Guide to personal insolvency in Scotland
Bankruptcy is a formal method of dealing with debts where other options have failed or are inappropriate. The consequences of bankruptcy are severe and no one should make an application for bankruptcy without seeking advice.
Bankruptcy starts when someone in debt (a debtor) is declared bankrupt by the Sheriff or the Accountant in Bankruptcy. If a debtor is declared bankrupt, it means that they have to hand over their estate including their home, to their trustee. The person who administers a bankruptcy is called the trustee. They can be either the Accountant in Bankruptcy or an insolvency practitioner.
A debtor will be able to keep some things that are essential for everyday living; however they may be required to make some payment from their income.
It is the duty of the trustee to sell the debtor's assets or property and to use the money to:
- pay the costs of managing the bankruptcy; and
- pay creditors as much as possible of what the debtor owes them.
Creditors are the people or organisations that are owed money by the debtor. Subject to certain conditions, a creditor can apply to a sheriff to make a debtor bankrupt or a debtor can apply to the Accountant in Bankruptcy to make themselves bankrupt.
In Scotland bankruptcy is sometimes called sequestration.
Minimal asset process (MAP)
MAP is a new route into bankruptcy which comes into effect in Scotland on 1 April 2015 and will replace LILA.
To qualify for MAS a debtor will have been assessed as requiring to make no debtor's contribution or has been in receipt of a prescribed benefit payment(s) for a period of at least 6 months on the day the application is made and has no other income.
The total amount of the debtor's debt including interest should be not less than £1,500 and not more than £17,000.
The total value of the debtor's assets must not exceed £2,000.
The value of a single asset of the debtor must not exceed £1,000 and the debtor must not own land.
Low Income Low Asset (LILA)
LILA is the route into bankruptcy for people who have a low income and low assets.
Low income means gross weekly income of no more than the standard national minimum wage for a forty hour working week. Any pensions or maintenance payments that you receive are also counted in with your income.
If you receive income support, income-based jobseeker's allowance or working tax credits you will be treated as meeting the low income test, even if your actual income is more than the standard national minimum wage for a forty hour working week.
When calculating your income no account will be taken of other social security benefits or tax credits you receive or any income paid to another member of your family. However, your income, pensions, maintenance payments, benefits, tax credits and the income of other family members may be taken into account when considering whether you should pay a contribution while you are bankrupt.
Low assets means that you have no single asset worth more than £1,000 and your total assets are not worth more than £10,000. In addition, it means that you must not own or jointly own a house or any other property or land.
With effect from 1 April 2015, LILA will no longer be an option for people who wish to apply for their own sequestration. It is being replaced by the Minimal Asset Process (MAP).
What is a trust deed?
A trust deed is a less formal procedure for personal insolvency in Scotland. It is a contract signed by a debtor by which he or she conveys his or her estate to a licensed IP who is appointed Trustee to realise the debtor's assets for the benefit of creditors.
Voluntary Trust Deed
A trust deed is a voluntary agreement between a debtor and their creditors (the people they owe money to) to repay part of what they owe. A trust deed transfers the debtor's rights to the things that they own to a trustee who will sell them to pay creditors part of what is owed to them. A trust deed will normally include a contribution from income for a specified period, this is a minimum of 48 months but can vary. A trustee may determine a shorter payment period where the full amount of the debtor's debt (including interest) at the date on which the trust deed is granted is met.
The trustee must be a qualified insolvency practitioner. Insolvency practitioners are regulated by law and must be members of an approved governing body. Independent Insolvency Practitioners' fees are at their own discretion.
An ordinary trust deed is not binding on creditors unless they agree to its terms.
Protected Trust Deed
A protected trust deed is one that is binding on all creditors. The total amount of the debtor's debts (including interest) at the date on which the trust deed is granted must be £5,000 or more. Provided the debtor complies with the terms of their protected trust deed, the creditors can take no further action to pursue the debt or to make the debtor bankrupt.
A protected trust deed prevents the debtor from applying for their own bankruptcy or for a debt payment programme under the Debt Arrangement Scheme.
If a debtor acquires any new debts after they sign the trust deed, they will not be protected from action by their new creditors.
What are the consequences of signing a trust deed?
Signing a trust deed is a serious step - debtors must be sure that they understand what they are signing.
Before a debtor signs, a trustee must give them advice about the consequences and must tell them about the alternatives to a trust deed. The alternatives include a debt management plan and a Debt Payment Plan under the Debt Arrangement Scheme. The trustee must also give the debtor a copy of the Scottish Government's Debt Advice and Information Package.
Like bankruptcy, a protected trust deed is likely to affect a debtor's credit rating and may prevent them from doing some jobs. If the trust deed fails to become protected the creditors may be able to make the debtor bankrupt.
The trustee will charge for the work they do and the debtor can choose who their trustee will be. The trustee must give the debtor an indication of what they will charge before the trust deed is signed.
Free advice on trust deeds and other alternatives can be obtained from Citizens' Advice Scotland or Local Authority money advisers.
Sequestration is the Scottish legal term for personal insolvency (bankruptcy). This is a formal procedure which starts when someone in debt is sequestrated as a result of an application to the Accountant in Bankruptcy either by the debtor or by a creditor. The Accountant in Bankruptcy awards sequestration. The person who administers a sequestration is called the Trustee. A trustee can be either an insolvency practitioner or the Accountant in Bankruptcy.
Certificate for Sequestration
The Certificate for Sequestration was introduced by the Scottish Government on 15 November 2010 as a new additional route into bankruptcy. The Certificate has to be issued by an "authorised person" for which there is no charge. It is a debt relief option directed towards those who previously were unable to meet the criteria for accessing any of the existing forms of debt relief. Further information and advice may be obtained from a local authority money adviser, Citizens' Advice Scotland or an insolvency practitioner.
Bankruptcy is a last resort for debt relief and there may be other options available. It is advisable to seek independent financial advice. Citizens' Advice Scotland and local authority money advisers provide free and impartial advice on options and may be able to help debtors fill in forms or liaise with creditors.
Some of the other options available may include:
Debt Management Programme
This is an informal arrangement between debtors and creditors to pay debts over an extended period of time. Debtors can arrange a programme directly with their creditors or with the help of a money adviser. Local money advisers can be found at Money Advice Scotland, or Citizens' Advice Scotland. Creditors do not have to agree to freeze interest or charges and can decide at any time that they no longer wish to accept payments and can pursue the debt using other methods.
Debt Arrangement Scheme (DAS)
DAS is a statutory scheme run by the Scottish Government to help debtors to pay single or multiple debts by giving them more time to pay without hassle or threat of court action from their creditors. DAS freezes interest, fees and charges on their debts from the date the DAS payment programme is approved. Debts will be written off if the programme is completed.
The scheme is delivered free by approved money advisers at local authority money advice units or Citizens' Advice Scotland. The scheme protects debtors' assets, including their home (as long as they keep up their mortgage payments).
Business Debt Arrangement Scheme (BDAS)
The Business DAS extends the Debt Arrangement Scheme to a legal person, trust or unincorporated body of persons having an established place of business in Scotland or constituted or formed under Scots Law and at any time carrying on business in Scotland.
All debts for which an individual debtor is liable and a legal person, trust or unincorporated body persons is liable must be disclosed.
Scotland's Financial Health Service
Further advice and information on dealing with personal debt can be obtained from the Scottish Government website - Scotland's Financial Health Service.