What happens if you are made bankrupt?
Expert outlines the in and outs of sequestration
Published:
Few people like to admit they are experiencing serious financial difficulties and will do anything they can to avoid the perceived stigma of bankruptcy.
With individuals getting into financial trouble, however, bankruptcy is an ever-growing possibility.
What exactly does it mean and what happens when you are made bankrupt?
Sequestration – as bankruptcy is legally known in Scotland – is usually an action of last resort because it does have serious implications for individuals.
It can be enacted voluntarily or forced upon you if you owe at least £3,000 and your inability to pay – referred to as your apparent insolvency – can be demonstrated to a court or to the Accountant in Bankruptcy, the body responsible for administering the process of personal bankruptcy north of the border.
Apparent insolvency means one of your creditors has served a charge for payment of a debt that you have failed to comply with within 14 days of the notice being sent; or one of your creditors has served a statutory demand for payment and you have not paid the sum due within 21 days.
Alternatively, it is applied for voluntarily by completing a short form and submitting it to the Accountant in Bankruptcy.
Once in effect, sequestration means your assets are signed over to a trustee – an insolvency practitioner – who then realises their value for the benefit of your creditors.
Your creditors will no longer be able to pursue you for debt or take action against you to recover what you owe. In addition, you will not be required to make any further payments to your creditors; and can be expected to be discharged after one year and then be free of debt after three years.
There are some exceptions to this, the most notable being student loans which remain payable after sequestration.
It may sound quite straightforward and painless, but most of your assets will be taken from you to pay your creditors, including interest in your house, and possibly the house itself if it is the only asset available; and interest in any vehicle you own, or possibly the vehicle itself if it is of significant value.
Sequestration is usually pursued when alternative arrangements such as debt-management plans or protected trust deeds (PTDs) are unable to generate a sufficient return for creditors.
A new low-income low-asset (Lila) sequestration came into force recently and is designed for those with minimal assets and income.
Before Lila sequestration was introduced, debtors would often have no solution since no insolvency practitioner would take them on because they would not have their fees paid.
In a few cases, sequestration may be preferable to a PTD.
If you have a job, you will be expected to make regular contributions from any surplus income to your trustee, while any money or property you inherit during the period of your sequestration will have to be surrendered to your trustee.
You are not allowed to take credit of more than £500 unless you tell the lender you are an undischarged bankrupt, and you are not allowed to be involved in the running of a business, act as a member of parliament or undertake certain other duties such as act as a member of any other councils.
Your sequestration will also be advertised in the Edinburgh Gazette and is likely to result in difficulty accessing credit for a period after your discharge.
Consulting a debt adviser early on when you are struggling to keep up with repayments will mean there are more options for tackling the problem, such as debt-management plans or PTDs, which allow you to be debt free after three years without the same penalties as sequestration.
Recalling a sequestration is a complicated and expensive business, so always make sure it is the best option for you.
Donald McNaught is a director of Invocas Business and Recovery, which operates consumer debt service arm Newtomorrow
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