Sequestration is the Scottish legal term for bankruptcy and can allow for all of your debts to be written off.
What is sequestration?
The term sequestration refers to the form of insolvency known as bankruptcy in England. It’s an extreme debt solution, but may be suitable if you’re in the position where you have no way of paying off all your debts.
Sequestration allows your debts to be written off after a fixed period of making monthly payments towards what you owe.
You must also turn all of your assets (belongings of worth) over to the agreement. To be eligible for sequestration, you must owe more than £3,000.
A licensed Insolvency Practitioner (IP), also known as a trustee, will take control of your assets and liaise with your creditors (the people you owe money to) on your behalf.
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How much does sequestration cost?
It costs £200 to apply for sequestration, and the request is submitted to the Accountant in Bankruptcy (AiB) with the agreement of any creditors you owe more than £1,500, or with a certificate of insolvency from an insolvency practitioner (IP).
The trustee’s fees and costs are then met from the funds received into the sequestration through the realisation of assets and the monthly contribution; there are no payments due by you over and above the agreed contributions from the income and/or the assets.
Creditors are given the opportunity to object to the level of the trustee’s fee at each anniversary of the sequestration.
At Creditfix, we don’t charge set-up fees for the sequestration process, and we would advise against using any company or approved money advisor who does.
Am I eligible for sequestration?
To apply for a full administration sequestration, you must meet the following criteria:
- You are a Scottish resident, have lived in Scotland within the last 12 months or have a place of business in Scotland.
- You have debts of more than £3,000.
- You have not been made bankrupt in the last five years.
- You have apparent insolvency and/or you are unable to pay your debts and have been granted a Certificate for Sequestration by an authorised person.
- You can afford to pay the £200 application fee to the AiB.
- You have received advice from an approved money adviser.
How do I apply for sequestration in Scotland?
The sequestration process
Step 1: Applying to the Accountant in Bankruptcy
If you decide sequestration is the best option, 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 take 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.
How will being sequestrated impact me?
What happens if I’m a homeowner?
If you’re a homeowner undergoing sequestration, the level of equity in your property is calculated and the trustee will release that amount for the benefit of the creditors.
It is possible to keep your home when entering sequestration, though unlikely if your property has significant equity. It’s important to note that your home won’t automatically be sold, however. Equity, if applicable, can be realised by the following methods:
- Third-party payments e.g. by family, a friend or a business associate
- Extending the payment period of the sequestration
- Re-mortgage or secured loan
- Mortgage to rent scheme
- Sale to private bargain or open market
If the property has negative or no equity, the trustee may request a nominal sum to relinquish their interest in the home. This payment would normally be charged at £550 as per the AiB guidelines.
What happens to my car?
If your car is valued at less than £3,000 it will not be included in the sequestration, however, if it is brand new or worth a significant amount, you may have to trade it in for a less expensive car.
Doing this will release either income or a lump sum to the sequestration.
If your car is subject to a hire purchase agreement, or another type of secured agreement, you’ll be allowed the contractual payment within the monthly expenditure (provided it’s not excessive) and in most cases you’ll be able to keep the car.
What are the advantages of sequestration?
- It’s possible to write off all unsecured debts.
- Creditors can’t reject the sequestration.
- Creditors can no longer take legal action to recover debts.
- The trustee will liaise with creditors, removing the pressure of constant phone calls and mail.
- Interest, fees and charges are frozen – creditors can only claim for the outstanding balance as at the start of sequestration.
- If asked to pay a contribution it will be an affordable monthly payment that’s calculated in consideration with your living expenses.
What are the disadvantages of sequestration?
- Your credit rating will be affected for six years.
- You’ll find it more difficult to get credit in future.
- You must declare that you are bankrupt to any person you attempt to get credit from, regardless of whether it’s an individual or joint application where the credit amount totals £2,000 or more, or in all circumstances, where you already have debts totalling £1,000 during the bankruptcy.
- It could have implications for your employment, for example you would not be able to act as a company director or in a role of financial responsibility.
- Assets such as your home or car may be sold to release funds.
- By entering sequestration, you could breach certain contractual obligations by being made bankrupt such as tenancy and lease agreements, various licenses, employment contracts and hire purchase agreements.
- Bankruptcy has a four-year acquirenda term. This means that the trustee has a claim on assets acquired for a period of four years from the date of sequestration, for example inheritance.
What is the difference between sequestration and a Debt Arrangement Scheme?
A Debt Arrangement Scheme (DAS) is another debt solution common in Scotland, and offers people an alternative way to pay off their debts.
The main differences between a DAS and being sequestrated is the duration of the agreement, and the debt write off.
With sequestration, you can usually successfully complete your term and be discharged after a year, even if you continue making monthly payments for longer. Once you have been discharged, your remaining debts will be written off.
With a DAS, on the other hand, there is no debt relief. In a similar way to sequestration, you will make a monthly contribution to your debts, however there is no fixed term for a DAS.
Under a DAS, you will continue making payments for however long it takes you to repay your debts in full.
Is sequestration the right debt solution for me?
As previously mentioned, sequestration (bankruptcy) is an extreme option. It involves turning over your assets to a trustee, making monthly contributions to your debts, and adhering to a strict budget over an extended period of time.
Once that period is over, however, your remaining debts will be cleared and you will be free to move on with your life, so if you have a level of debt you simply have no other way of repaying, sequestration may be an option worth exploring.
If you’re struggling with debt and are interested in hearing more about sequestration in Scotland, or any other debt solution, call Creditfix today on 0808 253 2554. Our friendly team of debt experts will be happy to talk you through your options.
Frequently asked questions.
Need more info? Here are a few of our most frequently asked questions on this topic. If you don’t see the answer you’re looking for here, give us a ring – we’d love to help.
Information about your sequestration will stay on your credit report for six years, after which time it will be removed.
Generally, sequestrations will last for 12 months, after which you will be discharged. However, your trustee may not vacate office for some time after this.
There is a fee of £200 that you must pay to the Accountant in Bankruptcy for setting up and administering your sequestration. You can pay this in instalments if you can’t pay the full amount in one go. This needs to be paid before your application can be made.
Sequestration can affect your job depending on the role that you work in. If you work with money, for example in a bank, or if you need to have a license to do your job such as a lawyer, then it may be stated in your contract that you cannot continue.
If you’re self-employed, your business will be taken by the trustee and you will not be able to act as a director for a company once you have been sequestrated.
You won’t be able to include debts such as your student loan, any court fines or current child maintenance payments in your sequestration, and these must still be paid.