Monday, 17 June 2013 12:30

Trust deeds – breaking the cycle of recession and household debt

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 When the economy fails to expand and the gross domestic product (GDP) of a country declines over two consecutive fiscal quarters or more, typically the rate of unemployment rises and house prices decline. This is what is more commonly known as a recession.  At its defining centre is the burden of debt.

The UK has experienced 2 recessions in recent years (2008-9 and 2010-11) and narrowly avoided a triple-dip in 2013, when the economy stuttered to a 0.3% rise in growth. Nevertheless, since 2008 the UK economy has stagnated with small spurts of growth compounded by ensuing contractions. The economy still faces "significant obstacles" according to Vicky Redwood, UK Economist at Capital Economics, "with households still experiencing falling real pay."

How recessions affect household debt

Any slowdown in economic activity affects capital investment spending, resulting in a sharp fall in business confidence and profits. Firms lay off workers in an effort to control their costs. Unanticipated changes in levels of income or circumstance has a marked effect on the levels of household debt.

As inflation continues to increase the price of goods and services as income stagnates or falls, the consumer may feel they are caught between the hammer and anvil. Money is tight because of lowering income levels. Money becomes tighter because prices are too high. The household budget becomes increasingly inadequate. Unsurprisingly for some, all roads seemingly lead to debt.

Figures released by the Office for National Statistics state:

  • £94.7 billion was the overall financial debt of all households in Great Britain
  • 49.4% of individuals living in households considered it a burden
  • 51% of households in the UK have financial liabilities.
  • £3,200 the average household is estimated to owe on credit cards, overdrafts or loans.
  • 73.7% was the percentage of lone parent households with dependents children reporting financial liabilities
  • The unemployment rate in the UK in the first quarter of 2013 stood at 7.8%.

The stress of dealing with money worries can exert an intolerable pressure on family units. Those with money problems feel their lives have spiralled out of control with debt levels that continue to rise. However, there are alternative solutions for those that are struggling with overwhelming debt.

For those experiencing severe money problems who are considering measures to regain control of their finances, it is recommended to contact a financial expert who can provide the right solutions to suit each individual circumstance.

Scottish trust deeds

If you live in Scotland then Trust Deeds may be the right solution. Trust Deeds are only available in Scotland, so if you live in England or Wales there is a similar scheme you may be eligible to apply for called an Individual Voluntary Arrangement (IVA).

What are trust deeds?

Trust deeds are legally binding arrangements between you and your creditors allowing you to make regular payments to your arrears. The duration of a trust deed is typically 36 months and is conducted through an Insolvency Practitioner (IP). The IP or 'trustee' acts on your behalf to draw up the arrangement and will negotiate affordable payments with your creditors based on your personal circumstances. It is not possible to create a trust deed without an insolvency practitioner.

Protected trust deeds

Your trustee is there to guide you through the process from set up to completion. Once your creditors agree to the conditions of the trust deed, they are legally bound to it and the trust deed becomes 'protected'. This means that creditors are no longer allowed to contact you, pursue you or use any form of legal action against you for the money you owe. All interest is frozen. The trustee handles all correspondences, leaving you to pay off your debts without the stress of dealing with court orders and bailiffs.

If you have equity in your property this will be 'realised' to pay towards your arrears, though trust deeds seldom necessitate the need to sell your home. Therefore trust deeds are a better option in most cases than sequestration or bankruptcy.

However, if you fail to maintain regular payments, or do not comply with the conditions of the agreement, the interest on your debts will be back-dated to the start of negotiations and you will be open to creditors petitioning you for bankruptcy. Therefore it is imperative you inform your trustee immediately if your situation changes.

If you experience a sudden windfall, for example, your payments to your creditors will be re-negotiated and increased. Conversely you may experience reduced income or job loss during the 36 month period. If this is the case, your trustee will usually be able to negotiate a temporary arrangement until your situation improves.

Advantages

  • No more stress of dealing with your creditors and interest is frozen on your debts allowing you to regain control of your finances
  • A single affordable monthly repayment and all administration is dealt with by the IP /trustee.
  • There is usually an element of debt written off after three years depending on the terms of the agreement
  • You will not be allowed credit during the 'protected trust deed' period and your credit rating will be affected for a further year after the PTD
  • Creditors can vote against a trust deed proposal, but if the majority vote for the trust deed it will still become “protected”
  • Some employers may not allow those on trust deeds to continue to work in their current contract
  • Equity in any property must be 'realised' to pay debts, but this will usually be done without the necessity to sell.

Disdvantages

This stagnation of the economy may continue for some time while many people continue to experience the anxiety of living with debt. There are professional debt specialists that can help to break this cycle of unnecessary suffering and to get finances and families back on track. When the cycle is broken, the freedom of the road lies ahead.

Amy Fry is a writer specialising in the area of personal finance, and discusses a range of topics including budget planning, debt solutions and savings schemes. Amy spends her spare time taking city breaks across Europe and riding her bike along the seafront in Brighton, where she currently lives and works.

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Amy Fry

Amy Fry is a former financial adviser specialising in the area of personal finance, and discusses a range of topics including budget planning, debt solutions and savings schemes. Amy spends her spare time taking city breaks across Europe and riding her bike along the seafront in Brighton, where she currently lives with her son.