In Scotland, Sequestration is the legal word for bankruptcy. It is a legal remedy that allows you to appoint a Licenced Insolvency Practitioner to wind up your estate, deal with your debts and your creditors.
You can also be required to pay what you can afford to your bankruptcy for up to four years and your Insolvency Practitioner can ingather your assets for the benefit of your creditors.
Once you receive a discharge you become debt free.
There are two ways you can be made bankrupt:
Debtor Application for Bankruptcy
The first way is to make yourself bankrupt (this is the most common way people go bankrupt in Scotland and is done by making a debtor’s application to the Accountant in Bankruptcy’s office);
Creditor Petition for Bankruptcy
The other way is for a creditor you owe money to, to make you bankrupt (this is done by a creditor raising a petition that is heard by the sheriff court).
How you are made bankrupt is important, as if you want to go bankrupt you will use the debtor application route. However, if you don’t want to go bankrupt, you could still be at risk of a creditor making you bankrupt, in which case you may want to try and stop them.
However, sometimes it may be that you want to go bankrupt, but don’t want the costs associated with doing so, so you may do nothing and wait for a creditor to make you bankrupt.
Why would you want to apply for your own Sequestration (Bankruptcy)?
If you want to go bankrupt, you will normally do so because it is a legal way for you to deal with your over-indebtedness.
You normally will only apply for bankruptcy in certain circumstances:
- Where your total debts are greater than your total liabilities (you owe more than you own);
- When you cannot make your minimum contractual payments to those debt (cannot afford to pay your debts as they fall due); and
- When repaying those debts through a repayment plan would not be possible within a reasonable period.
Owing a home, or a car is not necessarily a reason for not going bankrupt, but special care should be taken, and specialist advice sought first.
What does going bankrupt mean?
By applying for your bankruptcy, you agree to allow a trustee to be appointed who manages your debts and deals with your creditors for you.
A trustee is a licenced insolvency practitioner who is appointed to administer a bankruptcy. When they are appointed to administer a bankruptcy, they have a duty of care to the debtor, but they act in the interests of the creditors.
What this means is they must administer the bankruptcy to try and get as much money back for your creditors as they can.
The trustee does this by using your assets to repay your debts and if you can afford to contribute anything from your income, then you must do so for four years.
In return, you receive a discharge from your debts usually after one year (six months if it is a Minimum Asset Bankruptcy). After that you are no longer bankrupt, although this is conditional on you co-operating with your trustee.
However, although you may receive a discharge, your bankruptcy can still continue beyond that to allow your trustee to in-gather as much money as possible for your creditors: so you can still be made to contribute to your bankruptcy, for up to four years; you also don’t necessarily get any rights you had to any assets returned after your discharge, such as those to your house or car.
Also, you can also lose any rights to any assets you come into within four years of your bankruptcy, such as an inheritance or a gambling windfall.
However, despite these disadvantages, including the fact it can damage your credit rating, for many people these disadvantages are outweighed by the benefits of becoming debt free.
How are you Assets dealt with in Bankruptcy?
When someone is made bankrupt, either by applying for it themselves or because of a creditor’s petition, one of the effects is all the debtor’s assets transfer to their trustee (there, however, are many exceptions to this rule and a full list of assets that don’t vest with the trustee can be found here (they are the same as the rules that govern what Sheriff Officers can and cannot take).
In relation to cars, the general rule is if these are subject to a hire-purchase, conditional sale, or Personal Contract Purchase plan, they belong to the finance company and will be returned unless your trustee allows you to keep them. If they do the monthly payments need to be made or the car will be repossessed.
If you own the car then, providing you can show you have a reasonable requirement for it and it is worth less than £3,000, then it won’t be treated as an asset.
In relation to your home, where you are a home owner, it vests with the trustee. This does not mean you have to move out your home, but it does mean you cannot sell or re-mortgage it without the trustee’s permission and if you do and make any profits, or release any equity, these belongs to the trustee.
Normally, where there is negative equity in the home, (that is the mortgage is greater than its value), then although the home has no immediate value, it still vests with the trustee as it could have later if house prices increase. For that reason, his interest in it must be dealt with before he will discharge it.
This may mean where there is no equity, the trustee’s interest in it may be satisfied by arranging to pay a token amount, such as £500. Either yourself or a third party, like a family member or friend, can arrange to do this.
Where there is equity, (that is where the value of the property exceeds the mortgage secured on it), the trustee will normally seek to realise this for the benefit of your creditors before he releases his interest in back to you.
Where you cannot satisfy the trustee’s interest in your home, he can apply to the court to sell your home. If this is the case, you should seek legal advice immediately.
Types of Sequestration
When you want to go bankrupt, there are two types of bankruptcy you can apply for.
Full Administration Bankruptcy (FAB)
To use the Full Administration route, you need to meet several different conditions:
- You must owe at least £3,000 in debt; and
- You must normally live in Scotland;
- You must have received advice from an Approved Money Adviser or Licenced Insolvency Practitioner;
- You must have signed a Certificate of Sequestration, or be apparently insolvent, which normally means having an expired Charge for Payment;
- Signed a Trust Deed that has failed because your creditors objected to it;
- You cannot have been sequestrated within the last five years; and
- You must pay the £200 application fee (currently £150 due to Covid 19), or you may be entitled to a fee waiver if you are in receipt of certain benefits;
The application is then made to the Accountant in Bankruptcy by your Money Adviser or the Licenced Insolvency Practitioner. The Accountant in Bankruptcy is a Scottish Government agency, that awards and administers bankruptcies.
Minimum Asset Procedure (MAP)
The second type of bankruptcy is known as the Minimum Asset Procedure.
To use this procedure, you also need to meet the qualifying conditions:
- You must owe between £1,500 and £25,000 (when calculating debt levels, do not count student loans);
- You cannot own land or a house;
- Your total assets cannot be worth more than £2,000;
- You cannot have any one asset worth more than £1,000 (this does not apply to a car);
- You must have spoken with an Approved Money Adviser or Licenced Insolvency Practitioner;
- You need to show you have been in receipt of a qualifying social security benefit for the last 6 months; or you cannot afford to pay anything towards your bankruptcy.
- You must pay the application fee of £90 to the Accountant in Bankruptcy.
Creditor Petitions for Bankruptcy
When a creditor wants to make you bankrupt, they need to raise a petition (court application) for your bankruptcy in the Sheriff Court.
The application also must be heard by a sheriff court judge and you have the right to be represented. If you don’t appear or arrange for someone to represent you at court, you will be declared bankrupt.
To do this, the creditor must first meet certain criteria:
- You must owe them £3,000 at least (currently £10,000 because if Covid 19 rules); and
- You must be apparently insolvent;
If a creditor raises a petition for your bankruptcy, you will be notified by the court of the hearing date, which is often called the first calling date.
It is vital you obtain advice and representation before this date from a money adviser or a solicitor. Sometimes it is not in your interest to defend the petition and it may be better for you to allow the bankruptcy to be awarded. Other times, however, it is better for you to stop it.
There are several ways a bankruptcy petition can be defended:
- You could apply to the Debt Arrangement Scheme;
- You could offer to pay the debt off in full;
- You may have a technical argument, where the petition has proceeded on the back of a Charge for Payment after the Summary Diligence procedure has been used.
Regardless of the possible defences, it cannot be stressed enough how important it is to get advice first and for you to be represented at court.