What is Sequestration?

Sequestration is the Scottish legal term for personal Bankruptcy.

Strictly speaking it is an individuals estate that is sequestrated and an individual who is declared bankrupt although in practice the terms are used interchangeably.

Sequestration offers the opportunity to make a fresh start in circumstances where the debts you owe are overwhelming and there is little prospect that you will ever be able to clear them or make an offer to settle them.

Sequestration is sometimes seen as a last resort since it means any significant assets you may own, such as equity in your home if you are buying it, are likely to be used to help settle your debts. It also places some restrictions on your ability to obtain future credit, carry on business and hold certain public offices. You cannot act as a director of limited company or form a limited company or serve on the management board of a limited company throughout the term of your sequestration.

How does Sequestration work?

These are conditions that must be met BEFORE you can apply for your own sequestration.

• You must owe a total debt of £1,500 or more; and
• You must be living in Scotland or have lived in Scotland sometime during the last year; and
• You must not have been made bankrupt in the last 5 years; and
• You must pay the application fee, currently £100

Please note that no exemptions apply to the application fee for bankruptcy and the fee is non refundable whether your application is successful or not.

Following changes in Scottish bankruptcy laws which came into effect in April 2008, there are now 2 routes into bankruptcy, the Low Income Low Asset (LILA) scheme and Apparent Insolvency.

To qualify under LILA you must meet low income criteria and also have no single asset worth more than £1,000 or assets totalling more than £10,000. This also means that you must not own or jointly own a house or any other property or land.

Under the LILA criteria, 'low income' means gross weekly income of no more than the standard national minimum wage for a forty hour working week. This is currently equivalent to £220.80 a week. Any pensions or maintenance payments that you receive will also be included in your income.

If you do not meet the criteria to apply under the LILA scheme, you need to prove Apparent Insolvency before you can apply for your own bankruptcy.

To prove apparent insolvency you must have had one of the following enforcement actions taken against you:

1. A creditor has raised a court action, obtained a decree and has had a Charge for Payment served on you and the 14 days allowed for payment have expired without making payment.

   Or

2. A creditor has obtained a Summary Warrant against you for the recovery of rates or taxes and your goods have been subject to an attachment or an exceptional attachment order and 14 days have passed after the attachment without payment being made.

   COUNCIL TAX:

   From the 1st April 2008 Local Authorities will now need to serve a Charge for Payment on debtors, after service of a Summary Warrant, in order to be able to carry out any diligence.
   
   The Local Authorities will have until only July 2008 to enforce any Summary Warrant which was granted before the 31st March 2008 without a Charge for Payment, after this they will need to serve a Charge before any further diligence regardless of when the Summary Warrant was issued.

   Or

3. A creditor has served you a Statutory Demand which requires you to make payment of a debt within 21 days of the date of the notice, and you have not paid the debt or informed the creditor that you dispute either the sum of the money involved or the debt itself.

To apply for your bankruptcy you will need to obtain a 'debtor application pack' from the Accountant in Bankruptcy. You need to pay the application fee at the time of lodging the application.

You will need to supply details of all your assets, liabilities and your income and expenditure.

A creditor can also apply for your sequestration if you owe them more than £3000, and they can demonstrate your 'apparent insolvency' to the court. They must first provide you with debt advice and an information package. In this case and before your bankruptcy is granted, there will be a court hearing where you will have an opportunity to explain why your bankruptcy should not be awarded.

When you are made bankrupt, a trustee is appointed to administer your estate and oversee the administration of your bankruptcy. The trustee has various duties, including reporting to the creditors and selling any valuable assets with a view to paying your creditors as much as possible of what you owe them and paying the costs of managing your bankruptcy.

After you have been made bankrupt, your unsecured creditors cannot take any further action against you, however if you have a mortgage or a secured loan, the secured lender could take action to recover their money. Once you are discharged (usually after a year) your debts are effectively written off. There are exceptions, which you will still be liable to pay after your discharge:

• Court Fines

• Debts arising from fraud

• Social fund loans or overpayment of benefit

• Student loans

Your discharge from sequestration does not apply to any debts that you have run up after the date of your bankruptcy.

How long does Sequestration last?

You will usually be discharged after 1 year

The Trustee may however impose bankruptcy restrictions for between 2 and 15 years if your conduct before or after the award of bankruptcy has been dishonest or blameworthy in some way. Examples of this may be:

• incurring debts that you knew you had no reasonable chance of repaying;
• giving away assets or selling them at less than their value;
• gambling or making rash speculations or being unreasonably extravagant; and
• not co-operating with the trustee during the period of the bankruptcy.

If you and the Trustee can agree these restrictions a Bankruptcy Restriction Undertaking can be agreed.

If this is not possible the trustee may apply through the Accountant in Bankruptcy to the Sheriff for a Bankruptcy Restriction Order at any time during your bankruptcy, or in exceptional circumstances after your discharge.

If the order is imposed, you will remain subject to certain restrictions for the specific period stated in the Bankruptcy Restriction Order even after you are discharged from your bankruptcy. Failure to comply with the terms of bankruptcy restriction is an offence.

Even if you have been discharged, your bankruptcy will not be finished until the Trustee has done everything they need to, and they are discharged from their duties. You must continue to co-operate with the Trustee until the Trustee is discharged.

Will they take everything I have?

No. In most instances your household goods will not be taken. You will normally be allowed to keep things that are needed for normal day-to-day living - these remain yours and would not transfer to the trustee. If you own a car, the Trustee will take into account its value and whether it is essential to you before deciding whether to remove or sell it. The tools of your trade are normally exempt.

What about my home?

The effect of sequestration on your home depends on whether it is rented or owned or mortgaged. If you own your home, your interest in the property will automatically transfer to the Trustee and it will be their duty and intention to sell it.

It may be possible to safeguard your home if a family member or friend is willing to buy your share of the property (usually expected to be the market value of your share of the property). This enables the equity to be released, while protecting your home.

If you rent your home you should check your tenancy agreement for any clause preventing you from going bankrupt and continuing to live there.

Will I need to make contributions?

Your Trustee may require you to make a contribution towards your bankruptcy from your income or pension. They will look at your income and how much you and your family need to live on to assess whether you have any surplus income to make as a contribution.

If the Trustee agrees a voluntary contribution amount with you, this is known as an Income Payment Agreement (IPA). You can agree to have the contribution deducted from your wages if you wish.

If you are unable to reach an agreement, your trustee can apply to the Sheriff Court for an Income Payment Order (IPO) where the Sheriff decides the amount you must pay. Your Trustee can ask the Sheriff to order payments directly from your wages.

Your Trustee will not take a contribution from social security benefits or tax credits

Who will know?

Your Sequestration will be reported in the Edinburgh Gazette. The Trustee will contact your creditors.

Can I have a Bank Account during my sequestration?

When the Bankruptcy Order is made...

• Your bank account will be frozen.
• You will have to stop using your cheque books and bank cards immediately and then give them to the Trustee.
• You will need to make alternative arrangements for receiving and making payments.
• Money in your account will be counted as an asset in your Bankruptcy estate.
• Overdraft accounts will be counted as debts.
• The Trustee can release money from your account for living expenses.

After the Bankruptcy Order has been made...

• Your bank may agree to unfreeze your account but they do not have to do so.
• You may open a new bank account but you must tell the bank that you are Bankrupt.
• It is up to the bank or building society to decide whether to offer you an account.
• You may not obtain overdraft or credit facilities without telling the bank that you are Bankrupt.
• You may only be able to open a basic bank account. More information about basic accounts is available from the Financial Services Authority.

If you have trouble opening a bank account:

• You can get benefits paid into a Post Office account.
• You can ask your employer to pay you by cheque.
• You could start saving with your local Credit Union.

Will I lose my job / pension?

This will depend on your job. If you work for example in the legal or financial professions e.g. as a solicitor or an accountant it is likely that your job will be affected. Consult your union / personnel department / pension scheme administrator for advice.

What will happen to my credit rating?

Your Sequestration will be recorded by the Credit Reference Agencies for upto 6 years.

Where can I get more information?

More information is available from the Accountant in Bankruptcy. The website is: http://www.aib.gov.uk. There is also a telephone enquiry line 0845 762 6171.