Bankruptcy / Sequestration
Creditor’s Application
If you owe money to someone they will usually write to you requesting payment. Should you fail to make the payment they may initially use a variety of diligences to seek to recover the funds (see diligence). If the creditor feels that diligence will be unsuccessful or they have no other means to recover the funds then they may seek to have you sequestrated.
Sequestration by a creditor begins with the creditor submitting a petition (initial writ) to the debtor’s local Sheriff court. In order to be effective the writ must also be sent to the debtor advising them that an application is being made to the court for their sequestration. The initial writ is usually served on the debtor by sheriff officer however it could also be served by recorded delivery. When the writ is served you will have a very short period of time to respond to it and it is essential that you seek advice immediately.
The writ will be accompanied by a form from the court advising of a hearing date. If you do not attend the hearing or arrange representation at the hearing (by a lawyer or advisor) then you will be bankrupted. The only defence to sequestration is payment in full of the debt. A sheriff is only entitled to postpone the award of sequestration for up to 42 days so if you are to agree a payment plan with the creditor you will need to do so quickly. The Sheriff will only postpone the sequestration if they agree that there is a realistic chance that the debtor will repay the debt. To this end you should be prepared to demonstrate your financial position, weekly payments that you can afford and a willingness to repay the debt. It is also possible to register for the DAS scheme after the petition has been lodged which will stop the proceedings.
Low Income Low Asset (LILA)
If your gross weekly wage is less than £220.80 then you may qualify for LILA. LILA is a scheme that allows debtors to bankrupt themselves without the requirements for normal bankruptcy proceedings. Debtors no longer need the consent of a creditor if they wish to bankrupt themselves and qualify for LILA.
In order to qualify you must have debts amounting to more than £1,500 and:
- A total combined asset base of less than £10,000;
- No single asset worth more than £1,000; and
- Weekly earnings of £220.80 or less.
Any state or employment based benefits that you receive do not count towards the weekly wage.
Process of Sequestration, Legal Framework
The Bankruptcy (Scotland) Act 1985 provides the legal framework for sequestration, along with a few provisions of the Insolvency Act 1986. Section 5(2)(b)(i) of the 1985 Act prescribes that a qualified creditor may petition for the sequestration of a debtor if they are apparently insolvent. In accordance with Section 5(2B)(a) of the 1985 act a qualifying creditor may only petition in respect of debt(s) amounting to more than £3,000. A petition must be made requesting that warrant be granted to cite the debtor to appear not less than 6 and no more than 14 days from the date of citation.
In order to petition for sequestration a creditor must send a debt advice and information package to the debtor (Section 5(2D) 1985 Act). The debt advice and information package must be sent no less than 2 and no more than 12 weeks prior to the petitioning for sequestration.
For a creditor to petition for the sequestration of a debtor they must demonstrate that the debtor is apparently insolvent. Apparent insolvency occurs when a debtor is unable to pay their debts as they fall due. Section 7(c) of the 1985 Act lists the ways in which a debtor can be rendered apparently insolvent. The usual means for constituting apparent insolvency is an expired charge for payment or decree. The creditor must provide evidence that the debtor is apparently insolvent. This is usually done in the form of an oath sworn by the creditor stating the amount of the debt. Sequestration proceeds on the basis that there is a prima facie case and the debtor is therefore cited to appear to show just cause why they should not be sequestrated.
The creditor must provide an oath stating that as far as they are aware the debtor is not subject to an approved debt payment programme as prescribed by Section 2 of the Debt Arrangement and Attachment (Scotland) Act 2002. This generally involves a search of the DAS register and a simple Form 12 declaration that the creditor believes that there is no approved debt payment programme in place in respect of the debt.
If a debtor is sequestrated then their estate will be distributed amongst all of their creditors. In order to ensure that this is done the petitioning creditor will need to recommend a trustee to the court. It is at the discretion of the court who they appoint as trustee. Where there is little chance of recovery from the assets of the debtor creditors will often seek to appoint the AiB as trustee. In cases where the debtor has sufficient assets the creditor will often appoint their own insolvency practitioner to act as trustee. When seeking to have anyone other than the AiB appointed creditors require to obtain consents from the IP as prescribed in Section 2(3)(c) of the 1985 Act. IP’s are regulated and must provide proof of indemnity insurance and comply with their obligations under the 1986 Act.
In situations where the creditor fears that the debtor may dispose of their assets before a trustee is in place they may seek the appointment of interim trustee. A sheriff must be satisfied that there are sufficient grounds to appoint an interim trustee. Often sheriffs will require a hearing in relation to the appointment of an interim trustee or liquidator. The usual reason for the appointment of an interim trustee is that the debtor is divesting themselves of assets, thereby putting them outwith the reach of creditors.
Accountant in Bankruptcy (AiB)
The AiB is the trustee for Scotland. They offer advice to creditors and debtors in relation to debt, including how to recover debts and how to avoid sequestration. As the trustee for Scotland the AiB’s main role is to administer the estate of sequestrated individuals when they are appointed. All applications for the sequestration of an estate must be sent to the AiB at the same time that the petition is submitted to the court.
If you are sequestrated all of your assets will become the property of the AiB who will try to get as much money for the assets as possible. The proceeds from the assets will be distributed amongst all of the creditors. If the funds available to the AiB are not enough to cover all of the debtors debts (which is usually the case) then the AiB will pay each creditor a percentage of the amount owed to them.
If you have been sequestrated and the AiB has been appointed as your trustee then you will need to abide by the rules of the trust. This usually means that you will have restrictions on the amount of credit you can obtain, use of a bank account and activities that you can undertake such as gambling or speculative investments. If you fail to comply with the trustee’s instructions for any reason than the AiB can apply for Bankruptcy Restriction Order (BRO). Failing to comply with a BRO is a criminal offence and you could end up in court facing criminal charges.
Consequences of Sequestration/Bankruptcy
It is an inevitable consequence of bankruptcy that the debtor’s life will change. The most obvious effect is the loss of their estate. This means handing over the entirety of their possessions, including your home. Bankruptcy/sequestration is a very serious matter and will have lasting consequences. Whilst losing your house may seem a drastic event, there are several other matters to consider.
Bankruptcy generally lasts for one year. Once the year is up you will be discharged from bankruptcy and allowed to resume your usual routine. If you fail to comply with the trustee’s instructions this period could be extended for up to 5 years.
When you are sequestrated you are expected to turn over all of your assets to the trustee. This means giving up your house, car, belongings and anything else of value. The trustee is required to sell as much property as possible to ensure that they gain as much value for creditors as possible. There are only a few essential items that you will be allowed to keep for day to day living.
Once sequestrated you will be given very specific instructions by the trustee telling you what you can and cannot do. This will generally provide you with a very limited weekly budget that will allow you to live. You will be expected to declare all monies you receive from employment, benefits or any other source. Failure to declare income could be a criminal offence.
One of the biggest impacts that sequestration has is that you will have a severely damaged credit rating. This will stop you from obtaining loans. It also means that you will be unable to purchase goods on credit or hire purchase or have a credit card. Certain suppliers may no longer allow you to be billed for services. For example your power company may expect you to purchase power cards rather than being billed quarterly. You will also not be able to get mobile phone contracts. Even after you are discharged from bankruptcy you will continue to have a poor credit rating for several years. This will affect your ability to obtain credit for several years.