Bankruptcy and sequestration

• What does bankruptcy and sequestration mean?
• Explanation of relevant legal terms
• Are there alternatives to sequestration?
• Can I be sequestrated at any time?
• How can I be sequestrated?
• Can I apply for my own sequestration?
• How do I apply for my own sequestration?
• How much does it cost?
• Who will be my trustee?
• Who is the Accountant in Bankruptcy?
• What will I have to do after I am sequestrated?
• What can't I do during the sequestration?
• Other questions you may have

What does bankruptcy and sequestration mean?

Sequestration is the Scottish legal term for personal bankruptcy. It starts when someone indebt (debtor) is declared bankrupt in court. It means that the person who is bankrupt has to hand over the things they own to a trustee. The trustee sells those things to pay off some of the money owed to creditors. The creditors are the people or organisations that are owed money by the debtor. The trustee is the person who handles what the debtor owns for the benefit of the creditors.

If you are sequestrated, it is the duty of the trustee to sell your assets or property and to use the money the trustee gets for them to:

1. pay the costs of managing your sequestration; and
2. pay your creditors as much as possible of what you owe them.

Your trustee may also need you to make some payment from your wages if you have a regular job.

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Explanation of relevant legal terms

Below is an explanation of some of the legal terms we use in this section.

Apparent insolvency

A legal term that means you are unable to pay your debts and that at least one of your creditors has taken legal action against you.

Charge for payment

The formal demand for payment following a decree. A Sheriff Officer usually serves it on you and you have to pay the debt within 14 days.

Creditor

Any person, business or organisation you owe money to.

Debt Arrangement Scheme

A confidential debt management tool introduced by the Scottish Executive accessed through an approved money adviser (see www.moneyscotland.gov.uk). It may help you if you have two or more debts and want to pay what you owe, by giving you more time for repayments free from the threat of enforcement (diligence) or bankruptcy.

Debtor

 Any person who owes money. In this booklet it means someone who is insolvent and is aiming to have their estate sequestrated.

Decree

A formal order of court which says the debtor must pay money to a creditor. This might follow court action such as:

1. small claim (up to £750);
2. summary cause (£750 to £1500); or
3. ordinary action (more than £1,500).

Decree of adjudication

Adjudication is an action in the Court of Session (Scotland's Supreme Civil Court) where property you own which can be inherited, usually a house or similar, is transferred to a creditor to pay a debt.

Estate

Your estate is literally everything of value you own, including any rights you may have to receive money or goods from anyone else.

Interim trustee

Someone appointed by the court to handle your estate until a permanent trustee is appointed.

Permanent trustee

Someone appointed by the court to:

1. take possession of your estate;
2. sell any property you own; and
3. pay your creditors as much as possible of what you owe them.

Petition

A formal application to the court.

Protected trust deed

A trust deed which transfers all of your estate to a trustee and is not objected to by most of your creditors or by creditors to whom you owe at least one-third of your debts. It is binding on all the creditors, that is, 'protected'. None of the creditors may then apply to have you sequestrated.

Qualified creditor or creditors

A creditor to whom you owe at least £1500 (or a number of creditors to whom you owe at least £1500 in total).

Receiving order

A court order in England or Wales placing your assets under the control of an Official Receiver.

Sequestration

The Scottish legal term for bankruptcy. Bankruptcy is a formal court process which transfers your property to a trustee.

Sequestration for rent

A court process that can be raised against you by your landlord for rent you have not paid.(This is not the same as bankruptcy or formal sequestration.)

Statutory demand

A formal demand by a creditor giving you 21 days to repay a debt. The demand must be on the proper form and be served by a sheriff officer.

Summary Warrant

An order granted by the court to local or public authorities giving the creditor authority to recover amounts of money you owe. This procedure is generally used to recover unpaid rates, taxes, community charge and so on.

Trust deed

A voluntary alternative to sequestration. You can transfer all or part of the estate to a trustee to handle for the benefit of your creditors.

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Are there alternatives to sequestration?

If you have serious debt problems, you should think about other options before going bankrupt.

Debt rescheduling

As soon as you find that you cannot pay bills or instalments when they are due, you should contact your creditors to tell them why. They might give you more time to pay or agree to reduce your repayments for a time until things get better. This is called debt rescheduling. Your local Citizens Advice Bureau, Trading Standards Office, or Money Advice Centre can help you to try and reach this sort of arrangement with your creditors. This help will be free.

Debt Arrangement Scheme

This is a new statutory scheme introduced by the Scottish Executive on 30 November 2004. It is free to you as a debtor and gives you time to pay back what you owe if you have some surplus income. It will also protect you from the threat of enforcement or bankruptcy whilst you are on the scheme. Entry to the scheme must be through an approved money adviser (see www.moneyscotland.gov.uk). The adviser negotiates with your creditors and then applies to the DAS administrator (AiB) for approval of the debt payment programme (DPP). Creditors can object to the DPP but we can disregard unreasonable objections. Once approved, participating creditors cannot take enforcement measures.

Trust deeds

If you cannot reschedule your debt but you have enough income or assets to pay at least some of what you owe, you may be able to sign a trust deed. A trust deed is a voluntary arrangement. However, once you have signed it, you must keep to its terms. A trust deed is similar to sequestration. It means that you have to hand over your assets and property to a trustee. They must then manage them so that they can pay your creditors as much as possible of the debt you owe them. You will also have to pay the trustee's expenses. The trust deed avoids you being called a bankrupt.

Again, you can also get advice from a Citizens Advice Bureau, Money Advice Centre, or a solicitor. You can find more information on trust deeds on Protected Trust Deeds page.

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Can I be sequestrated at any time?

No, there are certain conditions to being sequestrated and these are:

1. you must owe at least £1500; and one or more of your creditors must have taken
2. you to court to enforce or demand you to repay a debt; or
3. you must have been on a debt payment programme under DAS that has been
4. revoked and one of the creditors in the DPP has been to court and obtained a
5. decree on one of the debts.

The technical term for these situations is that you are 'apparently insolvent'.

You will be apparently insolvent if any of these apply to you.

If a creditor goes to court and gets a decree on your debt, and a 'Charge for payment' of that debt (14 days' notice) has run out without you paying.

A government department or local authority has been to court to get a summary warrant against you to recover rates, Council Tax, other taxes and so on and some of your goods have been attached (or someone has tried to attach them) to the order and 14 days have passed.

You have been served with a 'statutory demand for payment' (21 days' notice) and you have not paid it in the time limit.

These are the main ways in which you can be sequestrated. However, creditors can take other legal action to recover debts which might also make you 'apparently insolvent'. If you have any doubts, ask for help from one of the advisory organisations listed on page 18 and 19 or call our helpline. Please refer to our 'apparent in solvency' page for more detail.

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How can I be sequestrated?

A creditor who you owe at least £1500 can petition a court for your sequestration. (It is also possible for two or more creditors you owe at least £1500 together to apply together.) The creditor can apply either at a local Sheriff Court or at the Court of Session in Edinburgh.

The court will send out what is called a Warrant to Cite. You will receive this either by recorded delivery or from a Sheriff Officer. This warrant will call you to appear in court on a certain date. You do not have to go to court unless you want to argue that you should not be sequestrated. However, you can normally only avoid sequestration if you go to court and prove that either:

1. you have paid the debt; or
2. you can guarantee that you can pay the debt.

If you do not appear, you will almost certainly be sequestrated. Your sequestration will begin from the date the court issued the warrant telling you to appear.

If you get a citation (summons), you may want to ask a solicitor for advice. This might be free if you are on Income Support or get paid very little and you go to a solicitor in the Legal Advice and Assistance Scheme. You can also get help from one of the organisations shown in 'Who can I ask?'.

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Can I apply for my own sequestration?

Yes, you might want to apply for your sequestration to prevent your creditors from using other forms of debt recovery (such as arranging to save money you owe directly from your wages-this is called a wages arrestment) or simply because your debt is worrying you all the time and you need to put your mind at rest.

But, you must meet certain conditions before you can apply to court for your own sequestration.

1. You must be 'apparently insolvent'.
2. You must owe at least £1500.
3. You must not have been sequestrated during the last five years.

Even if you are not 'apparently insolvent', you can still apply if:

1. you have the agreement (this is called a concurrence) of a creditor or creditors to whom you owe at least £1500; or
2. you signed a trust deed but it did not become a protected trust deed because most of your creditors objected to it.

Self-sequestration is a very serious step. You should ask a professional for help and think about other ways of dealing with your debt before you ask the court to make you bankrupt.

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How do apply for my own sequestration?

If you meet the conditions we have given above (Can I apply for my own sequestration?) and you decide to apply for your own sequestration, there is a form that you must fill in. This form is called a debtor's petition form. You may be able to get hold of it from your local sheriff court. Our 'Completing the debtor's application forms' page tells you how to fill in this form. If the court approves your application, your sequestration will start from the date of the court's decision. So before taking your form to the court, you must be sure that you want to go ahead.

There are two different forms depending on whether you are applying because you are apparently insolvent or you have the agreement of one of your creditors. Make sure that you have the right form.

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How much does it cost?

When this page was written it cost £63 to start sequestration proceedings in court. Court fees can change every year, so you should contact the court to confirm the current fee. If you ask a solicitor to draw up and present the petition in court, they will charge you unless you are eligible for legal aid. The trustee will take other costs such as your fees and their expenses out of your assets. You will not have to pay for any of those costs directly.

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Who will be my trustee?

If a creditor sequestrates you, they may ask the court to appoint a professional 'insolvency practitioner' as trustee. You can also do this if you are applying for your own sequestration. But, the insolvency practitioner must agree to it and they will want to be certain that there will be enough money in your estate to cover their fees. In most cases the court appoints the Accountant in Bankruptcy to be your trustee. She might use us (we are her staff) to work on your case or she may have the work done by an insolvency practitioner. It will make no difference to you, but you will be told who is working on your sequestration.

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Who is the Accountant in Bankruptcy?

She is a government official (representative) who is in charge of handling personal bankruptcy in Scotland. She also acts as trustee in all sequestrations except those in which you choose a private-sector insolvency practitioner.

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What will I have to do after I am sequestrated?

At the same time as the court awards your sequestration, they will appoint a trustee. The trustee will get in touch with you and, if a creditor sequestrated you, you must supply:

1. a list of all your assets (property);
2. a list of all your debts;
3. a statement of the money you get each week or month (wage slips); and
4. a list of what you spend each week and how much you spend on each item. (If you applied for your own sequestration, you will have already provided this for the court.)

The trustee may also want to:

1. visit your home;
2. visit any business premises you own or rent to check your statement and to get any more information they may need; or
3. ask you to come to their office.

You may face criminal charges if it is found out that you have not given full details of your assets and liabilities. If you are found guilty, you could be fined or sent to prison, or both.

You must:

1. tell the truth when your trustee asks you about your finances;
2. give your trustee all the relevant documents and accounts about your business and finances;
3. tell your trustee what assets you have, hand them over to the trustee, and sign any papers they ask you to, so that they can raise money by selling those assets;
4. give the trustee full details of what you earn and how much you and your family need to live on; and
5. tell the trustee about any change in your financial circumstances.

For example, this could include if you:

1. have been unemployed and then get a job;
2. get a better paid job or position; or
3. inherit money or property or receive money from any other source.

Any money or property you receive before the date your sequestration is discharged belongs to the trustee and you must hand it over to them.

Tell the trustee if you change your address.

Always co-operate with the trustee. If you do not, it can result in criminal charges being made against you and you could end up being fined or sent to prison, or both.

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What can't I do during the sequestration?

You must not gain credit over £250 without telling the lender that you are an undischarged bankrupt. You may be guilty of a criminal offence if you do.

You are not allowed to start up a limited company or be involved in the day-to-day management of a limited company.

You are not allowed to act as a member of parliament, and you cannot become a member of any local council or school boards and so on.

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Other questions you may have

• Will I be able to keep the things I own?
• What will happen to my house?
• Will my neighbours or employer find out?
• Can I have a bank account while sequestrated?
• What will happen to my wages or benefits?
• What happens to things I have on hire purchase or I have bought from a catalogue?
• What is the effect of sequestration on my gas, electricity and telephone?
• What happens to my debts?
• How long will my sequestration last?
• What happens to my assets after I am discharged?
• Who can I ask for advice?

Will I be able to keep the things I own?

You will normally be allowed to keep things you need for day-to-day living (such as settees, cookers and beds). You will not have to transfer them to your trustee. You can also keep any tools you need for your trade (up to a value of £1000) and certain other specific items.

The trustee can sell things they do not think you need such as hi-fis, motor vehicles, and jewellery.

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What will happen to my house?

'Debtor: What happens to my home?' is an information page that answers this question in more detail. However, in a few words the situation is shown below.

Rented property

If you are overdue with your rent, your landlord will be able to try and get their money through your trustee. Sequestration may mean that your landlord has the right to end your lease. However, if you have kept up your rent payments, the landlord may allow you to stay-as long as you keep up to date with your future payments.

Property you own and live in

If you own your home, you will have to hand over your interest automatically to the trustee. It will be their job to try and sell it. Before they can sell your property, there are a few things to remember. For example

1. if there is a mortgage, the organisation that gave you the mortgage will want to decide what they want to do;
2. if there are two or more people who own the house, the trustee has an interest in only your share of the property. The trustee might sell your share at an agreed price to the other part-owner or owners if he or she has not also been sequestrated.
3. if there are children in the home, the trustee might not have a right to sell it.

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Will my neighbours or employer find out?

Your sequestration is only advertised in a publication called the Edinburgh Gazette. This is an official publication which members of the public do not usually read. Normally you do not need to go to court (but see the paragraph 'How can I be sequestrated?' .

Your employer would not have to know unless you have a contract that says you must tell them. Your trustee will need to know how much you are paid. If you can give your trustee payslips or a P60, they might not have to contact your employer.

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Can I have a bank account while I am sequestrated?

Some banks will allow you to have an account but you must give your trustee the details of it and tell the bank manager that you are an 'undischarged bankrupt'. Other banks will say no to an account. You need to ask your bank whether they would allow you an account if you were bankrupt.

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What will happen to my wages or benefits?

The trustee will look at how much money you earn and how much you need to have a reasonable standard of living for you and your family. Your trustee can claim any money you don't need to live on as a voluntary contribution. If you and your trustee cannot agree the amount of the contribution, they can ask the court to say how much you must pay. If you only get state benefits, they are unlikely to ask for a contribution.

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What happens to things I have on hire purchase or I have bought through a catalogue?

These items often stay the property of the company which supplied them and the company will probably take them back. However, in some cases, your trustee may take possession of the goods and sell them.

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What is the effect of sequestration on supplying gas, electricity and phone services?

Electricity
The supplier may install a meter and you would have to pay by prepaid meter cards. Some suppliers may agree that you can pay each month.

Gas

Scottish Gas will, in almost every case, set up a new account with you under a gas payment plan so you make payments each week or month. Other gas suppliers may agree something similar.

Phone

British Telecom may allow the phone to stay in your name. If this happens, you will have to pay them a deposit and BT will stop and restart your phone service. Other phone companies may look at your particular circumstances, but will usually need someone else to take on your debts before agreeing to you keeping your phone.

General

It may be possible for another person, for example your husband or wife, or a relative to agree to pay your bills. However, companies might need a deposit from them if this person does not have an existing credit rating with the company. If you do not pay any future bills, you will be disconnected.

Ordinary creditors will treat all electricity, gas and phone bills you owe at the date of sequestration as claims. Any meters that have been set to collect your missed payments will have to be changed back to what you are using only. You should not try to pay any money you owe (arrears).

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What happens to my debts?

If you have a mortgage or other debt 'secured' on your property, the lender can still take action to get their money back. All your other creditors cannot take action to recover their debts once you are sequestrated. Once you are discharged (normally after three years), you will no longer have to make any contributions to your debts. But your debts are not written off until your trustee gets his discharge (which might be some years later depending on circumstances). However, there are a few exceptions to this:

1. student loans you have received or which became payable after the date of
2. sequestration:
3. court fines;
4. debts arising from fraud; and
5. Social Fund loans or overpayments of benefit may be taken away from current benefits by the Department for Work and Pensions.

You still have to pay any debts you have run up after the date you were made bankrupt.

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How long will my sequestration last?

As long as you work with your trustee, your sequestration will normally end three years after the date of sequestration. This is called being discharged. However, if you do not co-operate with your trustee, the court can increase the length of your sequestration for up to two years at a time.

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What happens to my assets after I am discharged?

By the time you are discharged, any assets that the trustee has not sold do not return to you. The trustee keeps them. This includes your house or your share of it if it is jointly owned.

Only assets you gain after your discharge belong to you.

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Who can I ask for advice?

Accountant in Bankruptcy
PO Box 8313
Irvine KA12 2AA
LP-4 Irvine
Phone: 0845 6126 460
Fax: 0845 6126 470
Helpline:
0845 7626171

We will be happy to help you by:

1. telling you how sequestration works and what its consequences are; and
2. helping you to fill in forms.

It is best to use our helpline (calls are all charged at the local rate) but you can also write or fax.

Your local Sheriff Court will be happy to give you an application form and advice about procedures. You can find the address and phone number in your local phone book.

We can only tell you how to go about sequestration. We cannot tell you whether sequestration is the best way of dealing with your debts and neither can the Sheriff Court.

The following organisations may be able to give you general advice and support.

Look at your local area phone book for addresses and numbers of national agencies such as:

1. Money Advice Centres
2. Citizens Advice Bureau
3. Trading Standards Offices

Scottish Bankruptcy Advice Ltd
1 Milton Road
Kilmarnock KA3 7HG
Phone: 01563 541028
Fax: 01563 537040

The Bankruptcy Advisory Service
2 Greenways
Swanland Hill
Kingston-upon-Hull HU14 3JN
Phone: 01482 633034, or 01482 633034

To help to find a solicitor with specialist knowledge about insolvency matters.

Law Society of Scotland
26 Drumsheugh Gardens
Edinburgh
EH3 7YR
Phone: 0131 226 7411

To help you to find an insolvency practitioner.

Institute of Chartered Accountants of Scotland
CA House
21 Haymarket Yards
Edinburgh EH12 5BH
Phone: 0131 347 0100

Disclaimer:

The information given on this page is for general guidance only. It is not a detailed or full statement of law.

© Accountant in Bankruptcy - Updated December 2004