How a trust deed becomes protected

A trust deed becomes protected when the Accountant in Bankruptcy (AiB) registers it in the Register of Insolvencies, after your creditors have had five weeks to object. It is blocked only if a majority in number of your creditors, or creditors owed at least one third of the value of your debts, object in writing. Once protected, the trust deed binds all your creditors, not just the ones who agreed.

AiB is the Scottish agency that supervises trust deeds and keeps the public Register of Insolvencies. Your trustee, the licensed insolvency practitioner who runs the trust deed, handles every step of the protection process, but it helps to know what is happening and when.

What does ‘protected’ mean?

A trust deed is a voluntary agreement. On its own, AiB guidance says, it is not binding on any creditor who does not consent to its terms, which is why trustees generally seek to have trust deeds protected.

A protected trust deed is one that meets the conditions in the Bankruptcy (Scotland) Act 2016 and has been registered by AiB. It has protected status from the date of that registration. mygov.scot says your trust deed must be protected for your debts to be written off at the end.

Most of what people read about trust deeds, including the write-off at the end, applies to protected trust deeds. If yours is not protected, the position is very different (see below).

How does a trust deed become protected?

1. You sign the trust deed. Before that, you must be given the Debt Advice and Information Package, AiB’s trust deed information document and at least 3 calendar days to think. See before you sign a trust deed.
2. The notice is registered. Once you deliver the signed deed to the trustee, they must send a notice to AiB without delay, for publication by registration in the Register of Insolvencies.
3. Your creditors are sent the papers. Within 7 days of registration, the trustee sends every known creditor a copy of the trust deed, a claim form, the notice, a statement of your affairs (your assets, debts, income and spending) and an estimate of what creditors are likely to receive.
4. The objection period runs for 5 weeks. It starts from the registration of the notice. AiB’s guidance gives an example: if the notice is published on a Tuesday, the period ends at midnight on the fifth Tuesday after that.
5. The trustee applies for protection. As soon as reasonably practicable, and within 4 weeks after the objection period ends, the trustee sends AiB the trust deed and supporting papers, including a statement that your contribution follows the Common Financial Tool (the standard method used in Scotland to work out what you can afford).
6. AiB decides. AiB registers the trust deed as protected if it has all the documents, is satisfied the legal conditions are met, and is satisfied with your contribution. Protection starts on the date of registration.
7. You are told. Within 7 days of hearing from AiB, the trustee must tell you and every known creditor whether the trust deed has been registered or refused.

When can creditors stop a trust deed being protected?

The trust deed is treated as accepted by your creditors unless, within the five weeks, the trustee receives written objections from:

• a majority in number of the creditors who were sent the papers, or
• creditors owed at least one third in value of the debts.

Creditors who do not reply in time are treated as agreeing. Objections that arrive after the five weeks cannot be counted.

The value test means a creditor you owe a lot to carries more weight. For example, if one lender is owed a third or more of your total debts, that lender can block protection on its own.

Homeowners should know about one particular risk. If you ask for your home to be excluded from the trust deed, the insolvency practitioner must warn you that, where there is equity in the home, unsecured creditors may not agree to the trust deed becoming protected.

What does protection do?

Once your trust deed is protected:

• it binds all your creditors. A creditor who objected, or who was not told about the trust deed, has no higher right to recover their debt than creditors who agreed
• earnings arrestments stop. An earnings arrestment is a type of diligence (the legal steps a creditor can take to recover a debt) where money is taken straight from your wages. Any current earnings arrestment stops having effect on the date of protection, and a creditor cannot start a new one for a debt included in the trust deed
• creditors deal with your trustee. AiB’s information document says creditors cannot collect debts from you while you are in a protected trust deed, though they can still send you important documents such as annual statements

Protection also has a side effect. While a protected trust deed is in place, you cannot apply for your own sequestration (Scotland’s form of bankruptcy).

What does protection not do?

Protection is not a guarantee that everything will work out. It does not:

• protect you from new debts. Anything you borrow after signing is outside the trust deed, and those creditors can take action in the usual way
• affect your mortgage lender’s rights. A secured creditor keeps its security over your home
• stop every sequestration petition. A creditor who objected or was not told can petition the sheriff (a judge in the local sheriff court) for your sequestration within 5 weeks of the notice being registered, and the sheriff will grant it only if that is in the creditors’ best interests. After that, they can petition only if they say the way your estate is being shared out is unduly unfair to them
• guarantee your discharge. You still have to make your payments and co-operate. If you do not, the trust deed can fail. See what happens if a trust deed fails
• keep it private. Your trust deed is on a public register, and your credit rating is affected for 6 years from the date it begins

Protection can also be removed. If, within 3 months of registration, the trustee finds that a legal condition was not met because of a material error or irregularity, they must tell AiB, and AiB can decide the trust deed should lose its protected status. You, the trustee or a creditor can ask AiB to review that decision within 14 days.

What happens if protection is refused?

A trust deed that is signed but never becomes protected is sometimes called an unprotected trust deed. It can happen because enough creditors object, because AiB is not satisfied the conditions or your contribution are right, or because the paperwork was not sent to AiB within the 4 weeks.

What happens next depends on why it was refused.

• If AiB refused because of your contribution or spending, the trustee, you or a creditor can appeal to the sheriff within 21 days. If the sheriff decides the conditions are met, AiB registers the trust deed.
• Whatever the reason, AiB’s guidance says a trustee who still wants the trust deed protected can ask the sheriff for a direction allowing the notice to be submitted again.
• If creditors objected, that is one of the situations in which you can apply for your own sequestration, after getting money advice.

The insolvency practitioner should have warned you about this possibility before you signed. Their professional rules require them to explain how likely protection is and what would happen if the trust deed did not become protected. Those rules also say that in an unprotected trust deed there is no statutory procedure for bringing it to a close, and creditors who did not agree to it do not have to grant you a discharge.

If your trust deed is refused protection, speak to your trustee straight away and get independent advice. Other options, including the Debt Arrangement Scheme, sequestration and the Minimal Asset Process, may be open to you. Free, impartial advice is available from the services in free debt advice in Scotland.

Official sources

• Bankruptcy (Scotland) Act 2016, Part 14: trust deeds (sections 169 to 173 cover protection)
• AiB Notes for Guidance 3.3: creditor objections
• AiB Notes for Guidance 3.5: date of protection and refusals
• mygov.scot: what is a trust deed
• Statement of Insolvency Practice 3.3 (Scotland): trust deeds