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Frequently asked questions about trust deeds and sequestration (bankruptcy)

 What is the difference between a trust deed and sequestration (bankruptcy)?

A trust deed is a private contract between you, your trustee and your creditors. It has to be advertised and how it works is regulated, but it is less formal and does not involve the Court.

In a sequestration (bankruptcy), your trustee is an officer of the Court. You commit a crime if you borrow money without disclosing your status, you cannot be a company director, and you are disqualified from elected public office.

 How much do I need to owe?

There is a minimum of £5,000 for a trust deed. For a sequestration (bankruptcy) you should usually owe at least £3,000.

 Can I choose my own trustee?

Yes, but in a trust deed the creditors can object to the trust deed without giving any reason. And in a sequestration (bankruptcy) there has to be a creditors meeting where another Insolvency Practitioner can be appointed to take over from the one you choose. In a sequestration (bankruptcy) where there are no assets, a civil servant called the Accountant in Bankruptcy usually acts.

 Does a protected trust deed or bankruptcy really get rid of all my debt?

If your creditors accept it, yes a Protected Trust Deed covers almost all debts. There are very limited exceptions such as social security overpayments and student loans. And creditors who object to a trust deed at the outset may still be able to take legal action and even make you bankrupt.

 I don’t have details of all my creditors. Can I still sign a trust deed, or make myself bankrupt?

Yes, but this may cause delays. The Court may reject your application. It may be best if you contact your creditors for their addresses and references, or even order a copy of your credit report to see if this helps identify to whom you owe money.

 There have been objections to my trust deed and it is not protected. What can I do?

The trust deed continues to run, even if it does not become protected. But creditors who objected can ignore it. So generally you or you trustee will immediately petition for sequestration (bankruptcy). You want to get out of financial stress quickly and immediate action avoids the possibility of sequestration (bankruptcy) coming after the end of the four-year trust deed.

 Who pays for the trust deed?

The trust deed has to be paid for out of the assets transferred to the trustee and/or the contributions you pay from your earnings. So you need to have valuable assets or be in a steady job before you can sign a trust deed.

 Will my partner have to sign a trust deed or be sequestrated (go bankrupt) too?

There is not a simple answer here. Your partner is only responsible for his or her own debts. They do not have to pay your debts. But very often a family’s finances are complicated. There may be joint accounts, or one partner may rely on the other’s income to pay their bills.

Very often, this is a good time for both parties to consider their finances. It is often the case that both partners should go for insolvency at the same time, but each needs separate advice.

The credit reference agencies (Experian, Equifax and Callcredit) know that family finances are interconnected; so one partner may have problems getting credit because the other is in financial difficulty. If this is not the case, speak to them about “disassociating” the credit records.

Finally, we would advise against trying to hide your financial problems from your partner. Find the right time to tell them and seek advice to sort out the joint position.

 Is my house at risk?

Yes. All your property is transferred to the trustee, and that includes your house if you own it. Unless there is negative equity (both at the beginning and end of the insolvency) the trustee has to realise it for your creditors. If there is a joint owner, the trustee will try to sell your interest to them or get them to agree to a sale. But eventually he will go to Court to force a sale.

The trust deed is a private contract, so you could leave the house out of a trust deed but (1) Scottish Debt Advice (CS Corporate Solutions) will not do such a trust deed and (2) your creditors would be expected to object to it anyway – leaving you facing sequestration (bankruptcy). However the value of the equity should be agreed at the outset. If the amount is small and with your trustee's agreement this can sometimes be dealt with by continuing payments after 48 contributions have been made.

Leases can also be affected. You may be in breach of your lease by entering formal insolvency proceedings. Or if the rent or mortgage you pay is unreasonably high for your circumstances, the trustee can sometimes object to the level of expenditure.

 Can I keep my car?

It depends. If the car has a high value you should expect the trustee to sell it. If the car is modest, then you may be allowed to keep it if you need it for work and you are paying a contribution from your earnings.

 Will I lose my TV, computer, jewellery etc.?

Your valuables have to be sold if it will raise money for your creditors. There is a list of “items exempt from poinding” – such as beds, chairs, tables, tools of trade that you may reasonably require – which the trustee will not touch. But the trustee has to balance the costs of taking and selling the goods with the costs of doing so and often no-one will come to your house to take them.

 Can I be a director, or hold public office?

If you are sequestrated, you cannot be a director or hold public office. In a trust deed you need to check (1) the terms of the trust deed (2) what the specific company’s Memorandum and Articles of Association set out and (3) what the rules of the public body itself actually say.

 How are the amounts I have to contribute decided?

Whether you are sequestrated or sign a trust deed, you have to pay what you can afford. There is a Common Financial Statement ("CFS") to try and standardise the calculation, but these can still vary to an extent. This also applies to the Debt Arrangement Scheme. Your trustee will go through the calculation with you. If you want to see the level of detail required go to our links page and look at the Personal Budget Planner document which asks similar questions.

Access to the CFS is by licence and Insolvency Practitioners and Money Advisors have access to it.  If your expenses exceed certain "trigger figures" you will have to explain why, and your creditors will object to a PTD if what you spend is extravagant.

 What happens if I can’t pay the agreed contributions?

Your trust deed may fail if you do not pay the agreed amounts from your earnings and cannot make up any amounts missed within a reasonable period. There is only limited provision for a single payment break of up to six months.  Of course your circumstances can change – for example you can lose your job – but the creditors would expect you to pay the amounts you agreed to pay at the start of the trust deed. If the trust deed fails it may result in sequestration (bankruptcy) and this may mean it takes longer for you to be clear of your debt.

In a sequestration (bankruptcy) the Court can settle any dispute over how much you can afford to pay. If you do not pay the amounts the Court orders, you may be committing a crime and your discharge from sequestration (bankruptcy) may well be delayed.

 When will I be discharged from my protected trust deed?

Your trust deed says how long it will last. This is normally four years, but can be whatever you, your trustee and your creditors agree. However your discharge is not automatic. The creditors need to discharge your trustee before you are discharged, so a trust deed may remain open for longer than four years. When you get your discharge, that means (with limited exceptions) your creditors can no longer demand payment of debts due to them from before the signing of the trust deed.

 When will I be discharged from my sequestration (bankruptcy)?

You are normally discharged from your bankruptcy after 12 months (6 months in Minimal Asset Process cases), and at that time the restrictions on you incurring credit, and being a company director, and standing for electred public office will cease to apply. If someone objects to this 12 month discharge, a Sheriff will consider it and you can be involved in the process. Whilst you are discharged usually after a year, you may have to pay contributions from your earnings for 4 years.

 Do I get my property back when I am discharged?

No. Your assets are transferred to your trustee at the start. He has to sell them for the benefit of your creditors. After the expenses and debts (including interest) have been paid in full then any surplus is returned to you.

 My insolvency is finished but I am still having problems getting credit. What can I do?

The credit reference agencies (Callcredit, Equifax, and Experian) tend to keep details of the insolvency on their books for six years. You can obtain confirmation of your discharge and send this to the credit reference agency. If your creditors have been paid in full, you should tell them so. But if what they have recorded is factually correct, there may be nothing you can do to prevent this.

If you know that you will want to borrow money whilst your insolvency is still on the credit reference agencies books, you may want to open an account to show the lender that you are in a position to make regular repayments.