If you are a resident of Scotland, and have unsecured debts that are spiralling out of control in a vortex of panic and anxiety now may be the time to take action and regain control. Sequestration may just help you do that.
What is Sequestration?
Sequestration is a form of insolvency and is designed to help you pay off debt you owe. Control of your assets is transferred to an appointed trustee who deals with your creditors on your behalf. Through sequestration, you would be able to write off any unsecured debt you have after a year.
It works in a similar way that bankruptcy does in England, and is designed to be a last resort, when you are genuinely unable to pay your unsecured debts. It can be voluntary, or creditors can force an individual into sequestration in order to satisfy any debts owed.
In order to apply for sequestration, certain criteria must be met:
- You must have lived in Scotland sometime in the past year, or be a current resident.
- Are able to cover the £200 application fee.
- Owe more than £3000
- Not been sequestrated in the last five years
- You must be classed as insolvent, which could mean that a creditor has issued a statutory demand, or a charge for payment. It could also mean that you were unable to have your Trust Deed protected.
- Obtained a Certificate of Sequestration (see below).
- Have a summary warrant to recover rates or taxes.
- An attachment or an exceptional attachment order has been made against items you own and the 14 days allowed for payment have passed without you making a payment.
In many circumstances, the best option for a lot of people in Scotland would be a Scottish Trust Deed.
How does Sequestration work?
An Insolvency Accountant will award a Certificate of Sequestration once they have examined your finances and deemed that you are insolvent and cannot pay your creditors. It is their job to determine whether you fulfil the criteria to apply for sequestration under the terms of the latest legislation. They can also advise whether a Scottish Trust Deed would be more suitable for your situation. Once your suitability is established, your Insolvency Accountant will assist you in completing your debtor application pack.
Within 30 day of obtaining your Certificate of Sequestration, you need to submit your application to the Accountant in Bankruptcy. If all the evidence required and a fee of £200 is presented, the Accountant in Bankruptcy will process your application quickly – usually within 5 working days. This means that within a very short time, you could formally be declared bankrupt (sequestration).
A trustee will be appointed to your case; this can either be your Insolvency Accountant or one will be appointed on your behalf. It is crucial that you feel comfortable with this trustee, as they will be working very closely with you.
The role of the Trustee
Your trustee examines your ability to pay back your creditors, and takes control of your assets. She can decide if your assets have enough value to, if sold, pay back some creditors. Your trustee will also map out a payment plan for you to follow; it is crucial that you stick to this, and therefore you must be open and honest about your income and expenditure with your trustee from the start. She can then work out a realistic payment scheme.
She will also take responsibility for liaising with your creditors, and explaining to them that they may not get their debts back in full. Officially, your trustee has 60 days in which to do this. Your creditors may seek to contact you, demanding repayment, or threatening action, however sequestration is a legally binding process and you are not obliged to respond to any contact directly – only through your trustee.
Depending on the level of your debt, and your willingness to cooperate, you could be discharged anywhere from 6 months to 1 year. You can apply for a Certificate of Satisfaction from the Accountant in Bankruptcy. However, your trustee may still have work to do.
You should still cooperate fully with your trustee, and in turn, they will keep you up to date on any developments in your case. If you can afford to, and are in employment, you may be required to keep making payments towards any remaining debts for the next 36 months. However, any that remain after this will be discharged, and you are free to start rebuilding your life, and your credit rating, as soon as possible.
Pros and cons of sequestration
As with a Scottish Trust Deed, the relief of not having to deal with angry, demanding and sometimes threatening creditors cannot be underestimated! Your trustee has the authority to deal with them, alleviating your stress immediately.
Entering sequestration allows you to start again, moving forward with your life, and although there are restrictions, in many cases, it is the answer.
Inevitably, sequestration will have a negative impact on your credit score, and the effects can remain for up to six years after discharge. However, once that period is over, you can work on rebuilding your credit. You will also be banned for acting as a company director until your debts are discharged. It may also be the case that your career options become limited. But again, this will only be for a limited time.
If you have been used to having a certain amount of financial independence, signing over your assets to your trustee may be difficult, and unsettling. It can have far reaching implications, especially if you have to sell the family home to raise funds. This impact should not be underestimated.
Will I lose my property if I enter sequestration?
While you are going through sequestration, the control of all of your assets will transfers to your trustee. They will look at your situation to see if you can afford any repayments towards your unsecured debts, and how those payments can be made. 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. This is the decision of your trustee.
However, in order to sell, or raise equity from, a house, both money and time are needed and it may be that this negates any benefits raised from selling. So whether or not you will need to sell your home might depend on the value and how much it would cost to release any money from it. If you jointly own a property, and your partner agrees to the sale, they would receive their share of the equity raised eg if you each own 50%, they will get 50% of the equity.
It should be noted, however, that if your mortgage lender has already started the repossession process for your property, your trustee cannot prevent this from happening. When the mortgage lender has sold the house, if there is any money left over, your trustee can pay off some of your creditors with it.
What about my car?
If you need your car, or other vehicle, to get to and from work, your trustee will take this into account and it is likely that you can keep that particular vehicle. However, if your vehicle has a value of over £3,000 or is not really necessary for your day to day life (eg you don’t have children that need to go to school, or a medical condition that prevents you walking to the shops), your trustee may insist on you selling it to raise whatever funds you can.
What other assets count?
Parting with your assets can be very unsettling, especially if children and spouses are involved. Other than releasing any equity in your property, and potentially your car, you will normally be able to keep hold of the items you need for day to day living. Clothes, furniture, household items, cooking and cleaning equipment, educational things and children’s toys will all be permitted to stay.
You may also keep any tools that you need for your trade, up to a value of £1000.
I am unemployed and have no assets – can I still apply for sequestration?
If you live in Scotland, have a minimum income and no assets, the rules are slightly different. Cheaper and more straightforward, a Minimal Asset Process (MAP) is an alternative to sequestration bankruptcy.
Under MAP, your trustee must be the Accountant in Bankruptcy, but her responsibilities to you, and yours to her, are the same as a sequestration bankruptcy.
If you fulfil the criteria, a MAP might be the answer for you:
- You reside in Scotland, but do not own a property
- Your income is made up solely of income-related benefits such as jobseekers allowance (JSA), or the amount of money you earn covers your essential living costs, with nothing left over.
- Your unsecured debts are more than £1,500 and less than £17,000.
- Your car is worth £3,000 or less.
- Your other assets are worth less than £2,000 in total, with no single item worth more than £1,000.