What is a Sequestration (Scottish Bankruptcy)?

Bankruptcy, or Sequestration as it is known in Scotland, involves a person who has no realistic prospect of repaying their debt, having their assets and property transferred to an Insolvency Practitioner (known as a Trustee) on behalf of Creditors.

There are some instances in which it can be an advisable course of action for people with debts of more than £1,500. For people with low income and low assets, there is a special bankruptcy route called LILA (Low Income Low Asset).

If a Scottish Trust Deed is not affordable, Sequestration may be a suitable solution enabling the Debtor to be discharged from their debts after one year, although the agreed affordable monthly payment normally lasts for another two years (three years in total).

How does a Sequestration work?

Step One

First of all, consult a qualified and approved Money Adviser or Insolvency Practitioner who will clearly explain all the issues relating to sequestration and run through a checklist to ensure you are eligible.

You must:

live in Scotland
have debts of more than £1,500
not have been sequestrated in the last five years

Step Two

It is advisable to seek expert assistance and advice on sequestration to ensure it is in your best interests and that you fully understand the process. In any case, you will need to consult an Insolvency Practitioner or an approved Money Adviser in order to obtain a Certificate of Sequestration which verifies your inability to pay your debts.

Step Three

Once you have obtained a Certificate of Sequestration, your IP will apply to the Accountant in Bankruptcy (AiB) for your sequestration to be officially granted. Your application must contain evidence of inability to pay your debt and be accompanied by a payment of £200. Usually the AiB application is dealt with speedily and a Trustee (usually your IP) is appointed to take control of your assets.

Step Four

In a sequestration the Trustee will assess your assets and also your income and expenditure and determine if you can afford to make any payment to Creditors yourself or whether any of your assets can be sold to release cash towards payment of your debt. The Trustee is also responsible for the sale of assets which can include your house, car, valuable items, savings and investments etc. for the benefit of Creditors. The Trustee also takes charge of informing all of your Creditors about the sequestration and they should no longer contact you directly. Your Trustee will deal with all further communication with Creditors on your behalf.

Step Five

Sequestration lasts for a relatively short period - you can normally be discharged after 12 months. However, you may be required to continue to make contributions from your income for a further two years, or longer in some circumstances, even after you have been officially discharged.

Advantages

Once you are declared bankrupt, Creditors are unable to pursue you or take any legal action against you to recover what they are owed.
The Insolvency Practitioner will deal with all Creditors, removing a source of stress.
You may be discharged from your debts after as little as 12 months – but monthly payments usually last for a further 2 years (3 years in total).
If you are receiving welfare benefits, these will not be classed as income for the purpose of calculating contributions to be made toward Creditors.

Disadvantages

Individuals may find it hard to get credit for a few years after sequestration. Creditors and credit rating agencies will assess risk level based on financial history and this will include the sequestration.
If the individual is a homeowner and has equity in their property (or has any other particularly high-value assets), this must be released to pay Creditors. There are various ways this can be done without the need to sell the property, for example through remortgage. Alternatively it may be possible to extend the contributions from income for a longer time.
Your Sequestration will be listed on a public online register called the Register of Insolvencies and will stay there for one year after the bankruptcy is completed.