Sequestration

If you find yourself struggling with unmanageable debt and you’re a resident of Scotland, you may consider sequestration. Sequestration is the Scottish equivalent of bankruptcy and serves as a formal debt solution for individuals who owe money they can’t reasonably pay back.

Summary

• Sequestration is only available in Scotland
• Sequestration, or Scottish bankruptcy, offers formal debt relief for overwhelming debts
• Sequestration can be initiated voluntarily if debts become unmanageable
• The application is a structured process that involves working with the Accountant in Bankruptcy (AiB)
• Sequestration will impact credit and assets like your home and car, so it should be seen as a last resort
• Always seek professional debt advice before sequestration, and explore all available options and use this as a last resort
• Sequestration appears on the Register of Insolvencies

What is Sequestration in Scotland?

Sequestration, commonly known as bankruptcy, is a formal debt solution in Scotland. It is a legal process designed to help individuals who are overwhelmed by debt and cannot afford to pay back what they owe.

Sequestration provides a structured and supervised means for debt relief, offering eligible individuals a chance to manage what they owe if they're willing to surrender their assets and adhere to the terms of the arrangement.

While the aim of sequestration is to provide individuals struggling with unmanageable debt an opportunity to regain control of their finances, the process comes with severe financial consequences. As such, it should always be considered as a last resort when other alternatives have been exhausted.

Who initiates the bankruptcy process in Scotland?

Bankruptcy petition lodged by creditors

Creditors, the people you owe money to, can initiate the bankruptcy process in Scotland by lodging a bankruptcy petition against you in court.

When creditors believe that you are unable to repay your debts, they may seek legal action to recover the funds they are owed. This action can prompt the court to consider sequestration as a solution.

If your creditors are successful with their bankruptcy petition, and the court agrees that you owe the money at issue, they will initiate bankruptcy proceedings against you and order you to comply fully with the process.

Initiating your own Sequestration

Initiating your own Sequestration is a proactive approach when your debts become unmanageable. By voluntarily applying for sequestration, you acknowledge that your debts have become unsustainable.

This process comes with important implications, including bankruptcy status, adherence to bankruptcy restrictions, and ongoing support from Insolvency Practitioners or approved money advisers, but it could mark the start of the process to regain control of your finances.

What does the Sequestration process look like?

The path to sequestration in Scotland is a structured one, involving several crucial steps. Here's a closer look at the key stages in the sequestration process:

Seek debt advice

Before embarking on the sequestration journey, it is essential to seek professional debt advice. Expert guidance is offered by debt charities, debt advice companies, or Insolvency Practitioners in Scotland.

These professionals can help you determine if sequestration is the most suitable solution for your specific financial circumstances.

Work with an Insolvency Practitioner on your application

If you decide that sequestration is the right path, you will need to formally apply through an approved money adviser.

An approved money adviser (or approved money advisor) can help guide you through the application process, which entails filling out forms that detail your financial situation and paying the necessary fees.

Submit your application to the Accountant in Bankruptcy

Your application will be submitted to the Accountant in Bankruptcy, the government agency responsible for overseeing sequestrations in Scotland. The Accountant in Bankruptcy plays a pivotal role in administering the sequestration process.

Notify creditors

Once the sequestration process begins, it is essential to notify your creditors of the proceedings. This will usually be taken care of by your approved money adviser or Insolvency Practitioner.

This step ensures transparency in the process and allows creditors to participate in the distribution of your assets to satisfy your outstanding debts.

Comply with bankruptcy restrictions

Throughout the sequestration process, you are expected to adhere to various bankruptcy restrictions. These limitations may affect your ability to take on specific roles, such as being a company director or working within particular industries, without court approval, but are designed to make sure you successfully complete the sequestration.

How does Sequestration affect your credit rating?

Sequestration will have a serious impact on your credit, making it harder to secure credit during and after, which is why it should only ever be considered as a last resort for people who have exhausted all other debt relief options.

Details of your sequestration will be listed on your credit report for a period of six years from when you first entered the arrangement. Future lenders will have a full view of this information when considering you for any credit application. This will impact the terms they offer, and may make it more difficult to obtain credit in general.

Once you successfully complete the process and six years have passed, you will be free of the debts that were included in the arrangement and can begin to rebuild your credit profile by making timely payments and demonstrating responsible financial management.

Who will be aware of my Sequestration?

When you undergo sequestration in Scotland, it will appear on the Register of Insolvencies. There are also certain people and entities who will be aware of the sequestration, which can have an influence on your personal and professional life:

Existing creditors

Your current creditors are notified of your sequestration to engage in the process of distributing available assets to settle outstanding debts. This transparency ensures a structured and equitable resolution for all parties involved.

Credit reference agencies

Sequestration affects your credit history. Information about your sequestration is recorded on your credit file for a period of six years, impacting your credit score.

Credit reference agencies, whose job it is to monitor your financial activity, will be aware of any active debt solutions on your record, and will adjust your credit score accordingly.

Future lenders

When you apply for credit in the future, potential lenders will review your credit history. The presence of a past sequestration on your credit report may influence their decision to extend credit, and can impact the terms and conditions they offer.

Certain employers

Some employers conduct routine credit checks on their employees, especially for roles that involve financial responsibilities.

If your employer engages in these kinds of checks, they may become aware of your sequestration. This awareness could potentially affect your employment status or agreements in your employment contract, particularly if your role involves financial trust.

What debts can be included in Sequestration?

Unsecured debts

The main purpose of sequestration is to address unsecured debts. Unsecured debts are financial obligations that are not tied to an asset, such as a house or a car.

Common unsecured debts that can be covered by sequestration include:

• Personal loans
• Credit card debts
• Payday loans
• Overdrafts
• Utility bill arrears

These kinds of debts can weigh heavily on individuals, making sequestration a suitable option to manage them and eventually write them off.

What debts are excluded from Sequestration?

Secured debts

In contrast to unsecured debts, sequestration does not cover secured debts, which are linked to specific assets like a mortgage on your home or a car loan. It also doesn’t cover debts like court fines.

Here are some common examples of debts that aren’t eligible for inclusion in sequestration:

• Mortgage arrears
• Car finance loans
• Unpaid child maintenance payments
• Court fines and other criminal charges

If you carry any of the debts above, you will remain responsible for making payments on these obligations, even after entering the sequestration process.

What happens to assets like my home and car?

Entering sequestration in Scotland involves the potential sale of assets, such as your home and car, which can be sold to raise money and pay creditors. The appointed trustee oversees this process, determining which assets should be sold to maximise returns for creditors.

While sequestration may include selling your home or car, exemptions exist to protect essential assets that you need for daily living.

It's crucial to stay updated on any changes in regulations and seek advice from a knowledgeable source in debt management in order to determine whether any of your assets might be suitable for exemption.

What happens at the end of Sequestration in Scotland?

When your 12-month sequestration period ends, any eligible debts included in the arrangement will be officially forgiven.

You will receive a Certificate of Sequestration, which you can share with creditors to confirm that you have successfully completed the sequestration process, although it can take a while for this document to be processed.

Can Sequestration last longer than 12 months?

The impact of sequestration can extend beyond the 12-month process. If you have a source of regular income, you may be asked to continue to pay money to creditors from your wages.

This is known as a Debtor Contribution Order (DCO) (formerly an Income Payment Order), and the regular payments will typically last for a period of 48 months, depending on your individual financial circumstances.