What happens if a trust deed fails?

A trust deed fails when you stop keeping to its terms, for example by missing payments or not co-operating with your trustee, so that it cannot end in a discharge. If that happens, the debts are not written off, your creditors can start asking for payment again and may add fees, you do not get back what you have paid, and your trustee can petition for your sequestration (Scotland’s form of bankruptcy). If you are struggling, talk to your trustee early, because there are often ways to change a trust deed before it gets that far.

Your trustee is the licensed insolvency practitioner who runs the trust deed. The Accountant in Bankruptcy (AiB) is the Scottish agency that supervises trust deeds. Free, impartial advice is available at any point from the services in free debt advice in Scotland.

Why do trust deeds fail?

A trust deed depends on you keeping to it for four years or more. Reasons it can fail include:

• payments stop without the trustee’s agreement
• your circumstances change, for example you lose your job, become ill, separate from a partner or have a baby, and the payment no longer fits your budget
• information is missing, such as income or assets you did not declare
• you do not co-operate with the trustee, for example by not replying to requests for information or not helping with the sale of an asset
• the payment was too high to begin with

The insolvency practitioner’s professional rules require them to assess, before you sign, whether you are likely to be able to keep to the trust deed for its whole length and whether it has a reasonable prospect of completing. If you were not asked about this, ask now.

A trust deed can also end up unprotected if creditors object or AiB refuses to register it. That is a different situation, covered in how a trust deed becomes protected.

What should you do if you cannot make your payments?

Tell your trustee straight away. AiB’s information document says you must tell your trustee right away if your financial situation changes. Do it before you miss a payment if you can.

Your trustee has several ways to respond:

• review your contribution. Payments are reviewed at least once a year and can go up or down based on what you can afford. mygov.scot says that if your income goes down, your trustee may agree to reduce your payment or give you a payment break
• change the payment period. AiB’s guidance says a change in your circumstances may mean the amount of your contribution, or the period over which you pay, needs to be varied. You and your trustee can agree a longer period, and the trustee must tell you if the period changes
• no contributions from benefits. The law says no contribution may be taken from Universal Credit or other social security benefits. If your income becomes benefits only, tell your trustee
• early discharge. Where circumstances outside your control mean you can no longer keep to the trust deed and there is no reasonable prospect of that changing, the trustee can propose an early discharge. AiB’s guidance gives a condition or illness as examples. See getting discharged from a trust deed

AiB’s guidance also says it would not be appropriate to refuse to discharge you because of circumstances beyond your control, such as a change that stops you paying your contribution. Being honest and keeping in touch with your trustee puts you in a much stronger position than simply stopping.

For more on telling your trustee about changes, see if your circumstances change.

Can you cancel a trust deed?

This is the honest answer to “how do I get out of a trust deed?”

You cannot simply cancel it. The professional rules for insolvency practitioners, Statement of Insolvency Practice 3.3, say that once signed, a trust deed is a binding obligation between you and the trustee and cannot be revoked. Stopping your payments does not end it: it makes it fail, with the consequences below. And while a protected trust deed is in place, the law says you cannot apply for your own sequestration.

What you can do is talk to your trustee about the lawful routes that exist:

• change it, by reducing your payment, taking a break or changing the length, if your circumstances have changed
• early discharge, if extenuating circumstances mean you cannot continue
• ask the trustee to seek a refusal of your discharge. Where you have not been able to keep to the trust deed and that looks likely to continue, the law lets you ask your trustee to apply to AiB for agreement to refuse your discharge. This does not write off your debts. It means the trust deed will not end in a discharge and your creditors become free to pursue you. It would only make sense as part of a plan for what comes next, so get independent advice before you ask

If you are unhappy with how your trustee has handled your trust deed, their professional rules say you should be made aware of your right to complain through the Insolvency Complaints Gateway.

What happens if a trust deed fails?

If the trustee considers you have not met your obligations or co-operated, they must apply to AiB for agreement to refuse your discharge. If AiB agrees, the trustee writes to you with the reasons and your right to apply to the sheriff (a judge in your local sheriff court). From then:

• your debts are not written off. You still owe what was included in the trust deed, apart from what creditors have already been paid
• creditors can pursue you again. AiB’s guidance says creditors are free to take recovery action. mygov.scot says they can chase you for payments, take you to court, and add further interest, fees or charges
• you do not get back what you paid. AiB’s information document says you will not get back any money you paid if the trust deed is cancelled
• you may face sequestration. The trustee can petition the sheriff for your sequestration if you failed to meet an obligation you could reasonably have met, or a reasonable instruction from the trustee, or if they say sequestration is in your creditors’ best interests. AiB’s guidance says a creditor who objected to the trust deed may also petition for your sequestration if your discharge is refused
• the records stay. Your credit rating is affected for 6 years from the date the trust deed began, and the trust deed stays on the Register of Insolvencies until 12 months after it ends

If creditors take action again, they may use diligence, the legal steps a creditor can take to recover a debt in Scotland, such as taking money from your wages or bank account through an arrestment. This is carried out by sheriff officers, officers of the court who serve papers and enforce debts. See debt enforcement in Scotland.

What options are there after a failed trust deed?

Once a trust deed has ended without a discharge, your debts still need to be dealt with. Depending on your situation, the options in Scotland may include:

• the Debt Arrangement Scheme (DAS), where you repay your debts over time through a debt payment programme, and interest, fees and charges are frozen. You cannot apply while a trust deed is in place
• sequestration, which usually ends in discharge after 12 months, though you may have to pay contributions for longer
• the Minimal Asset Process, a simpler form of bankruptcy for people with low income and few assets
• an informal debt management plan, which is not legally binding

Which of these, if any, is open to you depends on your debts, income and assets and on what happened with the trust deed. An adviser needs to look at your full situation before you decide. Free, impartial advice is available from the services in free debt advice in Scotland.

Official sources

• Statement of Insolvency Practice 3.3 (Scotland): trust deeds
• AiB Notes for Guidance 9.5: trustee’s refusal to discharge the debtor
• AiB Notes for Guidance 4.7: petition by the trustee
• mygov.scot: if your circumstances change during the trust deed
• AiB protected trust deed information document