What is a trust deed?
THE BANKRUPTCY AND DEBT ADVICE (SCOTLAND) ACT 2014 CAME INTO FORCE ON 1 APRIL 2015 AND THIS PAGE HAS NOT BEEN UPDATED. SEE OUR NEWS PAGES FOR AN OUTLINE OF THE NEW PROVISIONS.
A person can voluntarily make over their assets to a trustee (an insolvency practitioner) who then manages and/or sells the assets to allow creditors to be repaid.
The creditors and the Accountant in Bankruptcy (AiB) have to approve a trust deed. If more than half in number or one third in value object of the creditors, they can ignore the trust deed and still ask the Court to make you bankrupt. As a result, there is little point to a trust deed unless it does become protected. The AiB might also be expected to refuse to register a Protected Trust Deed if the creditors could be paid in full using the Debt Arrangement Scheme.
You have to owe £1,500 before you can petition for bankruptcy, but there is a £5,000 minimum amount for a trust deed. The trustees fees have to be paid for out of the individual’s assets, or from earnings during the four year period. An Insolvency Practitioner may only agree to act if there are assets from which he can be paid, or if you are in steady work and can afford to pay a contribution from your earnings.
The trust deed is a contract between the debtor and the trustee. It can transfer some or all of the assets, but if it transfers only some of your assets it cannot become protected - the creditors will object.
As with a bankruptcy, the debtor has to cooperate with the trustee for the four years and pay a contribution from earnings. Generally you are not prevented from being a director of a limited company. Some professional bodies will not allow continued membership of debtors who have signed trust deeds. Some public bodies will also prevent anyone who has signed a trust deed from holding office.
Effect of a protected trust deed
If a trust deed becomes protected the creditors are bound by it. Only the trustee can generally take legal action against the debtor.
The trustee no longer has to advertise the trust deed in the Edinburgh Gazette, but he has to send a notice to all known creditors. It is also recorded in the Register of Insolvencies kept by the Accountant in Bankruptcy so that its existence and status are public knowledge.
The trustee under a protected trust deed can petition for a debtor’s bankruptcy at any time. Creditors can still ask the Court for bankruptcy if they can show their return would be better in a bankruptcy.
The trustee under a trust deed can sell property, including the debtor’s house. The trustee should lodge a notice in the Register of Inhibitions to stop the debtor selling heritage without his consent.
The trustee has to realise the assets and collect contributions. If the realisations are enough to pay the expenses and the creditors have been paid in full (plus interest) then the surplus would be refunded to the debtor.
Trust deed or sequestration?
There are many matters that need to be taken into account - for example certain occupations would expect to lose their job if made bankrupt. But for many people the deciding factor is likely to be how much they have to pay, and how quickly they get discharged. At the time of writing (November 2013) the PTD contribution period is just being raised to 48 months, but the sequestration period remains 36 months (until maybe spring 2015). For a time at least - for most people - the balance will swing to sequestrations and away from Protected Trust Deeds (PTDs).
In addition, the way the trustee is paid is being changed to a fixed fee plus a percentage of realisations (approved the outset by creditors) rather than time spent at hourly rates (approved each period by the creditors. Whilst this might reduce costs, it will make the work less attractive to trustees - so you might find it difficult to find one prepared to act.