Bankruptcy is an insolvency process that deals with serious debt problems. It's known as "sequestration" in Scotland.
If your debt status is serious, this option might be right for you.
Bankruptcy is a last resort, but so are some other debt solutions. It can be the fastest and cheapest way to get out of debt.
If you live in England, Wales or Northern Ireland please click here. Bankruptcy is different in Scotland.
How Does Bankruptcy Work?
• The application fee is £200.
• The “Minimal Asset Process” makes this fee £90. See below for further detail.
• You don’t need to attend Court.
• You must get formal debt advice first.
You submit the application to the Accountant in Bankruptcy (AIB). The AIB is Scotland’s Insolvency Service. They assign a “trustee” to you. A trustee deals with your bankruptcy.
Some applicants can select their own trustee. They help you to apply. They handle your case.
The trustee looks at your income, your costs, and your assets. This is to see if you can pay towards the debt. Sources of payment can include:
• Your surplus income. This is money earned that you don't need for costs.
• Certain assets that you own.
• Assets that you receive later.
Your discharge should happen after one year. You're released from bankruptcy restrictions. You're discharged from your debts. You will not necessarily be discharged from debts that were not included.
If you can afford to pay towards the debts, this will continue. The total payment period is 4 years.
What Might You Have To Pay?
You’ll be asked to provide income and expenses information. This will include evidence like bank statements, pay slips, and bills.
A limit to your spending applies. This is true of other debt solutions (bankruptcy isn't different). You should have enough money for bills and other fair costs.
Further payment may be due if you own assets. Assets like a car or home get covered further below. Some people sell their assets. To avoid a sale, another person can make payment for you.
For four years, you must tell your trustee if you come into money. An example is if you inherit. Such money (or property) will be used to repay your debts.
Bankruptcy in Scotland for Homeowners
A home owner should be careful. The trustee looks to see if they could raise money by selling the home. If equity exists in the home the options include:
• A third party can help you. They pay the money due so the asset isn't sold. This could be family or a friend.
• The home gets sold. The profit goes to the trustee.
The sale of jointly-owned homes can happen in sequestration. With a jointly owned home, the other person gets their share of the sale profit. They are unlikely to be able to stop the sale of the home.
The sale of a home in which children live can happen. You may get longer to sell it, to help find a new home.
You may own (or part own) a home in which your ex lives. Without a legal transfer, the home will be at risk of sale. An informal deal with your ex isn't a legal transfer.
Bankruptcy for Vehicle Owners
The Trustee has two main questions:
• Do you need the car? Need might relate to living in a rural area. It might relate to poor public transport. It could relate to needing a car for work. A sale is possible without a fair need.
• What is the vehicle worth? If greater than £3,000, a sale may happen. A third party could pay the money rather than selling.
This applies to cars (and other vehicles) that you own. Being the “registered keeper” doesn't always mean that you own it. A family member can own a car that you use.
You don't own a car with secured finance. Some finance firms might recover a car if you become bankrupt. Others will let you keep the car if you keep paying.
Bankruptcy and Employment
Few jobs prevent you becoming bankrupt.
You cannot be a Company Director if bankrupt.
In some types of work regulation applies. A regulator might stop you working, or restrict your work. Examples include accountants and solicitors. Mortgage brokers, or financial advisers, can be the same.
In some types of work risk-control takes place. The employer acts to control risks. Financial services workers may have bankruptcy terms in their contract. This can apply to bank workers.
In some types of work vetting takes place. This may include the police, prison officers, and members of the armed forces. You may have to disclose your plans to the employer. You may need their consent.
Self-employed persons should be careful (very careful if you employ people). The closure of your business is possible. You may be able to resume work following this initial closure.
Will You Lose Your Pension?
Money kept in a pension should be safe (rare exceptions exist). This changes if you release the money from your pension.
• If you receive a pension income, it's treated like any other income.
• If you take a pension lump sum, it's treated as income. You may have to hand it over.
• A van will clear goods from your house. This is untrue. Valuable items can be at risk. Normal household goods aren't. A fridge or sofa won't get taken, nor should tools of your trade.
• You cannot have a bank account. This is untrue. You might have to move to a new bank. Fewer accounts will be available to you. You will be able to get a bank account of some type.
• You'll be on a credit blacklist. Credit blacklists don't exist. Your credit rating will take a hit. This can recover in the future. Credit file entries last for six years.
Creditor Making You Bankrupt
Any creditor owed £3,000 or more can try to force bankruptcy upon you. This is most common with HMRC, council tax, or business debts. It isn't as common with consumer debts.
If a bankruptcy threat gets made, obtain advice right away. Delay might deny you access to other solutions.
Appointing Your Own Trustee
Some people may prefer to appoint their own trustee. You can do this if you can contribute towards your debts.
You can agree the payment amount with your trustee. You can agree how your assets get managed. This happens beforehand, so you know what will happen.
Minimal Asset Process – MAP
With a low income and few assets, this is a cheaper route to bankruptcy. The application fee is reduced to £90.
Your debts must range from £1,500 to £17,000. You cannot be a home or land owner. You must own no single asset worth in excess of £1,000 (other than a vehicle). Total assets must value below £2,000. Vehicles worth a maximum of £3,000 are OK (if you need it).
An assessment can check that you have no surplus income. Being on benefit income for the past six months is another test.
Who Can Help You Apply?
You first need advice from an approved money adviser. Citizens Advice or your Local Authority’s money advice team can help.
If you can pay money into your bankruptcy, you can choose a trustee. This will be an "insolvency practitioner" (IP). They can give you the advice and help you to apply.
An approved adviser can register you for a “moratorium”. This protects you from creditor legal action for six weeks. This gives time to apply and get approved for bankruptcy.
Bankruptcy (sequestration) may be a quick and cheap way to tackle debt.
It is a serious insolvency process. Check the drawbacks ahead of applying. A better option may exist for you.
Bright Oak is not a direct provider of bankruptcy services. We work with our partners, Wylie & Bisset LLP.