Bankruptcy (Sequestration) Scotland

How does Sequestration work?

Sequestration is a process that is there to help you if your debts are mounting and all other debt restructuring options cannot help. It is separate from corporate bankruptcy and works for people who are personally insolvent or have become insolvent whilst working as a sole trader, partnership, trust or other unincorporated body.

It is a formal process that sees a trustee take control of your estate (all your assets) and deal with your creditors (people you owe money to) on your behalf. The trustee can be a money adviser, an Insolvency Practitioner or the Accountant in Bankruptcy themselves if you are able to use the Minimal Asset Process (MAP). Either way they must be qualified to give you financial advice.

The Accountant in Bankruptcy (AiB) is the official body who deals with all personal insolvency cases in Scotland. They operate under both the Bankruptcy Scotland Act 1985 and the Bankruptcy Scotland Act 2016.

During the Sequestration process your trustee will look at your financial situation and work out the best solution for you and your creditors. Their primary goal is to find a way to pay back as much money as possible to your creditors. This is normally accomplished by selling off assets or property to raise money and then working out a repayment plan if there is one at all.

The main point to note here is that once you have started the Sequestration process and your trustee is working on your behalf you can ignore any further calls asking you to make payments. Your trustee must contact each of your creditors within 60 days and ask them to deal directly with them.

3 ways to enter Sequestration;

• You voluntarily begin the process once you realise that there are no other options. (minimum debt level £1,500)
• Creditors can present a petition at the sheriff court after certain conditions are met. (minimum debt level £3,000)
• A previously granted Debt Arrangement Scheme (DAS) or a Protected Trust Deed has failed and your trustee or creditors believe it is the best course of action.

NB. Creditors wishing to petition the Sheriff court for your Sequestration are required by law to have previously issued you with either a 21 day Statutory Demand or a 14 day Charge for Payment.

If you have received either a Statutory Demand or a Charge for Payment then call Local Business Rescue as soon as possible, preferably before the demand runs out. One of our advisers can explain all your options over the phone or in person. Advice is always FREE and we have advisers all over Scotland ready to help you.

Am I eligible for Sequestration?

Contact LBR and we will have a trained professional go over your specific situation and let you know all your options.

There are two main types of bankruptcy in Scotland

• Minimal Asset Process (MAP) Scotland – This option is only available to people who have been in receipt of benefits for over 6 months and have assets under £2,000.
• Full Administration (Sequestration) – This is the standard method for most people who own assets over £2,000.

To use Full Administration Sequestration you will need to;

• Be officially classed as insolvent
• Owe a total debt of at least £3,000
• You must be living in Scotland or have lived in Scotland sometime during the last year
• You must not have been made bankrupt in Scotland in the last five years
• You must have received advice from a qualified adviser or Insolvency Practitioner
• Pay the Accountant in Bankruptcy fee of £200

Will I lose my home if I enter Sequestration?

If you rent your home, you will need to keep paying your rent during the Sequestration process. You should also check your tenancy agreement to see if it says anything about bankruptcy. There are some landlords who will end an agreement if they find out a tenant has become bankrupt although in practice we have found that many do not mind as long as the rent is paid on time.

If you own your home and there is equity in it then it could potentially be sold. Equity is the money that you would have left after the property is sold and any mortgage is paid off.

If you are a joint owner, for example with a partner or spouse then it is typical practice for them to be asked if they want to buy your half of the property. If this is not possible then the trustee could apply to the court to have your house sold to liquidate those funds.

Similarly, a court action would be required if you have family living with you in the house. The court can delay the sale of the house for up to three years or deny the sale all together. Blocking the sale of a property will only be ordered by the court in special circumstances like if you have a disabled child and the house was modified for their specific needs.

What will happen to my other possessions or my car?

You will get to keep many of your possessions and usually get to keep the items that you need for work such as tools or computer equipment up to a value of £1,000.

You can normally keep your car if you need it for work or you have a disabled child. The car must be worth less than £3,000.

What are the advantages and disadvantages of Sequestration?

Advantages

• Peace of mind as you will now have a solid plan in place and know exactly where you stand financially.
• You do not need to go to court.
• No more creditor pressure as Sequestration provides legal protection.
• If you are in receipt of benefits then this will not be classed as income when calculating your monthly contribution.
• Can be discharged after 12 months.

Disadvantages

• If you are a homeowner or own assets with significant value in them then these may require to be sold.
  (There are alternatives to this so please contact one of the below for FREE advice)
  Money Advice Scotland
  Citizens Advice Scotland
  Step Change Debt Charity
• Your credit rating will be affected & obtaining further credit is limited for a period of time.
• Your Sequestration will be visible on the Scottish Register of Insolvencies for up to three years.
• If you are working you may have to make payments for up to 4 years.

How long does Sequestration last and when will i be discharged?

• Voluntary route – discharged after 12 months.
• Minimal Asset Process (MAP) – discharged after 6 months.
• If a creditor has petitioned the court to have you made bankrupt then you will be discharged 12 months after the court issued the warrant citing you to appear at court.

You will receive a formal certificate with your discharge details on it from the Accountant In Bankruptcy after your 6 or 12 month period.

It is very important that you cooperate with your trustee throughout the process as failure to do so can cause a delay in being discharged.

What happens after I’m discharged?

In the short term you will need to keep making your monthly payment if one was arranged. If your circumstances change or your financial position changes then let your trustee know as soon as possible so things can be adjusted.

Your trustee will continue to manage the case for you and will not be discharged themselves by the Accountant in Bankruptcy until every aspect of the case is concluded.

In the long term you will want to focus on fixing your credit rating. Don’t worry this can be done. It just takes a little time.

What happens to my debts?

Once you are discharged any money that you owed to your creditors is written off. They cannot come back to you looking for more money or raise new legal actions in respect of those original debts.

Your only ongoing financial concern now is any monthly instalments that were agreed to with your trustee. If you do not have any monthly instalments to pay then you are now free to start over again and focus on building your credit rating back up.

What debts cannot be written off?

Most debts will be written off once you are discharged in 12 months time. However, there are some exceptions to this.

The following debts cannot be written off;

• Court orders or fines (this includes court ordered child maintenance).
• Debts which have been acquired through fraud.
• Debts secured on your property, ie a mortgage.
• Any other ‘Secured’ loans.
• Student loans covered by the Education (Scotland) Act 1980 c.44.

Will I be allowed a bank account?

Yes. There are banks who will provide you with an account however, they usually restrict some of the functionality. For example, it will come without an overdraft or ability to obtain credit. Otherwise the account is just like any other and can be used to pay your bills as normal with direct debits and standing orders etc.

Can I get credit after sequestration?

Yes. However, it will be limited to no more than £500 until you are discharged. It may be possible to obtain more but this will be at the lender’s discretion and you must have made them aware of your current situation.

It is best not to take on any credit until you are discharged. Instead, during the 12 months waiting for discharge you can get a basic current account that will be subject to some restrictions, like no overdraft and no contactless payments. It will however. do what you need it to do and that is to start a brand new relationship with a bank that you can eventually go to for a larger loan in the future.

After 12 months and once you are discharged you can apply to this bank which you will have been with for 1 year now for a very basic credit card, say £300 or £500 limit. The purpose of this card is not to get in more debt. In fact, it is the opposite. You use this card every month to buy your basic necessities like shopping or fuel but you always make sure and pay the balance off each and every month before the due date. If you do this consistently for a year or two then you will see your credit rating climb back up. You will also build a new relationship with this bank and in time can approach them for larger loans or a mortgage.

Can I be a director of a limited company after Sequestration?

No. You must wait until you are discharged. After being discharged, you are free to become a director.

What if I’m already a company director and then declared bankrupt?

It may be in the best interests of you and the company to appoint a new director before you enter into any bankruptcy proceedings. The best thing about a limited company and the reason people should use this type of vehicle for business is that you are not the business unlike with a sole trader. You can step aside and let someone else take the directors position. You would need to do this anyway later as you cannot hold a directorship position until you are discharged which will be 12 months after applying.

If you remain in the directors position and are the sole director then the company would be wound up and its assets would be sold off to pay the outstanding debts to creditors.

Please call us are let us guide you through your options as there may be better solutions for you than letting things get to this stage.

Can I operate as a sole trader?

Yes. You are free to operate as a sole trader. However, you must trade under your own name, or under the name you were trading under when you were declared bankrupt.

Can I keep my current job?

This is an area that is often overlooked when people think about using Sequestration. It is important that you give it proper consideration.

For current employees it is best to check with your HR department before beginning the Sequestration process. Below are some examples of jobs that may be affected by bankruptcy.

Some limitations may apply in the following;

• Armed forces
• Cash handling, for example in banking, payroll or security
• Financial services, for example an accountant, mortgage broker, stock broker or financial adviser
• Law, for example a solicitor or legal executive
• Medicine, for example a GP or dentist
• Property, for example an estate agent or letting agent
• Police
• Pub licensee
• Security
• Self-employment as a sole trader or partnership

Positions that cannot be taken until discharged;

• Charity trustee
• Company director
• Insolvency Practitioner
• Justice of the Peace
• Registrar of births, marriages and deaths
• MOT authorised examiner
• Consumer credit licence holder

Some employers restrict the department you can work in and some have a zero tolerance policy while others only restrict you until you are discharged. It is not a black and white area and we advise that you contact the HR department of any current or future employer to do a quick check.