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The term sequestration itself means much the same as bankruptcy in other parts of the UK. In effect, sequestration is Scotland’s version of bankruptcy and the sequestration laws are very similar to the bankruptcy laws in England, Wales and Northern Ireland.
Sequestration is a form of insolvency designed to be used only as a last resort and when an individual is genuinely unable to meet their unsecured debt obligations in any way. Sequestration can be entered into voluntarily by a person submitting a debtor application who wants to draw a line under their debt management situation and move forward, or creditors can force an individual into sequestration in order to see debts they are owed repaid in part or in full. A creditor or creditors have to be owed £5,000 to sequestrate an individual.
If you live in Scotland and you’re unable to pay back unsecured personal debts worth in excess of £1,500 then you might be able to enter sequestration as a form of insolvency to help alleviate the worst of your financial worries.
Sequestration isn’t right for everyone but the process can work well as a debt solution in a variety of circumstances and it helps thousands of people around Scotland get back on their feet every year. Our advisers are here to provide the right debt advice you need to decide whether sequestration is suitable for your situation.
Until 2008, it was often the case that a person in Scotland with high levels of unsecured debts, whether through credit cards, personal loans or store cards, would be unable to enter sequestration of their own accord. As a result, creditors would often leave people for long periods of time in the uncomfortable position of seeing their debts growing and becoming increasingly insurmountable day by day as interest fees and charges were steadily added to the equation.
The sequestration laws were changed though in 2008 to give people who are demonstrably insolvent a chance to enter sequestration as a means of seeing their debt problems resolved. So if you live in Scotland, you have not been sequestrated in the past 5 years and you owe more than £1,500 that you cannot pay back then you have the option of entering sequestration, without the need for creditor approval.
As part of the sequestration process, most of your unsecured debt will be written off, although depending on your income you may be required to pay a monthly contribution to your creditors. Any assets you own will be held by the Trustee and these will be used to repay creditors.
A key element of the sequestration process will be the establishment of a relationship and an understanding between yourself and your insolvency practitioner (IP). Initially, the role of your IP will be to assess whether you are indeed eligible to enter sequestration under the terms of the latest legislation in Scotland. The essential questions there will be whether or not you are in fact insolvent and unable to pay back your creditors, and whether a Trust Deed or a Debt Arrangement Scheme might be more appropriate given your situation.
Once it is established that sequestration is the best way forward for you, your IP will assist you in completing your debtor application pack and issue you a Certificate of Sequestration if required and submit your application to the Accountant in Bankruptcy. From there, the AiB will aim to process your application with within five working days and see that a Trustee is appointed to your affairs. You can either ask for your own IP to act as your Trustee in certain circumstances or one will be appointed on your behalf to administer the details of your case.
The appointment of a Trustee to your affairs is a vitally important step in the context of a sequestration scenario. What happens is that your Trustee takes control of any assets that you own and scrutinises your ability to pay back the creditors to which you owe unsettled amounts of unsecured debts.
The Trustee will then decide upon the best way for you to settle your outstanding debts as fully as possible by selling any assets with value and mapping out a repayment plan for the future.
The Trustee also takes responsibility for liaising with your creditors in a way that should mean they realise you aren’t likely to pay them back in full. Strictly speaking, the Trustee has 60 days in which to inform each of your creditors that you have been sequestrated and that your financial affairs are essentially being reconstituted from that basis.
It could be that your creditors will seek to contact you and demand or request payment of debts that you owe. However, sequestration is a legally binding process and you are not obliged to respond to your creditors in any way other than through the Trustee appointed to your affairs.
Depending on the level of your debt and the assets which you own, you may be discharged from your debt after 6 months, subject to your compliance and cooperation. However, this may not be the end of the process because the terms of your sequestration may include that you have to make a contribution to your estate for a period of 4 years.
The extent to which you are obliged to continue paying back your creditors once discharged will depend on the level of your debt, the assets which you own and your income position. If you’re in employment, you may be obliged to make a contribution to paying back your creditors for a period of 48 months which will continue for a period after being discharged from sequestration. Your ability to make a contribution will be assessed using the Common Financial Tool, a calculator set down in legislation to assess affordable contributions.
The premise behind sequestration is that the process only applies in a situation whereby an individual owes money to one or a series of creditors but has no means and no prospect of settling those unsecured debts. As such, sequestration involves the transfer of your assets to the control of a Trustee, who is then responsible for finding a route forward that is fair to all the parties involved.
So, if you own all or part of a property, those assets are likely to enter the equation and your home might need to be sold or leveraged in some other way to raise funds to settle some of your debts.
However, it could be that the fees involved in the process of selling a property or raising equity from it could make that course of action unhelpful and ultimately not worthwhile. So whether or not you will need to sell your home might depend on the value of the asset and how much it would cost to raise money from it, which will be a decision made by your Trustee.
You may be obliged to sell your car or any other vehicle you own after you’ve entered sequestration for the same reasons that you may have to sell your house or any property assets you own. However, this is not necessarily the case because the terms of sequestration arrangements are designed to give individuals the best chance of paying off their debts over a specified term of up to 4 years. So, if you need a car to get to and from your workplace then this will be taken into account by your Trustee and you may be given the option of retaining ownership of your vehicle.
On the other hand, if your vehicle is deemed to have a value in excess of £3,000 or you don’t have any real need for it then your Trustee may insist that you sell it to raise whatever cash you can to help settle some of your debts.
There are slightly different procedures relating to sequestration in Scotland when an individual entering the process has a modest income and few assets. People in this position would enter bankruptcy through MAP (‘Minimal Asset Process’).
MAP sequestration is only available to you if you live in Scotland and owe more than £1,500 but less than £25,000 in unsecured debts. In addition, your assets must be worth less than £2,000 (with no single assets worth more than £1,000) and your income must be wholly from benefits or be assessed as not being able to make a contribution to your bankruptcy using the Common Financial Tool, a calculator set down in legislation to assess affordable contributions. You also cannot be a property owner or have been declared bankrupt in the previous 5 years which is extended to 10 years where a previous bankruptcy was a MAP bankruptcy.
Under MAP only the Accountant in Bankruptcy can be your trustee. You will normally receive your discharge after 6 months although you will have certain restrictions on credit for a further 6 months following discharge.
If you are in a position of applying for sequestration and you may qualify to enter a MAP then it is important to get advice on whether the option is right for you and how it might impact your financial future as a result.
Perhaps the most significant benefit to be gained from sequestration is that it enables individuals to draw a line under their unsecured debt problems and start moving forward. There are consequences and restrictions on individuals who enter sequestration but in many cases it may be the best way forward to resolve their current situation.
The nature of a sequestration scenario is such that an appointed Trustee acts as a mediator between debtors or creditors, which can help provide reassurance for both. From the perspective of debtors, the role played by a Trustee in settling issues or disputes of any sort with creditors can be a big help in alleviating fears and understanding options more clearly.
Sequestration essentially hands responsibility for your financial affairs over to a third party who is a licensed insolvency practitioner, which has its disadvantages but when your finances have become a nightmare then it can be an enormous relief. The arrangement relieves indebted individuals of the need to fend off creditors who in many cases might otherwise be relentlessly demanding payment of outstanding debts. All the creditor correspondence can be passed to your Trustee to correspond with them directly.
What sequestration proceedings provide ultimately for anyone facing serious debt problems is the prospect of improving their financial position. Whether you enter sequestration voluntarily or are forced into that position by creditors, the process can create a sense of positivity and of taking action. This in turn can lead to an individual feeling not just relieved but also as if there is some light at the end of the tunnel when it comes to dealing with unsecured debts of any kind. Should you fall behind with mortgage payments and your house be repossessed by the bank any shortfall of mortgage arrears can also be discharged through the sequestration.
Entering sequestration, as a form of insolvency, will inevitably have a damaging impact on your credit rating as an individual and the effects will remain for a period of six years after you’ve been discharged from your agreement. However, once that six-year period is over, you will be able to start rebuilding your credit rating and move on.
You will be obliged to hand over your assets to an insolvency practitioner when you enter or are forced into sequestration. This can be a difficult and unsettling process for anyone and the impact can also be felt by a person’s family, particular in instances where a family home has to be sold to raise funds.
Anyone who enters sequestration will be banned from acting as a director of any company while undischarged. The ban also extends to cover any meaningful involvement in the promotion, formation or management of any business for that same period of time.
One inevitable consequence of entering sequestration will be the placing of significant restrictions on credit availability. You will not be able access credit in excess of £2000 while undischarged (and for up to 6 months after if a MAP sequestration), which could be a challenge to deal with if you’ve been accustomed to having much greater financial flexibility.
For anyone faced with serious debt management problems, it is vitally important to be fully aware of all the options available and to get advice from genuine experts in the field. There are a variety of alternative routes out of any level of unsecured debts in Scotland, sequestration is one but it could be that a Trust Deed or a Debt Arrangement Scheme could be more suited as a solution in your particular situation.
What you need before you take any decisions on these subjects though is clear and impartial guidance and that’s where Scotland Debt Solutions can help. We have a network of offices and teams of experienced insolvency practitioners around the country in Glasgow, Edinburgh, Aberdeen, Dundee and Inverness. Call us directly to find out more and to arrange a consultation.
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