A protected trust deed is a legal voluntary agreement between two people, usually between a debtor and a creditor and is being used in Scotland to manage people’s debt. It resembles the Individual Voluntary Agreement that has been used in parts of the UK as an alternative for bankruptcy.

Unlike most agreements, a protected deed of trust has a third independent entity called a trustee. The trustee, usually a company, will be the one to negotiate for the debtor to his/her creditor. All declared financial assets will be given to the trustee from the debtor. The trustee’s job is to manage these assets and to pay the creditors agreed amounts for the debtor; the trustee is also the one to manage the Deed of Trust.

The difference between a protected deed of trust and an ordinary trust deed lies in the fact that in a protected deed of trust, creditors cannot contact the debtor in any manner. In an ordinary trust deeds, creditors are free to pursue the debtor but in a protected trust deed, as long as both parties agree, the creditor cannot pursue the debtor. This is why the trustee is the one who makes all negotiations for the debtor. The creditor cannot take legal actions against the debtor once a protected trust deed comes in force. With this, the creditor cannot pressure any debtor until the debtor succumbs to bankruptcy.

Payments in a protected trust deed is easier, this is because all interest are frozen. A protected deed of trust is designed for an affordable payment for a debtor. The two parties, the debtor and the creditors, will agree on a certain payment amount. The parties usually sign a contract for three years or thirty six months. In these three years, the debtor will pay the trustee a certain amount monthly that will be paid to the creditors. After three years, or less, if all the debts have been paid and all terms agreed were followed, any remaining debt is written off.

Unlike mortgages, the house of a debtor cannot be taken when terms in the protected trust deeds are not followed; however, equities in the house are taken into account and maybe used to help pay the creditors. Protected trust deeds only cover the unsecured debts of the debtor.

Bankruptcy and protected deeds of trust should not be misunderstood as equivalent to one another. Protected trust deed is designed to be more “debtor” friendly unlike bankruptcy. However, if in a situation that the debtor cannot pay the monthly amount to the trustee because of financial changes, a bankruptcy may be filed against the debtor. If and only if the debtor does not inform the trustee of his/her financial situation changes and does not make an effort to pay the monthly amount then it is possible that sequestration may be filed against the debtor. Note that this is very unlikely.

Before protected deeds of trust are implemented, the debtors and creditors should agree on all terms. Protected deed of trust is a way to solve debt problems.