Trust deed or sequestration?
Both can end with debts written off, but they work in different ways and carry different risks. Here is how they compare, so you know what to ask an adviser.
A trust deed and sequestration are both formal Scottish debt solutions that can end with the remaining debts included in them being written off, if you meet the conditions. The difference is how they work: a trust deed is a voluntary arrangement with a licensed insolvency practitioner that your creditors can object to, while sequestration is bankruptcy under Scots law, decided by the Accountant in Bankruptcy (AiB). Which, if either, might suit you depends on your income, your assets, your home and your job.
This page compares them side by side. It does not recommend either one. An adviser needs to look at your full situation, and there are other options too.
What is the difference between them?
A trust deed is a legal agreement in which you pass your estate (your assets and some of your income) to a trustee, who must be a licensed insolvency practitioner. You pay a monthly contribution, usually for 48 months. If your creditors do not object in large enough numbers, the trust deed becomes protected, which means it binds all the creditors included in it.
Sequestration is the Scottish word for bankruptcy. You apply to AiB, Scotland’s insolvency service, through a money adviser. A trustee takes control of your estate, and you may pay a contribution from your income. There is also a simplified route into sequestration, the Minimal Asset Process, for people with low income and few assets.
Both use the Common Financial Tool, the standard budget used in Scotland to work out what you can afford to pay after essential living costs.
How do they compare side by side?
| Protected trust deed | Sequestration | |
|---|---|---|
| What it is | A voluntary arrangement that becomes protected if creditors do not object | Bankruptcy under Scots law |
| How you start | Through a licensed insolvency practitioner, who becomes your trustee | Application to AiB, which you can only make after getting money advice |
| Minimum debt | £5,000 including interest | £3,000 for your own application |
| Connection to Scotland | Habitually resident, or an established place of business, in Scotland at any time in the year before | The same one-year test |
| Can creditors block it? | Yes, it cannot become protected if a majority in number or at least one third in value object within 5 weeks | AiB decides your application |
| Costs | Trustee’s fixed fee, a percentage fee and outlays, plus AiB fees, taken from your payments and assets | Application fee of £150, waived for many people. Ask an adviser about any other costs |
| Payments | A contribution set with the Common Financial Tool, usually for 48 months | A contribution set with the Common Financial Tool, which can be zero, for 48 months from your first payment |
| When debts are written off | On discharge at the end, if you have kept to the terms. Not automatic | On discharge, usually after 12 months, though contributions can continue |
| Your home | Equity may need to be released, often through extra payments | The trustee can deal with it for 3 years, then it normally reverts to you |
| Restrictions | No ban on the offices bankruptcy restricts, but the deed may limit being a director | Cannot be a company director, MP, councillor or Justice of the Peace |
| Public register | Register of Insolvencies, removed 12 months after it ends | Register of Insolvencies for the whole bankruptcy, normally removed 12 months after the trustee is discharged |
| Credit rating | Affected for 6 years from the date it begins | Can stay on your credit file for at least 6 years |
| If it goes wrong | Creditors can pursue you again and the trustee can petition for your sequestration | You cannot make another application within 5 years |
What happens to your home?
This is often the biggest difference for homeowners.
In a trust deed, the trustee has a right to the value in your home (the equity). Instead of selling, the trustee may agree to leave the home with you in return for a lump sum, extra monthly payments after the main payment period, and your co-operation. The equity figure comes from a surveyor’s valuation at the date you grant the trust deed. Where there is little or no equity, the home can be left out of the trust deed if the mortgage lender agrees not to claim. For more detail, see your home and a trust deed.
In sequestration, the family home stays part of your estate for 3 years. The trustee needs your consent, or the authority of a sheriff (a judge in the local sheriff court), to sell it, and a sheriff can postpone a sale for up to 3 years. If the trustee takes no action within 3 years, the home normally reverts to you.
Homeowners, take care. In either solution, the value in your home can be used to pay your creditors, and a trust deed can run longer than 48 months if equity is paid through extra monthly payments. Ask for the figures in writing before you decide.
How do payments and costs compare?
In both, your contribution comes from your surplus income as worked out with the Common Financial Tool. In a trust deed, no contribution can be taken from Universal Credit or other social security benefits, and your contribution is reviewed at least once a year. In sequestration, the contribution can be set at zero if you have nothing left over.
Trust deed costs are set in three ways only: a fixed fee, a percentage of the money and assets collected, and outlays (costs paid out to others). These are disclosed to you and your creditors at the start. There is no legal cap, but creditors and AiB can challenge fees. AiB also charges statutory fees, including £120 a year for supervision. All of these come out of your payments and assets before creditors are paid. See what a trust deed costs.
Sequestration has an application fee of £150. It is waived if you get Universal Credit or certain other benefits, if you had help from the Scottish Welfare Fund in the last 3 months, or if the Common Financial Tool shows you have no surplus income.
How do restrictions and jobs compare?
Sequestration brings formal restrictions while it lasts. You cannot be a company director, an MP, a councillor or a Justice of the Peace, and you must tell a lender you are bankrupt before borrowing £2,000 or more. mygov.scot says it may also affect some jobs, such as accountant or solicitor.
A trust deed does not carry those statutory bans. However, some employers do not allow staff to sign a trust deed (financial institutions are the most common), and your trust deed may restrict you from acting as a company director, so check with your trustee. See whether a trust deed affects your job.
Not sure which, if either, fits your situation? Tell us a little about your situation and a licensed insolvency practitioner firm will call you to go through every option, including ones that are not a trust deed.
May not be suitable in all circumstances. Fees apply. Your credit rating may be affected. Free, impartial advice is available from MoneyHelper and other services.
What if a trust deed does not work out?
A trust deed depends on you keeping up your payments and co-operating with the trustee for the whole period. If it fails, creditors can start asking for payment again and may add fees, and the trustee can petition for your sequestration. Discharge at the end is not automatic either: the trustee has to confirm you met your obligations, and AiB can refuse it. If a trust deed never becomes protected because creditors object, that can itself allow you to apply for sequestration.
Not all debts can go into either solution. Fines, debts from fraud and student loans are not written off, and secured debts such as a mortgage are treated differently.
Are there other options?
Yes. Before choosing between these two, it is worth knowing about:
- The Debt Arrangement Scheme (DAS). You repay your debts in full, with interest, fees and charges frozen and written off when you finish. No fee to set up. See trust deed or DAS.
- The Minimal Asset Process (MAP). A simpler form of sequestration for people with low income and few assets, with no application fee.
- A debt management plan. An informal repayment plan with no legal protection.
- A moratorium. Six months of protection from diligence (creditor enforcement such as arrestments) while you get advice.
Free, impartial advice is available from free debt advice services. A money adviser can look at every option with you, and you need one to apply for sequestration in any case.
Official sources
Common questions
Is a trust deed better than bankruptcy in Scotland?
Neither is better for everyone. A trust deed does not carry the legal bans that come with bankruptcy, such as on being an MP or councillor, but it has trustee fees and creditors can object to it. Sequestration can cost less to start, but it brings wider restrictions. Both affect your credit rating. An adviser needs to look at your income, assets, home and job to say whether either could suit you.
Can I go bankrupt if my trust deed fails?
Yes. If a trust deed fails to become protected, that in itself can allow you to apply for sequestration. If a protected trust deed fails later, your trustee can petition for your sequestration, and creditors can start chasing you for payment again. This is one of the main risks of a trust deed, so ask what would happen in your case before you sign.
Do I have to pay anything in sequestration?
Possibly. If the Common Financial Tool shows you have money left over after essential living costs, you may be asked to pay a contribution for 48 months from your first payment. The contribution can be set at zero. There is also an application fee of £150, which is waived for many people, including those on Universal Credit.
Which one affects my credit rating for longer?
Both have a similar effect. mygov.scot says a trust deed affects your credit rating for six years from the date it begins, and that bankruptcy can stay on your credit file for at least six years. Both also appear on the public Register of Insolvencies while they last, and are normally removed 12 months after the trustee is discharged.
Related guides
- Sequestration (bankruptcy in Scotland) How bankruptcy works in Scotland, who can apply, what it costs and what it means for you.
- Trust deed pros and cons The advantages and disadvantages of a trust deed, set out side by side.
- The Minimal Asset Process (MAP) A no-fee route into bankruptcy for people with low income, few assets and debts up to £25,000.
- Trust deed or DAS? The Debt Arrangement Scheme and a protected trust deed compared side by side.