Reviewed 5th December 2019
For Scottish residents there are three specific debt help solutions designed to get you out of the red and back into the black over a period of time. If you have large personal debts that you simply cannot afford to pay and creditors are chasing you for payment, it may be time to consider one of these solutions.
In this guide, we’ll discuss the differences between two of these solutions; the debt arrangement scheme (DAS) and sequestration (also known as bankruptcy). Each process has its similarities but also a number of key differences which we will shed more light on in order to bring clarity to your situation and potential options.
Although both processes allow you to regain freedom from crippling debt, the two are actually very different. A DAS is not a formal insolvency procedure; instead it is a structured Debt Payment Plan (DPP) which helps you pay your debts in a more affordable way. Your debt will not be written off, however, you will be given more time to pay back what you owe. Sequestration, on the other hand, is an insolvency procedure and therefore has much more serious consequences for you and your future.
Although sequestration and DAS share a number of similarities, they also have numerous differences which are important to recognise. A DAS is effectively a statutory repayment plan whereby you have come to a point where you need real help with the debts you can’t afford and want to put a structure in place to repay creditors, though these creditors are not forced to agree to it. If one or more creditors object to the Debt Payment Plan then the fair and reasonable test shall be applied by the Debt Arrangement Scheme (DAS) Administrator to decide whether to approve or reject the DPP. However, in sequestration, creditors have no choice but to adhere to its terms.
In sequestration the Trustee (the individual who is administering the bankruptcy) shall look to realise your share of equity in any assets owned by you, such as property, for the benefit of the creditors. In addition to this the Trustee may ask you to make a monthly payment towards the cost of your bankruptcy; again, this money will be portioned between your creditors. These contributions, known as a Debtor Contribution Order (DCO), will be taken from any disposable income you have. The amount will be calculated by adopting an approach which takes into account your essential living costs. You will be expected to make contributions for a period of 48 months should your finances allow.
In a DAS, a regular monthly payment to cover all unsecured debts will go to a Payment Distributor who will then distribute this amount to your creditors. It’s important to differentiate that a DAS allows you to repay your debt in full over a manageable period of time, whereas a sequestration will provide debt relief and discharge you from the debts (subject to certain exceptions) you have incurred after a period of one year unless you are subject to a DCO.
You will typically be discharged from the obligations of sequestration after 12 months providing you comply with your Trustee. If you fail to comply, the Accountant in Bankruptcy can decide not to discharge you. A DAS can last for several years depending on the amount of debt you have and the amount you are able to repay on a monthly/weekly basis. A DAS will not usually be allowed to extend beyond 10 years. If you do not believe you would be able to clear your debts within this time then you may need to consider an alternative debt solution process such as sequestration or a trust deed.
If you have a Debt Payment Plan under the DAS an entry will be recorded in the DAS Register, which is a matter of public record. If you have been sequestrated there is an entry in the Register of Insolvencies, which again, is a public register.
In order to enter sequestration or DAS you must have sought advice from a Money Advisor or Insolvency Practitioner. The Money Advisor/Insolvency Practitioner will review your financial position and ascertain the most appropriate option for you.
With both a DAS and sequestration, the ultimate aim is to be financially stable and debt-free at the end of the term. With each solution, you will be required to repay your creditors through monthly repayments and/or through proceeds raised from the sale of assets depending on your individual circumstances.
A DAS will last until all debts are repaid. Entering into a DAS won’t affect your home or mortgage providing you keep up with your repayments. You can exclude all assets or choose to realise assets to make lump sum payments and thereby reduce the total term of the DAS.
In contrast to the regular monthly payments of a DAS, sequestration will see an insolvency practitioner realise your share of equity in any assets owned by you. You are not able to exclude any assets from the sequestration and these will automatically pass over to your Trustee. You may also be required to make an income contribution towards your debts should you have sufficient disposable income to do so.
Both sequestration and a DAS will have an adverse effect on your credit rating which is unlikely to recover for at least six years after entering the procedure. This will make it difficult for you to access credit in the future, meaning a variety of things from a mortgage, down to a mobile phone contract, could be out of reach.
What you should remember, however, is that your credit rating is likely to be already affected by the time you get to the stage of considering a debt remedy solution. Any missed or late payments, or any payments made which are less than the contractual amount, will all damage your credit rating.
As many as one in four Scottish renters or mortgage holders are worried about whether they’ll be able to cover their housing costs over the course of this year.
Rules relating to Debt Arrangement Schemes (DAS) have been relaxed in ways that should provide extra breathing space for Scots whose finances have been adversely affected by the Covid pandemic.
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. (*This figure is temporarily set at £10,000 following the Scottish Coronavirus Act).
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.