Want to Apply for a Trust Deed? Know about its Advantages and Disadvantages

trust-deed-advantages-and-disadvantages

Every year, a lot of people find themselves unable to clear their debts, to various creditors. And, the number of such cases has only increased after the COVID-19 pandemic. A large number of people across the world who were in good financial status are finding their situation completely turned upside down. 

If you have a debt that you’re having trouble paying, it is understandably stressful to you. Unpaid debts have the potential to badly affect a person’s life. So, it is very important that you act quickly. 

Ignoring them would bring a lot of trouble including legal action in your life. There are certain options that offer you a way out of this situation. A trust deed is one such option that is open to the residents of Scotland. There are some things that you’d want to know while considering it. So, read to find out about Trust Deeds disadvantages.

How does a Trust Deed Work?

A trust deed works almost the same way as an Individual Voluntary Arrangement (IVA) which is available in England and Wales. It is a formal agreement that you would make with your creditors. Thus, the terms are protected by law. 

You would be required to pay monthly instalments based on what you can afford. This would allow you to clear most, if not all of your unpaid debts. This arrangement generally lasts for 4 years at the least. All dealings with your creditors during this period is managed by an Insolvency Practitioner (IP) who is known as a ‘trustee’ in this arrangement. You would have to share all the financial details that your trustee asks from you. Based on your earnings, you would have to strictly follow a fixed budget. 

Generally, the spending allowed would be such that you’ll have no trouble paying for your basic necessities. Though you wouldn’t be allowed to spend on any luxurious items. Apart from the basic rules, there are no fixed terms. They would be decided according to your case details. 

The arrangement would come to effect only after most of your creditors agree to your terms. At the end of this arrangement, all your remaining debts, except certain types, would be written off. All you have to do is stick to the terms and keep paying the monthly instalments.

Who can get a Trust Deed?

Even though it is a viable option as a way to avoid bankruptcy, not every debtor can avail a Trust Deed. There are certain conditions you have to fulfil. First, you must owe an unsecured debt to multiple creditors. Second, the total amount you owe must be £5,000 or above. 

Moreover, going for a Trust deed won’t be worth it if you owe less than the specified amount. That’s because this arrangement is generally costly to get, as the fee of a trustee is quite high. But, you don’t worry, if you don’t find yourself to be eligible to get a Trust Deed. There are other options as we shall see and also get to know about Trust Deeds disadvantages.

Should you go for a Trust Deed?

If you fulfil the conditions required to avail of a Trust Deed, but still you shouldn’t go for it without careful consideration. Now, whether a debtor should get into this arrangement varies with each case. If it’s suitable for someone else, that doesn’t mean it would be suitable for you as well. To be able to make a decision, you must consider the advantages and disadvantages.

What are the advantages you get in a Trust Deed?

If you think about it, there are dozens of ways a Trust Deed can come to your advantage. You probably won’t get these many advantages in any other kind of arrangement. If you do it right, it’s only a matter of time before you become debt-free.

  • You’ll be free from the hassle of debt collectors

The biggest cause of stress in your situation would be repeated calls from creditors. Even though they have no right to harass you, they might threaten you with a legal proceeding, or try all kinds of tactics to make you pay. 

In a Trust Deed, all that hassles get removed from your life. It’s your trustee who deals with your creditors in this arrangement. If they contact you, that would be a breach of the arrangement.

  • You would be protected from legal action

Besides, without informing you, your creditors also can’t start any legal proceedings during the agreement period. As a result, they won’t be able to take control of your properties and sell them. That takes away another big chunk of stress from your life.

  • The debt amount would be frozen

All the interest rates would be frozen from that every point after you get into a Trust Deed. That would clearly make it much easier for you to clear all the debt you owe.

  • The monthly instalments would be affordable

This is one of the main reasons why you would want to go for this arrangement. As opposed to paying the full amount, you’ll have to clear the debt in instalments. Moreover, the amount you pay would strictly be based on whether you can afford it. So, you wouldn’t face any difficulties in paying for your daily necessities.

What are the Disadvantages of a Trust Deed?

Even though you get many advantages in a Trust Deed, it comes with its own share of Trust Deeds disadvantages. So, you must not ignore them while considering whether you must go for it.

  • You must get the creditors to agree to the terms

This is a disadvantage that you might face before the arrangement is in effect. It is not easy to get the creditors to agree to your terms. Though it’s your trustee who would negotiate with them. In case, they demand a monthly instalment that you’re not sure you can afford, it is better not to settle for it. After all, the reason behind getting a Trust Deed is to be able to pay your debts with ease.

  • It would affect your credit score

Getting a Trust Deed would have a negative impact on your credit rating. Though it won’t be as much as the damage that would be caused by bankruptcy. Moreover, it would get your name added to the Insolvency Register. This would make it difficult for you to get a loan or mortgage for a while. It would show on your credit file for 6 years, after starting the arrangement. Even after that time, you would have to let a lender know about your insolvency when asked.

  • It can be quite expensive

The fees charged by an IP is generally quite high, though they generally take it in instalments. Still, you might have trouble keeping up with the regular payments. Now, if the trustee is convinced that you can’t pay him further, he/she can terminate the arrangement.

What other Options can you Choose from?

Now you know about the Trust Deeds disadvantages and advantages. As viable as it is as an option, a Trust Deed won’t necessarily suit your situation the most. Again, you have other options as well. You can choose a debt arrangement scheme (DAS) that works quite similarly to a Trust Deed. 

As opposed to a formal agreement, you can also get into an informal payment agreement with your creditors. A debt consolidation, which is basically borrowing money to pay your debts, might also be suitable for you, based on your situation. If any other option doesn’t work, there’s the option of sequestration, also known as bankruptcy.