Should The US Move From Bankruptcy to Trust Deeds?

 There are many folks these days that are finding themselves in financial trouble.  With easy-to-obtain credit and over-lending, folks that are unable to control their spending may very quickly find themselves in over their heads.  In the US, individuals have the option of declaring bankruptcy and discharging some of their debts.  In other countries, such as Scotland, they have an alternate option called the trust deed.  In this article, we’ll learn about trust deeds and answer the question: should the US move from bankruptcy to trust deeds?

 What is Bankruptcy?

Bankruptcy is the legal status of a person, or company, that cannot repay the debt it owes its creditors.  Someone will normally declare bankruptcy to get relief from debt.  If approved under bankruptcy law, the debtor will either have their debt discharged or have their debt payments restructured.

Did you know in the US there are six different types of bankruptcy?  These are:

1. Chapter 7 – this type of bankruptcy is the most simple and straightforward.  It is also the most common!  This is basic liquidation type of bankruptcy allows business or individuals to sell off their assets to pay of debts.  One is able to claim a certain amount of exemptions so that even the shirt off your back does not need to be sold.  After assets are liquidated, all debt is normally discharged.  This type of bankruptcy will stay on the record for 10 years!
2. Chapter 9 – this is a section of code dealing with municipal bankruptcy.  I am going to assume you are not running your own town or city as a mayor, so we will skip past this one 🙂
3. Chapter 11 – this section of bankruptcy code will normally apply to businesses, but individuals can also use it.  Chapter 11 bankruptcy allows for reorganization of debts and will allow for the business to continue to operate while financial matters are figured out.  This can be very helpful for business that are “stuck” in contracts that are not favorable to them any longer.
4. Chapter 12 – chapter 12 bankruptcy is a special provision for farmers and fishermen.  The main intent is to give a little more help to this category of folks to keep them from losing their only source of income.
5. Chapter 13 – this section of US bankruptcy law deals with individuals.  This allows for rehabilitation with a payment plan for folks that have a source of income.  This enables individuals to develop a plan to repay creditors some or all of the debt back.  The plans developed are usually 3-5 years in length.  This type of bankruptcy will stay on one’s credit record for 7 years.  The advantages for filing for Chapter 13 bankruptcy over Chapter 7 are:
   1. delay a foreclosure – the foreclosure can be reinstated once the bankruptcy is complete
   2. more types of debts are dis-chargeable under Chapter 13 vs. Chapter 7
   3. allows for modifications of certain types of debts
   4. protection collections activities for co-signers
6. Chapter 15 -chapter 15 of bankruptcy law is setup to allow foreigners to declare bankruptcy and clear their debts.

Now that we’ve investigated all of the types of US bankruptcy, let’s look at another type of option – the trust deed.

What is a Protected Trust Deed?

What is a protected trust deed?  A protected trust deed is a voluntary arrangement used by Scottish residents to protect them from legal enforcement of debts.  This is used by Scottish residents to help pay-off their debts and remain in their home.  Any equity in the home will most likely be transferred to the debtors, but residents will not be ‘kicked out” on the street.

A protected trust deed sets up a trustee, a neutral third party, to communicate with the creditors.  This helps to eliminate hassling collections phone calls to the debtor.  Companies like http://www.trustdeedscotland.net/ will do this for residents and have a 98% success rate in getting a protected trust deed approved by creditors!  There is no court involvement if the protected trust deed is accepted by the creditors.

A protected trust deed allows for the freezing of debts and associated interest.  After 3-4 years, the remainder of the debtor’s debt can be written off!  A protected trust deed is setup to only use disposable income to pay back creditors – not true assets like your home.

What is the Difference Between Bankruptcy and a Protected Trust Deed?

You probably noticed that protected trust deeds are intended for individuals, not companies.  So, what are the main differences between bankruptcy and protected trust deeds?

As you can see, a protected trust deed and a chapter 13 bankruptcy are similar in nature.  They both allow for restructuring of debt and the development of a payment plan.  The main advantage of a protected trust deed is that it allows for better protection of the individual to remain in their home.  It eliminates the concern of a foreclosure as long as the debtor can remain in compliance with the repayment plan.  Another benefit is that the protected trust deed allows for the debt to be more easily discharged at the end of four years.

Should the US Move From Bankruptcy to Trust Deeds?

So, should the US move from bankruptcy to trust deeds?  I am not so sure…  I like the protection of individuals that get in over their heads.  And, no one wants to throw people out on the street.  BUT, I strongly believe that folks should structure their lives to live within their means.  This means having your costs lower than your expenses so that one is able to save.

Everyone should have a healthy emergency savings to cover them in case of the unexpected.  This is best achieved by living within your means.  I wish there were a good way to  to separate folks that actually had a financial emergency – like someone that lost their wife/husband from someone that just ran up their credit cards on consumer goods.

I support protected trust deeds for the former set of folks, but certainly not for the latter!

Final Thoughts

We all hope that we will never have to file for bankruptcy or seek out to setup a protected trust deed.  It is nice to know that there are laws and provisions setup to protect us in the case of a financial emergency.  Should the US move from bankruptcy to trust deeds?  I am not so sure…  If we were to include something like this in the US bankruptcy law, I think there would need to be a lot of provisions to separate out emergency type situations from over-consumers!