Sequestration

“Sequestration is available in Scotland.”

Sequestration is a debt solution that was only applicable in Scotland. It is a form of insolvency and is beneficial to someone who cannot pay off their debts.

Unlike other forms of debt solutions available for Scottish residents, the main difference with Sequestration is that the assets a person owns (house, car) could be sold to pay off the debts.

Read our comprehensive guide as we talk you through what Sequestration is, whether you meet the criteria of Sequestration and what you need to do if you find yourself sequestrated.

What is Sequestration?

Sequestration is a term which is known as bankruptcy in England.

Like bankruptcy, this is a debt solution that will be eligible for a person who has no other means of paying off their debts.

Who is, does Sequestration help?

Sequestration is a solution designed to help people in severe debt and have no possible means to pay off their debts.

Unlike other schemes available in Scotland, such as a Debt Arrangement Scheme, Sequestration is a last resort when trying to get out of a debt problem, as it often means you will have to sell your assets to pay your debts back to the creditors.

Who is eligible for Sequestration?

To qualify for total administrative Sequestration, you will need to fall into the following criteria:

  • You are a Scottish resident
  • You have not been made bankrupt in the last five years
  • You have debts of more than £3,000
  • You are unable to pay your debts
  • You have been granted a Certificate for Sequestration by a qualified person.
  • You can pay the £200 application fee to the Accountants in Bankruptcy (AIB)

How much does Sequestration cost?

To apply for Sequestration in Scotland, you must pay the £200 fee. This fee will ensure that your request is submitted to the Accountant in Bankruptcy (AiB).

What debts are included in Sequestration?

Unsecured debts, which consist of credit cards, loans, and overdrafts, are included in Sequestration, as well as arrears on household debts such as utility and council tax.

Debts secured on an asset such as a house are not included.

In addition, student loans, child maintenance payments and overpayment of benefits are not included in Sequestration.

What is the process for Sequestration?

  1. Applying to the Accountant in Bankruptcy

Once you have decided that Sequestration is the best option to deal with your debt problem, you will need to complete an application form and send it to the AiB.

If all the evidence is correct, you can be awarded Sequestration typically within five working days.

Once the Sequestration has been awarded, you’re protected from any creditors taking legal action for the recovery of debt.

  1. Appointing a Trustee

Sequestration in Scotland requires a trustee to administer and oversee everything. They are formally known as Insolvency Practitioners.

  1. Contacting your creditors

The Insolvency Practitioner will work on your behalf to deal with the administration side of your Sequestration. This will include contacting your creditors to ensure that they agree to the arrangement set up.

  1. Creating your monthly payments

Your Trustee will review your disposable income, and a viable contribution is set for four years using a Debt Contribution Order (DCO). The DCO is reviewed every year on the anniversary of the Sequestration.

  1. Making your monthly payments

The Trustee’s responsibility would be to take control of your assets and use these to the benefit of your creditors. The contributions paid as part of your debt programme will be distributed fairly among your creditors.

When will I be discharged from my Sequestration?

Commonly, you will be discharged from Sequestration after one year; however, this occurs if you have cooperated with your Trustee and made the contributions set out in the agreement. As a result, you should walk away from the arrangement debt-free.

However, if you can still afford a contribution, you will be required as part of the Sequestration to make the agreed monthly payments for a further three years.

What happens if I can’t make my monthly payments on my Sequestration?

If you fall ill or are unable to work for a certain period of time, it is reassuring to know that sequestration agreements take into consideration these unexpected eventualities.

Although it is paramount that you keep up with your formal agreement set out by your Trustee, sometimes things are beyond your control.

You may be unable to work because of a long-term illness.

This could mean that your income drops or, even worse, that you are not entitled to sick pay from your employer. It is, however, good to know that there are safeguards in place that will consider the unexpected.

If your income decreases, it may be possible for your Trustee to reduce or even temporarily put a stop to your repayments so you can get back on your feet.

You must inform your Trustee of your situation as soon as possible so that they can make the necessary arrangements with you and decide the best solution so that you are not in breach of your agreement.

Will I lose my home if I undergo Sequestration?

If you are a homeowner undergoing Sequestration, the level of equity in your property is calculated, and the assigned Trustee has the power to release this amount for the benefit of your creditors.

It is possible to keep your home when you are going through the Sequestration process; however, this depends on the level of equity you have assigned to the property.

If the property has negative or no equity, then the Trustee may request a small amount of money usually, a payment of £550 to abandon their interest in the home.

However, things often get a little complicated when there is a large amount of equity in your home. Your house won’t be automatically sold; however, you can release equity through a variety of methods:

  • Re-mortgaging or secured loan
  • Mortgage to rent scheme
  • Sale to private bargain or open market
  • Extending the period of the Sequestration
  • Third-party payments, e.g. family, friends

Will I lose my car if I undergo Sequestration?

This is dependent on the value of your car. If your vehicle is less than £3,000, this will not be included in your Sequestration agreement.

However, if your car is worth a significant amount of money, you may be asked to trade your vehicle in for a less expensive vehicle to free up some money which will be either be released for income or paid as a lump sum to the Sequestration.

Does Sequestration affect my job or career?

As your Sequestration will be notified on a public register called the Register of Insolvencies, this could potentially lead to problems with your employer if they see that you are bankrupt. Industries such as law enforcement or finance may be disinclined to employ you because of this reason.

You will also be banned from specific vital roles, such as school governors or pension trustees. In addition to this, you will not be able to act as a limited company director.

It is best to speak to your HR department or your employer before you apply for your Sequestration to see if your position will be affected.

Once you are discharged, the restrictions imposed during your Sequestration should be removed; however, Sequestration could still affect you as some employers may ask you whether you have been sequestrated when applying for a job.

How does Sequestration affect me if I have a low income and few assets?

The process of Sequestration is slightly different in Scotland when a person has a low income and very few assets. Individuals would enter something called MAP (Minimal Asset Process).

MAP Sequestration is only available if you meet the specific criteria:

  • Live in Scotland
  • Owe more than £1,500 but less than 17,000 in unsecured debt
  • Your assets should be worth less than £2,000 (no single asset must be worth more than £1,000)
  • Your income must come solely from benefits
  • You cannot be a property owner
  • You can’t have declared yourself bankrupt in the previous five years (this is ten years if it was a MAP bankruptcy)

Under MAP, only the AiB (Accountancy in Bankruptcy) can be your Trustee. Typically, you will receive your discharge after six months, although you will have certain restrictions on your credit for a further six months following your discharge.

Is their support available to help me manage my finances better in the future?

Your Trustee may decide that you need to participate in a financial education programme to get a better understanding of financial management.

The support is there to help ensure that you remain debt-free once you are discharged from Sequestration.

How does Sequestration affect my credit rating?

Like we said before, Sequestration is usually a last resort when you fall into financial difficulty. Not only could it affect your house and other assets you own, but your credit history will be affected.

Sequestration will show up on your credit file if anyone carries out a credit check. Sequestration will be listed on your credit file for six years, and this will hurt your credit rating. After six years, your Sequestration will be taken off your credit file, and it is then that you can start to rebuild your credit rating again.

Even after the six-year period, borrowing again might take time, and it would be up to the lender’s discretion or criteria if they allow you to borrow again.

It is essential to check your file also to see if default notices are still on your record after six years. Your creditors will be able to record a default notice against you after your Sequestration has started, and these will remain on your credit file for six years.

However, there have been cases where default notices have not been removed as oversight from the creditors after six years. So that you are not adversely affected by bad credit, you should contact the creditor to have this removed.

What happens to my pension during Sequestration?

Your Trustee’s job in the sequestration process is to understand how much money can be obtained through your assets to pay your creditors; however, when it comes to a pension, this is different.

If you have already saved money in a pension, this is not categorised as an asset in Sequestration. In most cases, the money you have saved will not be taken by the Trustee.

Things get complicated when you are put aside pension savings to use to fund your retirement. As the money has been saved outside the ‘pension wrapper’, it does have the same protection as this is considered an asset. This money can be given to pay off the creditors.

Another instance whereby you may be asked to take money out of your pension scheme to pay creditors is if you made large lump sum payments just before being sequestrated. This is usually 15% of your income into your pension.

If this is the case, then your Trustee will see this activity as a way of putting large cash amounts into the pension fund to stop your creditors from getting hold of it. So even if your actions are legitimate, it is essential to ear on the side of caution when making these payments.

Generally, you will be able to continue to make payments on an existing pension; however, this will depend on the type of scheme.

If you have a workplace pension, then you will still be able to make contributions to your pension.

However, if your Trustee feels that the percentage payment is too high, then you may be asked to decrease the amount so that you are paying the minimum contribution level.

Regarding a personal pension, things are different.

You may be asked to suspend your payments until you have been discharged. Your Trustee will consider your age and circumstances in this process.

It is important to note that irrespective of whether you have a work or personal pension, any money you have saved will be protected.

What if I won the lottery, received a windfall, or inherited money during Sequestration?

You might feel your luck is in if this happens; however, it will be wise to hold off going on a spending spree. Any financial gains during your Sequestration must be declared to your Trustee, and this will be used to pay your creditors.

During your sequestration period, this is four years, and you will need to notify your Trustee, irrespective of whether you have been discharged. Your Trustee will expect you to pay your debt in total if you win a sizable sum of money.

If you do not declare this, then you will be committing an offence and may be fined or imprisoned.

The benefit of paying off your debt in full (including interest and fees) is that with Scottish bankruptcy, you can have this ‘recalled’.

The recall would, in effect, remove any record of your bankruptcy, which could be particularly important if you need to buy a big purchase such as a house.

Can you be forced into Sequestration?

Yes, your creditors can force you into Sequestration to ensure that the debts are paid in part or whole.

What are the advantages of Sequestration?

  1. Only last for a 12-month period

Sequestration typically only lasts for 12 months. After this period, you will be discharged and will no longer be tied to the restrictions of being sequestrated.

  1. Low administrative costs

£200 is the fee you will need to pay to the Accountant in Bankruptcy to allow you to go into Sequestration. £200 may seem like a large amount of money, especially as you might be dealing with a lot of financial struggles; however, if you are in the low-income bracket, then after you are sequestrated, you will no longer need to make any further payments towards your debt.

  1. Not having to deal with persistent creditors

Often a large part of the stress when being in debt is dealing with the constant letters and phone calls from your creditors. When you are in the process of Sequestration, you will be assigned a Trustee who will deal with that headache and let you concentrate on sorting out your financial situation.

  1. No payments unless it is affordable

As we have already discussed, once you start your Sequestration, you will no longer have to deal with your creditors and make payments directly to them. Instead, your assigned Trustee will review your income and expenditure.

If you can afford to make payments towards your debt, then this payment is made directly to the Trustee, who will then distribute the income to the creditors based on the payment plan that is set out.

If you are unable to make the payment or have a low income, then please check out our section on what happens if you have a low income and very few assets.

  1. Your debt can be written off

Once you are discharged from your Sequestration (this is usually 12 months from the start date), your debts will be taken away from you, and you no longer need to pay for them.

However, the condition applies if you have an income payment agreement that you will continue to make contributions for a further three years.

  1. HRMC Tax and VAT debts can be included in the Sequestration

One of the biggest debt worries, especially for small business owners, is tax arrears. These are HMRC debts; then, these can be written off in the Sequestration.

What are the disadvantages of Sequestration?

As it has been previously said, declaring yourself bankrupt or being awarded Sequestration can also have its disadvantages.

To go into Sequestration is a decision to be strongly considered as there are a few pitfalls that you may need to consider before making the final decision.

  1. If you can afford it, payments will still need to be paid for four years

Depending on your income and if you can afford to pay towards your debts, you will have to do them as part of your income payment agreement for a 4-year period.

If an income payment agreement is in place, then you will also have to report any changes to your income to the Accountant in Bankruptcy (AiB), which could potentially mean your payments could increase or decrease as a result.

  1. You could lose your home

Homes have a financial as well as an emotional attachment to them; so often, when people hear the words that they could lose their home, things can get a lot scarier.

However, being forced to sell your home depends on the level of equity you have in your home.

If you have little or no equity in your property and your home is in negative equity, then it is likely that you can keep your home.

Consequently, things get a lot more complex when you have a significant amount of equity in your home.

The AiB will be compelled to investigate this and, as a result, may force you to sell your home for the benefit of your creditors.

  1. Your car could be at risk

A car can be a lifeline for some. If you need a vehicle for work or for other family commitments, then Sequestration does consider this.

Their duty is also to ensure that you can be financially independent. However, you can only do this if the value of the car is not worth more than £3,000.

If it is higher than this amount, then your Trustee will force you to sell your vehicle and replace it with a cheaper one.

  1. Your credit rating will be badly affected

Credit rating is a catalogue of your financial health and history, so it is essential that you represent yourself in an excellent financial position, especially to future lenders.

Unfortunately, when you are in debt, often your credit rating will be affected.

With Sequestration, your credit rating will be significantly worse, so it is vital that you think carefully before entering an agreement.

Sequestration will be marked on your credit file for six years. Please find out more in our section on how Sequestration affects my credit rating.

  1. Your employment and careers prospects could be damaged

If you declare yourself bankrupt or go into Sequestration, you will not be able to work in certain positions such as a company director, solicitor, accountant, and other finance-related roles.

To clarify this, you will need to speak to your HR department to get a better idea of your position.

Get Help Today

If you think that Sequestration is the right debt solution for you, then it is essential to consider all the aspects detailed in this guide; however, getting expert advice is as crucial.

Money Advisor has a team of experienced advisors to offer you guidance on the best debt solution for you. If you need help with managing your debt or are facing financial difficulty, then get in touch with us today.

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