance that he will be able to recover part, or all, of the outstanding balance from the borrower by seizing the asset and making a forced sale, under the terms of the original agreement.

Because of this, secured loans cannot be included in a Protected Trust Deed.

There are also a few other types of debt that cannot be included in a Scottish Protected Trust Deed.

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20 What happens if my Trust Deed fails to become Protected?

Although rare, there is always a possibility that your creditors will reject your proposed Trust Deed. This means they refuse to allow your Trust Deed to become Protected and, therefore, refuse to be legally bound by the Trust Deed’s proposal.

When a Trust Deed fails to become Protected, it loses its viability as a holistic debt solution, leaving the applicant with some very serious questions as to what to do next. In most circumstances the natural option would be to declare bankruptcy and by doing so, effectively take the option of rejection away from your creditors. Most people who are faced with this situation instruct the Trustee to begin the bankruptcy proceedings on their behalf.

Your creditors will also have the right to take bankruptcy proceedings against you, especially if they feel that they stand to gain a better deal than they would have got through the Trust Deed. But this is unlikely as the Trustee will deal with your assets and income in bankruptcy in the same way as he would have done in the Trust Deed.

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