Personal Insolvency Options in Scotland: Sequestration

What is sequestration?

Sequestration is a form of insolvency designed to offer a financial solution to individuals who have found themselves unable to pay back unsecured debts they owe and which amount to more than £1,500.

The term sequestration is used in Scotland to mean much the same as bankruptcy in the rest of the UK and it is not a route to follow without careful consideration and appropriate expert advice.

There can be lasting ramifications for your credit rating if you enter sequestration but it can also serve to draw a line under the worst of your financial woes if you’ve been struggling with debts for a long time.

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How sequestration works in Scotland

The process of entering sequestration is designed effectively as a last resort for individuals who have no way of paying back their debts or satisfying their creditors. It is a legally defined and recognised process in Scotland that formalises a debtor’s insolvency and opens up the prospect of seeing a debt repayment strategy established.  If you want to discuss the option of sequestration then you can find further details at scotland debt solutions who have a team of personal insolvency experts.

An individual in Scotland can enter sequestration voluntarily or they can be forced into sequestration by a creditor owed more than £3,000. Whatever the circumstances might be that lead to a person entering sequestration, the fundamental elements of the process will be the same with the individual being obliged to pay back what money they can to satisfy creditors.

Clearly, the act of entering or being entered into sequestration indicates an inability on the part of the relevant debtor to satisfy creditors in full. Therefore the underlying aim of sequestration is to see creditors paid back money they’re owed as fully as possible and to ensure debtors are able to find some resolution to their debt problems. 

How sequestration could work for you

If you are in the position of having large amounts of unsecured debts and you feel you have no realistic prospect of paying those debts off then entering sequestration could be a sensible way forward for you.

It was the case until a change in the laws in 2008 that an individual in Scotland could not choose to enter sequestration but could only be entered into that position on the basis of a petition by creditors. This situation often left debtors powerless to resolve their financial problems in any conclusive way, with creditors able to continue adding interest charges and other fees to any outstanding unsecured debts.

Thankfully, Scottish debtors can now take matters into their own hands and move forward with sequestration as a means of finding protection from creditors.

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Making it official

In order to officially enter sequestration under the terms laid out by Scottish laws, an indebted individual will need to work closely with an insolvency practitioner (IP) and an expert in matters relating to sequestration.

Initially, the role of the IP will be to establish whether or not you are in fact eligible to enter sequestration, which will mean finding out whether or not you have any means of paying creditors money you owe.

The IP will also advise you on whether or not a Trust Deed or a Debt Arrangement Scheme might offer a more appropriate and advantageous means of dealing with your debts and your creditors.

If it is agreed that entering sequestration does indeed represent the best possible route forward given your particular circumstances then your IP will help you in formalising your application to that effect. In practical terms, this means submitting a variety of relevant forms to the Accountant in Bankruptcy, which should see your application processed within five working days. From there you can expect to have a Trustee appointed to your affairs, unless you decide to continuing working with your existing IP who can then begin to administer your case in further detail.

What does a Trustee do?

Once a Trustee has been appointed to your affairs in the context of a sequestration process, you will start to see your financial situation addressed in detail with a view to finding a route forward that works for you and satisfies your creditors. The Trustee effectively takes control of your finances at this point and looks at how and to what extent you might be able to pay back a proportion of the unsecured debts you owe to creditors.

The Trustee is responsible for drawing up a plan of action designed to raise as large an amount of money as possible from your finances. Any assets you have will be evaluated by the Trustee and they might be sold to raise funds where possible. The aim will be to pay back as much debt as possible at this stage and for a repayment plan to be established to ensure your creditors can be satisfied to some extent over time.

The process of handing over control of your finances to a Trustee can be difficult and even quite painful but the positive outcome is that you will no longer be required to respond to or deal with your creditors in any way. The Trustee has 60 days to inform each of your creditors that you have entered sequestration and you will be seeking to repay your debts from that basis.

Because sequestration is a legally recognised and supported process, you are within your rights as a debtor to ignore any attempts at communication from your creditors or to refer them directly to your Trustee.

Being discharged from sequestration

Subject to full compliance and cooperation, an individual is discharged from sequestration 12 months after entering it. However, the terms of a sequestration settlement will generally include having to repay pre-agreed amounts of money to creditors over a subsequent period of around 3 years.

Precisely how much and for how long a person entering sequestration will have to pay their creditors back will depend on the assessments of the Trustee appointed to oversee the process. The crucial issue in this context is your ability or otherwise as an individual to pay back the debts you owe.

Sequestration is by no means a quick fix for serious financial problems. Despite the fact that most people who enter sequestration are discharged after a year, the ramifications persist. If you are employed, you will need to allocate part of your monthly pay packet to settling your debts for a period of 36 months. So being discharged is far from the end of the story and there are still obligations to be met long after.

Sequestration and your property assets

It’s likely that any property assets you own upon entering sequestration will be considered in the assessment process that follows. Your appointed Trustee, having taken control of all your assets, will look to see where money might be raised to satisfy creditors and may decide that selling your property holdings represents a worthwhile way of settling some of your debts.

However, it is certainly not inevitable that entering sequestration will mean losing ownership of your home. The decision as to whether or not your property assets will need to be sold will always be made by your Trustee but they have a responsibility to be fair to both indebted individuals and their creditors.

It could be that the fees and charges involved in trying to raise cash via your property holdings will render the process cost ineffective and your Trustee will look at other ways of satisfying your creditors. Where the process could be cost effective though, your Trustee may well decide that your property assets ought to be leveraged to raise funds as part of the sequestration process. 

Sequestration and your car

When the terms of a sequestration arrangement are being drawn up, the aim is to find a solution and a route forward that can and will be sustained by all the stakeholders involved. From the perspective of an insolvent individual’s creditors, reliability of repayments is of vital importance and so if you need your car to get to and from work each day then that will be taken into account by your Trustee.

However, if you own a car with a clear and considerable resale value then you may well be obliged to sell it to raise funds to repay creditors in the short term. Here again though, allowances could be made if your vehicle is necessary for you to carry on earning a reliable income during the period of your sequestration and beyond.

Generally, any vehicles owned by a person entering sequestration that are worth in excess of £3,000 will be sold under the instructions of a Trustee acting in the interests of all stakeholders.

Applying for a LILA sequestration

If you live in Scotland and you have unsecured debts which you cannot afford to pay back and which you have no realistic prospect of being able to pay back then you are eligible to enter sequestration. If you are in this position and you have no more than £10,000 in assets and earn the equivalent of the national minimum wage for a 40-hour working week then you may qualify for what is called a LILA sequestration.

LILA (low income, low asset) sequestration functions in much the same way as any other form of sequestration, which means the individual involved must live in Scotland and owe more than £1,500 in unsecured debts. If you think you may qualify for a LILA sequestration then you should ask an insolvency practitioner for their expert opinion on whether or not the option is right for you. 

Advantages of sequestration:

A new beginning
Dealing with creditors and with debt problems can be extremely difficult and stressful over a period of time and sequestration offers a chance of a new financial beginning for thousands of people across Scotland every year.

Relief from creditors
Entering sequestration is a challenge in itself but from the perspective of a debtor, it can be a relief to draw a line under a period of indebtedness and to look forward without being hassled by creditors. Repayments will still have to be made once you’ve entered sequestration but the pressure of seeing your debts getting worse and worse is alleviated.

External assistance
If you’re in a situation whereby you finances have become a source of great stress and your debt problems have spiralled out of control then the third-party assistance that sequestration inevitably involves can come as a huge relief.

When you enter sequestration, your estate and all your assets are effectively handed over to the control of you Trustee. Most people wouldn’t want this situation to arise but when your finances have become a real mess then external help can be just what’s needed to start turning your situation around.

Long-term improvements
Entering sequestration is not an ideal situation for a person to find themselves in but it does represent a positive step forward for thousands of people facing serious debt problems. In most cases, sequestration is a vital step towards turning around a bad and otherwise unsustainable financial position. In short, it opens up the potential for a route toward solvency and a more manageable set of circumstances for people who’ve been struggling with debts they can’t repay. 

Downsides of sequestration:

Dented credit rating
One inevitable consequence of entering or being forced into sequestration is that your credit rating will be negatively impacted for a period of time. There is scope for your rating to be recovered but no avoiding a negative knock in the first instance.

Loss of control
Entering sequestration essentially makes clear that an individual has no capacity to pay back the unsecured debts they owe. To establish that this is indeed the case, a Trustee has to take full control of the relevant person’s assets, which many people might find difficult to deal with.

Company involvement restrictions
Anyone entering sequestration in Scotland is banned from having any meaningful involvement in a company at a directorial level for a period of 12 months. Plus, a person who has entered sequestration cannot be actively involved in the promotion, creation or management of any kind of business during that same period.

Very limited credit options
Entering sequestration effectively spells an end to an individual’s ability to access unsecured loans or credit of any sort for a period of time. For any number of reasons, credit and the financial flexibility it can afford is rendered out of reach for sequestered individuals, until such time as their finances are in better order.

Getting good advice
Sequestration is and should be viewed as a last resort for people who are struggling desperately with their unsecured debts. There are a variety of options available as potential solutions to financial problems beyond sequestration, with Debt Management Plans, Debt Arrangement Schemes and Trust Deeds all designed slightly differently to provide a blueprint for paying back creditors in part or in full. Whichever path you decide to take as a debtor, it is important to seek out expert advice from organisations like Real Business Rescue. Our offices are located right across the UK and we have five offices in Scotland, where our experts provide clear and no-nonsense guidance on how to handle serious debt difficulties and financial distress.