A Protected Trust Deed (PTD) in Scotland is a type of personal insolvency. It is different from bankruptcy.
It allows you to deal with your debts with the help of a licensed insolvency practitioner in a manner that is legal, organised and voluntary. You may consider granting a Trust Deed if you cannot make your monthly repayments or are unable to repay your debts within a reasonable period of time.
When you grant a Trust Deed you voluntarily sign a legal document which transfers over all your possessions to an Insolvency Practitioner (subject to a wide number of exceptions – see here). The Insolvency Practitioner then becomes your Trustee. Your Trustee gives your creditors an undertaking that he will use your assets to help pay off your debts.
You also normally have to agree to pay what you can afford to your Trust Deed for 48 months.
In return, your creditors are asked to agree to the trust deed becoming protected.
If they do this, and you do everything you said you would, then in return your liability for your debts are discharged at the end of your trust deed, which is normally after 4 years, but can be five years or longer where you own your home.
How does a Trust Deed become a Protected Trust Deed?
A Trust Deed becomes a Protected Trust Deed (PTD) providing the number of creditors that object to it are not owed more than a third of your debts in total. So if you owe £9,000 then providing creditors who are owed more than £3,000 don’t object to it is, it is normally “protected”. In addition, it can still fail if creditors who make up half in number of the people you owe money to object. For example if you have five creditors and six object, it fails.
Where no creditor responds within five weeks, it becomes protected.
Who can apply for a Trust Deed?
Trust deeds can be granted by anyone who normally lives in Scotland, has more than £5,000 of debts and who have not already been sequestrated for their debts. Where they have been previously been made bankrupt, they need to have been discharged from that bankruptcy and cannot include debts that were included in that bankruptcy.
There Trustee in Bankruptcy also must be discharged before the debtor can grant a Trust Deed.
What are the effects of your Trust Deed being registered?
When the Accountant in Bankruptcy registers your trust deed at the end of the 5 week notification period, it becomes protected.
The effects of this are:
- Any earning arrestment is lifted;
- No further earning arrestment or bank arrestment can be executed for the debts you have included in your trust deed;
- You will need to make the 48 monthly contributions that you agreed to when you signed your trust deed;
- If you fully co-operate with your trustee and do everything they reasonably request of you, you should get a discharge at the end of your trust deed and this will mean you will no longer be liable to pay the debts that were included in it.
What happens to my car?
What happens to your car in a protected Trust Deed will depend on what you agreed with your Trustee prior to granting your trust deed. However, where you own the car and it is valued at less than £3,000, and your trustee agreed that you have a reasonable requirement for it, then normally it is ignored.
Where it is valued as being worth more than £3,000 the Trustee normally has discretion as to how he deals with it. They could take the view it should be sold and the proceeds used to repay your debts, but if this is the case, then they should have discussed this with you and agreed it prior to you granting your trust deed.
Alternatively, he may agree to value it at the end of the trust deed, which is likely to mean it may have depreciated in price and be worth less. If it is worth less than £3,000 at that point and you still have a reasonable requirement for it, he may discharge his interest in it. Another approach may be to agree with you at the beginning that you will make additional payments to pay off the excess value over £3,000, either during the trust deed via a third party contribution, or at the end by making additional instalments.
A third party contribution is where a friend or family member agrees to make some additional payments during the trust deed to satisfy the trustee’s interest in the property.
What happens if my car has been purchased on car finance?
Where your car has been purchased on car finance, such as through a hire-purchase or conditional sale agreement or a Personal Contract Purchase plan, and you have not made the final payment, you don’t own the car.
In such a situation, the Trustee may require you surrender the car back to the finance firm and include any debt you owe them into the Trust Deed. Alternatively, the finance firm may use the fact your granted a trust deed to terminate your agreement with them, request the return of the car and submit a claim to your Trustee to be treated as an ordinary creditor in your Protected Trust Deed.
Where you have a reasonable requirement for the car, however, and you can make a contribution to your Protected Trust Deed, the Trustee will often allow you to keep the car, providing you maintain your payments to the car finance firm. The car finance firm also have to agree, but providing they are getting paid, they usually won’ t object.
Treatment of your home in a Protected Trust Deed
How your home is treated in a Protected Trust Deed depends on whether you own it or not.
If you rent your home, then usually the Protected Trust Deed will not affect your home, unless you include rent arrears into your Trust Deed. If you include rent arrears into it, your landlord may choose to try and evict you. A Protected Trust Deed does not necessarily protect you from this.
This is something that should be discussed with your Trustee and your landlord before you grant the Trust Deed.
If you own your home, this is a more complicated and you should discuss this with your Trustee.
If you property has no equity or a minimum amount of equity , the Trustee may be happy with a off payment of £500 to discharge their interest in your home.
This can be paid during your Trust Deed by a third party contribution (see above), or at the end of your 48 monthly contributions.
Where the equity is more, the Trustee may look for you to pay off the equity at the end of your 48 months, by agreeing that you will make another 12 monthly contribution.
Granting a Trust Deed does not necessarily mean you will lose your home, however, there is a risk of it. You should always, therefore, ask your Trustee how you home will be dealt with before you grant a Trust Deed.
More on Protected Trust Deeds
How does a Protected Trust Deed affect your credit rating?
Will a Protected Trust Deed affect my ability to borrow?Granting a Protected Trust Deed will affect your ability to borrow once you have granted it, as lenders in deciding whether to lend, will consider your credit history. So, they will look at whether you have a history of missed payments, have had arrears or default notices served or whether you have entered a formal insolvency solution. This does not mean you will not be able to borrow, as whether a creditor will lend is a decision for the lender to take themselves. Several factors will influence this decision, not just your credit history, but also the lenders willingness to take risks. Some lenders, therefore, may be willing to lend, whilst others won’t.
How else will a Protected Trust Deed affect my ability to borrow?Even where a lender is prepared to lend to you, granting a Trust Deed may affect the cost of borrowing for you, so you may have to pay higher levels of interest. However, as time goes on, providing you pay your debts promptly and do not become over-indebted again, your credit rating should begin to improve, meaning your ability to borrow, but also borrow at competitive rates should improve over time.
Does granting a Protected Trust Deed affect my ability to re-mortgage?Granting a Protected Trust Deed will also affect your ability to re-mortgage, like it will affect your ability to borrow generally. You can, however, in theory re-mortgage whilst in a Protected Trust Deed, although it can be very difficult and your ability to do so can change over time, depending on the state of the financial markets and the willingness of lenders to lend. It will also be influenced by the level of equity you have in your property and your ability to afford any repayments. If you are re-mortgaging whilst in a Protected Trust Deed, or before your Trustee has discharged any interest he has in your property, you will require your Trustee’s permission to do so. Once you are discharged from your Protected Trust Deed and after your Trustee has discharged any interest he has in your property, you can re-mortgage without your Trustee’s permission, although you may still struggle, depending on the other factors mentioned above. For more information on your credit report and how to obtain a copy of it, visit our page on how to Check your Credit Report. Return to Protected Trust Deed homepage.
Can you get a mortgage after a Protected Trust Deed?
Getting a mortgage after a Protected Trust Deed is possible. It may not occur immediately, but it certainly is possible.
However, it will not be possible to obtain a re-mortgage on a home that is still in the Trust Deed, without the Trustee’s permission, until they have discharged their interest. A Trustee’s interest in a property can continue even after the debtor is discharged.
Protected Trust Deed and Fresh Starts
Many consumers leave Protected Trust Deeds and go on to become home owners or re-mortgage their existing homes. This makes sense, as one of the purposes of a Protected Trust Deed is to address problem debts and to allow consumers a fresh start.
Once someone’s leaves a Protected Trust Deed, however, their credit rating can still be affected, even if their ability to afford any mortgage repayments will have improved with their discharge.
However, in deciding whether to give someone a mortgage or whether to re-mortgage an existing borrower, a lender will consider a number of factors, meaning although someone may be able to get a mortgage after leaving a Protected Trust Deed, it may not occur immediately.
Credit Scores and History
When someone is applying for a mortgage, one of the factors a lender takes into consideration is the potential borrower’s credit score and history. This means obtaining a copy of the prospective borrower’s credit report from one of the three main credit reference agencies (see here for more information on credit reference agencies).
These reports contain information about a consumer, including personal information and information about their borrowing history, including any arrears or defaults they have had and whether they have previously been in a Protected Trust Deed. It will also contain information about existing borrowing and their recent payment history.
Information about Protected Trust Deeds and defaults should remain on someone’s credit reports for up to six years after they occur, so they are likely to remain on someone’s credit history even after they have been discharged from their Protected Trust Deed, which normally lasts for 4-5 years.
Another factor lenders will also consider is whether a prospective borrower will be able to afford the mortgage if it is granted and whether it will remain affordable should their circumstances deteriorate. This is known as stress testing the borrower’s affordability.
A consumer who has left a Protected Trust Deed should be helped by the fact the Protected Trust Deed will have dealt with their historic debt problems.
Loan to Value
Another factor lenders will consider before deciding to lend someone money is the loan to value ratio of the mortgage they want to take out. This means, as a percentage, what percentage of the house value do they want to borrow? So, where the home is worth £100,000 and someone wants to borrow £75,000, the loan to value ratio of the borrowing will be 75%.
This means when someone is buying a home, can the borrower can put down a deposit towards the purchase of the house? Or where the home is being re-mortgaged, what is the loan to value ratio of any existing borrowing.
This may mean the lender may only be prepared to lend a percentage of the value of the home, such as 65% or 75%, and will either expect the borrower to be able to put down a deposit or for there to be existing equity in the home, where it is a re-mortgage.
It is likely, however, even where a borrower, who was previously in a Protected Trust Deed can get a mortgage or re-mortgage, the terms of the loan will not be on the most competitive terms available reflecting their impaired credit history.
However, over time and as they demonstrate they can maintain regular payments to their existing mortgage, where they have one, or to their utility bills or other borrowings, this should improve.