Reviewed 25th February 2020
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 £3,000 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.
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.
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 you 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 £17,000 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.
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 free consultation
The UK’s financial services regulator has told banks and other lenders they ought to give their customers a break from repayments if they need one as the coronavirus crisis unfolds.
The Scottish government has taken a series of steps that it hopes will help to ease some of the financial pressures being felt by people with debt problems across the country.
It is possible that your home may need to be sold or remortgaged in order to raise money if you own part or all of it. This is not always the case, however, and much depends on whether the cost of raising money in this way makes it a viable option. This is a decision that only your Trustee can make.
Losing control of assets, such as your home and car, is a possibility. Sequestration will be noted on your credit file for a period of time, which is dependent on certain factors determined by credit agencies and how creditors view the information. Your sequestration can be viewed in the public Register of Insolvencies. Your job may be affected if there are restrictions written down in your contract of employment regarding sequestration You won’t be able to act as director of a company
You can either sequestrate yourself, or alternatively a creditor owed more than £3,000 can start the procedure. To enter sequestration yourself you need an approved money advisor to agree that you are in fact insolvent, and that other procedures are not more suited to your circumstances. Once this has been established, they will issue a Certificate of Sequestration which is valid for 30 days. This is sent to the Accountant in Bankruptcy, along with the application for sequestration and the fee of £200. For a creditor to start the sequestration process, they have to be owed more than £3,000. They may already have sent you a Statutory Demand, and will lodge a petition for your sequestration with the court. If no single creditor is owed £3,000 they may get together to organise a joint petition.
You are normally discharged from sequestration after 12 months. You will be discharged after 6 months if you enter sequestration through the MAP route. Your Trustee will remain in office for a further period of two years, during which time they may continue to realise your assets. Even though you have been discharged, you must cooperate with your Trustee.
Creditors will not be able to take further legal action against you, alleviating much of the pressure associated with being in debt Your Trustee becomes an intermediary between you and your creditors, dealing with all correspondence relating to your debts Once you are discharged you do not have to repay the debts which you had when you were made bankrupt, although there are some exceptions to this. You are still responsible for paying: fines, penalties, compensation and forfeiture orders imposed by any court; any liability due to fraud including benefit overpayments; any obligation to pay ongoing aliment; some students loans; and money owed to someone who holds a security on your property, such as a mortgage or secured loan. Apart from the exceptions listed above, your pre-bankruptcy creditors will not be able to take any legal action against you to recover their debts.
You have to be resident in Scotland, owe more than £1,500 and be unable to meet payments as they fall due. Additionally, you must not have been in sequestration during the previous five years.
If you can afford to, you will need to continue making repayments from your income for a further period of 36 months. Your Trustee will remain in contact, and you are obliged to cooperate fully.
If you own a car worth more than £3,000, or you have no real need for a vehicle, it may need to be sold to raise money for your creditors. Alternatively, your Trustee may ask you to sell it and buy a cheaper one so that you can put the difference to paying off your debts. If a vehicle is needed to get to work, however, selling it may not be the best option and you may be allowed to keep it.
Sequestration is a form of insolvency available to Scottish residents, whereby assets are transferred to the control of an appointed Trustee in order to pay off unsecured debts. It is very similar in nature to bankruptcy in the rest of the UK, and is seen as a measure of last resort to pay creditors and permanently write off debts. You can apply for sequestration yourself, or if one or more of your creditors are owed £3,000 or more they can apply to put you into sequestration in order to recover part or all of their debts.
Unsecured debt including credit cards, loans and overdrafts are included in sequestration, as well as arrears on household debts such as utility bills and council tax. Any debt secured on an asset is not included. Nor are student loans, Child Maintenance payments, fines or overpayment of benefits.
Our Scottish based team can help advise you on your debt problems.