What is a Protected Trust Deed?

What is a Protected Trust Deed

A Protected Trust Deed (PTD) is a type of personal insolvency and helps you manage your problem debts. It is different from bankruptcy

It allows you to deal with your debts  through a licensed insolvency practitioner (Trustee) and is a voluntary process. 

You grant a Trust Deed if you cannot pay your debts on time or within a reasonable period of time.

How does a Trust Deed work?

When you grant a Trust Deed you transfer your possessions to an Insolvency Practitioner (see here for a list of assets not transferred). 

The Trustee then gives your creditors an undertaking he will use your assets to pay off your debts.

In turn, you agree to pay what you can afford for 48 months.

The Trustee then makes a proposal to your creditors and asks they agree to your trust deed becoming protected.

If there are no objections, your Trust Deed will be protected. If you co-operate with your Trustee, your debts are written off at the end. This is normally after 4 years, but can be five years where you own your own home.

How does a Trust Deed become Protected?

Where Creditors with more than a third of your debt object to your proposal, your Trust Deed does not become protected.

If you owe £9,000, for example and creditors with more than £3,000 object, the proposal fails.

Also, if more than half of your creditors object, it also fails. So, if you have five creditors and three object, it doesn’t get protected.

Creditors get five weeks to respond. If they fail to respond, it becomes protected.

Who can apply for a Trust Deed?

A Trust deed can be applied for by anyone living in Scotland who has more than £5,000 of debt. They cannot already be bankrupt.

Where they previously have been bankrupt, both they and their Trustee need to have been discharged from it.

Effects of a Trust Deed once Registered

When the Accountant in Bankruptcy (AIB), a government agency, registers your trust deed at the end of the 5 week notice period, it has protected status.

The effects of this are:

  • It stops Earning arrestments;
  • It stops wage arrestments and bank arrestments for debts included in the trust deed;
  • You need to make the 48 monthly contributions you agreed to when you signed your trust deed;
  • If you co-operate and do everything agreed, you should receive a discharge at the end of your trust deed.

What happens to your car?

What happens to your car in a PTD depends on what you agreed with your Trustee before granting it.

If you own your car and the value is less than £3,000, it is not treated as an asset, if you can demonstrate you have a reasonable requirement for it.

Where it is worth more than £3,000, the Trustee can exercise some discretion as to how he deals with it.

This means he can sell it to pay your debts. If he does, he should have discussed this with you prior to you granting your trust deed.

Alternatively, he might agree to value it at the end of the trust deed.

This means it will probably fall in value and be worth less at the end. If it is worth less than £3,000, and you still have a requirement for it, the Trustee can abandon his interest in it. 

Does my Trustee have to sell my car?

Another approach may be to agree with you at the beginning that you will make additional payments to pay off any surplus value over £3,000 at the end of the trust deed. Alternatively, the trustee may agree a third party, like a family member or friend, can buy out his interest in the car by making instalments during the PTD.

Cars purchased using car finance

Where your have purchased a car on finance, such as by using hire-purchase or a Personal Contract Purchase agreement, and you still have not made the final payment, you don’t own the car.

In such a situation, the Trustee can require you to give the car back to the finance firm. Where he does the debt is included in the Trust Deed. Alternatively, the finance firm may terminate your agreement, because your granted a PTD and request you return the car.

If there is a reasonable requirement for the car and you can make a contribution to your PTD, you often will be allowed to keep it.

However, you will need to maintain your payments to the car finance firm.

Treatment of your home in a Protected Trust Deed

How your home is treated in a Protected Trust Deed depends on if you are an owner or not.

If you rent your home, then usually the Protected Trust Deed will not affect your home, unless you include rent arrears into it. If you include rent arrears, your landlord may try and evict you.

As a Protected Trust Deed does not necessarily protect you from this, you should discuss this with your Trustee and your landlord before you grant the Trust Deed.

If you own your home, this is more complicated and you  should discuss this with your Trustee.

What happens if you own your home?

If your property has no equity or a minimum amount of equity , the Trustee normally will be happy with a one off payment of £500. This will allow them to discharge their interest in your home. 

This can be paid during your Trust Deed by a third party (see above), or by yourself at the end.

Where there is significant equity, the Trustee may require you to buy it out at the end, by making additional payments.

Granting a Trust Deed does not necessarily mean you will lose your home, however, this is a risk.

Always ask your Trustee before you grant a Trust Deed how you home will be dealt with.

More on Protected Trust Deeds

How does a Protected Trust Deed affect your credit rating?

How does a Protected Trust Deed affect your credit rating? The unfortunate answer is badly. However, the truth is most people who grant trust deeds will already have a bad credit rating, as they will have missed contractual payments to their credit cards and personal loans and may even have defaulted on some of their credit agreements. This means they will have had arrears notices and default notices registered on their credit report. When someone does miss an instalment to a credit card or loan or have an arrears or default notice served on them, then this information is recorded by credit reference agencies, who record it on their credit records. This information is then retained on their credit reports for six years. The same is true for any formal debt solution, such as a Protected Trust Deed. This means even if you enter one for four or five years, it can be recorded on your credit report for another one or two years after you have had your discharge. It, therefore, can have a continuing effect, even once you are debt free.

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.

Affordability

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.

Interest Rates

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.

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Comments

  1. Dave

    Hello all,

    I completed my trust deed in January and received my form 5 a few months after, but my trustee hasn’t been discharged. What does this mean?

    I am thinking of selling my house and down-sizing so there would be equity. Would this still be required to go to my trust deed and also what would happen if I came into some inheritance money? It does say on the form that I don’t need to make any further contributions, but I’m a bit confused.

    Thank you

    1. Scottish Adviser Post author

      Hi Dave

      Form 5 is copied to you when your trustee sends it to the Accountant in Bankruptcy to apply for your discharge.

      So, congratulations!

      However, your discharge is not effective until it is registered on the Register of Personal Insolvencies. Once it is registered, you are discharged of your personal liability to repay any of your debts, unless you are excluded from receiving a discharge for that debt (criminal fines, fraudulent debts).

      However, as you note your trustee is still in office. This is normal, as although you are discharged, your debts still exist (your are just not liable for them) and your trustee must continue to wind up your estate, which may include dealing with your home.

      I, would, therefore, confirm with the trustee that his interest in your home has been discharged before you take any further action. Once he has discharged your home you should be okay to move on with your life, but speak with your trustee first.

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