What is Sequestration?
Sequestration is essentially the Scottish version of bankruptcy. The rules of sequestration are very similar to the bankruptcy laws in England, Wales and Northern Ireland.
It is a form of insolvency, which help alleviate the worst of your financial worries.
When someone is genuinely unable to meet their unsecured debt obligations in any way, the final resort is sequestration (a form of insolvency). It allows your debts to be written off after a fixed period of making monthly payments towards what you owe.
How it works
You can enter sequestration voluntarily by submitting a debtor application. This is effectively asking your creditors (the people you owe money to) to draw a line under your debt situation and move forward. They can put you into sequestration to get debts repaid in part or in full.
Although sequestration isn’t right for everyone, the process can work well as a debt solution in a variety of circumstances. It has helped thousands of people around Scotland get back on their feet every year.
You will need a licensed Insolvency Practitioner (IP), also known as a trustee, to take control of your assets and liaise with your creditors on your behalf. This is what we do at Middlebrooks.
Until 2008, a person in Scotland with lots of unsecured debts (such as credit cards, personal loans or store cards) would be unable to enter sequestration of their own accord.
This meant creditors (the people you owe the money to) would watch people’s debt grow over long periods of time, adding interest fees and charges day-by-day. This became an insurmountable debt that would be impossible to pay off.
Thankfully, sequestration laws were changed in 2008, allowing people to voluntarily choose sequestration and resolve their debts.
Appointing a Trustee over your affairs is vital. As your insolvency practitioner, this is a role we can undertake. Our first step is to understand your situation. We want to build a relationship with you and determine if sequestration is the most appropriate solution – and whether you eligible under the terms of the latest legislation in Scotland.
The essential question is whether you are insolvent or not, and therefore unable to pay back your creditors.
Once we’ve ensured sequestration is the best way forward for you, we will assist you in completing your debtor application pack and issue you a Certificate of Sequestration (if required) and submit your application to the Accountant in Bankruptcy (AiB).
From there, the AiB will aim to process your application with within five working days.
While this is happening, as your Trustee, we will take control of any assets you own and determine your ability to pay back your creditors. We will then decide the best way for moving forward, helping you to settle any outstanding debt as fully as possible. This often means valuing and selling your assets, as well as mapping out a repayment plan for the future.
You don’t need to worry about your creditors anymore. We will take full responsibility for liaising with them, and ensure they understand you won’t be able to pay them back in full. Strictly speaking, as your Trustee, we have 60 days to inform each of your creditors that you have been sequestrated and that your financial affairs are essentially being reconstituted from that basis.
Your creditors might still try and contact you, requesting payment of the debts you owe. However, sequestration is a legally binding process and you are not obliged to respond to your creditors in any way other than through your appointed Trustee.
Depending on the level of your debt and assets you own, you may be discharged from your debt after 6 months (subject to your compliance and cooperation). However, the process might not end there because the terms of your sequestration might include you have to make a contribution for a longer period of time.
The extent to which you are obliged to continue paying back your creditors once discharged will depend on the level of your debt, the assets which you own and your income position. If you’re in employment, you may be obliged to make a contribution to paying back your creditors for a period of 48 months which will continue for a period after being discharged from sequestration.
The process of sequestration means an individual owes money to one or more creditors, but has no means and no prospect of settling those unsecured debts.
Therefore, sequestration involves the transfer of your assets to the control of a Trustee, who is a licensed insolvency practitioner. The Trustee is then responsible for finding a route forward that is fair to all the parties involved.
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.
So whether or not you will need to sell your home might depend on the value of the asset and how much it would cost to raise money from it, which will be a decision made by your Trustee.
Not necessarily, because the terms of sequestration arrangements are designed to give you the best chance of paying off your debts over a specified term of up to 4 years. So, if you need a car to get to and from your workplace then this will be taken into account by your Trustee and you might be given the option of retaining ownership of your vehicle.
On the other hand, if your vehicle is deemed to have a value in excess of £3,000, or you don’t have any real need for it, then your Trustee may insist that you sell it to raise whatever cash you can to help settle some of your debts.
A Fresh Start
Perhaps the most significant benefit to be gained from sequestration is that it enables individuals to draw a line under their unsecured debt problems and start moving forward. There are consequences and restrictions on individuals who enter sequestration but in many cases it may be the best way forward to resolve their current situation.
Relief from creditor demands
The nature of a sequestration scenario is such that an appointed Trustee acts as a mediator between debtors or creditors, which can help provide reassurance for both. From the perspective of debtors, the role played by a Trustee in settling issues or disputes of any sort with creditors can be a big help in alleviating fears and understanding options more clearly.
Third party assistance
Sequestration essentially hands responsibility for your financial affairs over to a third party who is a licensed insolvency practitioner. The arrangement relieves indebted individuals of the need to fend off creditors who in many cases might otherwise be relentlessly demanding payment of outstanding debts. All the creditor correspondence can be passed to your Trustee to correspond with them directly.
Improved financial prospect
What sequestration proceedings provide ultimately for anyone facing serious debt problems is the prospect of improving their financial position. Whether you enter sequestration voluntarily or are forced into that position by creditors, the process can create a sense of positivity and of taking action. This in turn can lead to an individual feeling not just relieved but also as if there is some light at the end of the tunnel when it comes to dealing with unsecured debts of any kind. Should you fall behind with mortgage payments and your house be repossessed by the bank any shortfall of mortgage arrears can also be discharged through the sequestration.
Step 1: Applying to the Accountant in Bankruptcy
Once it has been decided that sequestration is the best option for you, you will complete an application form and send it to the AiB. Once the sequestration has been awarded, you’re protected from any creditors taking legal action for the recovery of debt.
Step 2: Appointing a trustee and approaching your creditors
All sequestrations in Scotland are administered by a trustee, who will also be a licensed Insolvency Practitioner (IP). When your application for sequestration is approved by the AiB, the trustee will approach your creditors to get their agreement on the arrangement.
Step 3: Setting your monthly payments
Your disposable income is reviewed by the trustee, and a contribution is set for a four-year period using a Debtor Contribution Order (DCO). The DCO is subject to review at every anniversary of the bankruptcy. Both duties are very similar to the responsibilities assumed by a trustee under a trust deed.
Step 4: Making your monthly payments
The trustee’s main duty in the sequestration is to take control of your assets and, if required, realise them for the benefit of the creditors. The trustee will also collect any contributions payable as set by the AiB at the application stage, and make sure they are distributed fairly among your creditors.
Step 5: Being discharged from your sequestration
Normally, you’ll be discharged from sequestration after one year, subject to co-operation and asset realisation; however, if you can afford a contribution, you’ll be required to make a monthly payment to the sequestration for a period of four years, as described above.
If you’re still feeling confused, feel free to drop us an email or give us a call.