Bankruptcy in Scotland
Coronavirus - more protection from action by creditors
If you're worried about creditors taking enforcement action against you or you are thinking of applying for Bankruptcy (sequestration), a Protected Trust Deed or the Debt Arrangement Scheme (DAS) you can apply for a moratorium, which prevents creditors taking action whilst you seek advice. The moratorium protects you for six months but it does not stop interest or charges building and may impact on your credit rating.
If you are worried remember that creditors and sheriff officers should be reacting sympathetically to Covid 19 related financial hardship and you should ask them to treat you fairly as per the Financial Conduct Authority’s rules. If this does not work and your creditor has sent you a document called a “Charge for Payment for Money” giving you 14 days to pay your debt in full, then you should apply for a moratorium.
You can apply for a moratorium yourself but it is recommended you only do this after getting advice. Once you have applied for a moratorium bear in mind that if you do not get advice within 6 months, and make an application for either DAS, protected trust deed or bankruptcy, then it will expire and your creditors can take action again. Read more about protection from action by creditors on the Accountant in Bankruptcy website.
Changes to bankruptcy debt levels
From 27 May 2020 the people you owe money to can only make you bankrupt if you owe them £10,000 or more. This limit has been increased from £3,000 to £10,000.
This is a temporary change to help people whose debts have increased due to coronavirus. Its in force until 30 September 2021.
Read more about changes to bankruptcy on the Accountant in Bankruptcy website.
What is bankruptcy in Scotland (sequestration)
Bankruptcy is a formal process in which you are declared bankrupt by the Accountant in Bankruptcy (AiB) or a court. It is called sequestration in Scotland.
When you are bankrupt, your finances are controlled by a person called a trustee. It is the trustee's job to control all of your belongings and property (assets) with the aim of paying as much money as possible to the people you are in debt to (your creditors). You can apply for bankruptcy in Scotland if you can’t pay back your debts.
As well as applying for bankruptcy yourself, your creditors can apply to make you bankrupt, even if you don’t want them to. You must owe your creditors at least £10,000 for them to be able to make you bankrupt.
Bankruptcy is only one option to help with debt problems. If you are considering bankruptcy, you will need to get help from a money adviser. You can find your nearest money adviser on the 'find an adviser' page on Scotland's Financial Health Service website.
If you owe money to people or companies in the EU
Any debts you owe to people or companies in the EU might not be covered by bankruptcy.
Your creditors could keep asking you for money, for example by calling you or sending you letters. If you live in the EU, they could take you to court in the EU.
From 1 January 2021, EU creditors have to sue in the UK rather than in the EU, even if they have an existing judgment. The UK will recognise EU judgements entered or started before 31 December 2020.
If you live in the UK but have a home in the EU with a mortgage from an EU lender, the lender could take you to court in the EU.
Get legal advice if you have creditors in the EU.
When bankruptcy might be an option for you
Bankruptcy might be an option for you if you have:
- no money - you have no money to pay your debts or you have so little that it will take many years for you to re-pay your debts
- debts of between £1,500 and £25,000 – if you have debts of between £1,500 and £25,000, no disposable income and little property (assets) then you can apply for a shorter form of bankruptcy called the Minimal Assets Process (MAP). You can apply for MAP if your only income is from benefits or you have no disposable income
- at least £3,000 of debt - If you have £3,000 or more of debt, and you aren't able to apply for the Minimal Assets Process bankruptcy (see bullet point above) you can apply for standard bankruptcy
- difficulty dealing with the people you owe money to – if the people you owe money to (your creditors) will not negotiate with you or you are under excessive strain because of the situation
- unlikely to get more money – your circumstances are unlikely to change in the near future.
Advantages of bankruptcy
The advantages of bankruptcy include:
- less contact with the people you owe money to - you will have less contact with the people you owe money to (your creditors) as your trustee will deal with them
- no more enforcement action - if you are thinking of going bankrupt, you can apply to the Accountant in Bankruptcy to stop your creditors taking any steps to recover the money you owe them. This is called a 'moratorium' and it lasts for 6 months. You can only apply for a moratorium once in any 12 month period (although this has temporarily been changed due to coronavirus). During the moratorium, your creditors can no longer take steps such as arresting your bank account. You can also apply for a moratorium if you are thinking of setting up a trust deed or applying for a debt payment programme under the Debt Arrangement Scheme
- current enforcement action stops – for example, an arrestment order, where a court makes an order telling your employer to pay some of your wages directly to your creditor. If you become bankrupt, this will stop
- debts wiped out - most of your debts will be wiped out after your bankruptcy is over and you will not have to pay them back. Your bankruptcy will usually come to an end (you will be 'discharged') after 6 months or 1 year depending on the type of bankruptcy that you have. Some debts will not be written off, such as student loans and criminal fines.
Disadvantages of bankruptcy
The disadvantages of bankruptcy include:
- paying regular contributions – if you are assessed as having enough money to make contributions towards your debts, you will have to pay them for 4 years. If you don't pay your contributions, the trustee can arrange for your employer to take deductions directly from your wages. If your only income is from benefits, you won't have to pay any contributions
- credit rating – going bankrupt will affect your credit rating for 6 years. This can make it harder to get credit like a mortgage or a loan in the future
- selling your belongings and property – you may have to sell some of the things you own (your assets) such as your home
- you can't have certain jobs – if you are bankrupt, you cannot hold certain jobs, stand for public office or act as a company director. You may be dismissed from some jobs for example if you work in financial services
- self-employment – if you are bankrupt, you may not be able to run your business
- limit on borrowing money – there are limits on the amount of money that you can borrow if you are bankrupt
- cooperation - you must cooperate with your trustee. If you don't, the end of your bankruptcy may be delayed, you may have to do training in financial education and you may have restrictions placed on you after the end of your bankruptcy (called a bankruptcy restriction order)
- new money or property - if you get any new money or property within 4 years of the start of your bankruptcy, it may be claimed by the trustee. Examples include PPI compensation or an inheritance.
Other things to consider about bankruptcy
If you are thinking about going bankrupt, you will need to think about whether you have enough money to pay contributions, what will happen to your home, any impact if you are self-employed, what will happen to your belongings, the costs and any impact on your immigration status.
Will I have to pay contributions
Your trustee will assess your income and expenditure to see if you have any disposable income left after your usual spending every month. If you do, you will usually be expected to pay contributions towards your debts. If you don’t, you won’t have to pay anything.
If your circumstances change, you may have to start paying contributions or you may be able to reduce the amount you pay. In some circumstances you can ask for a payment break of up to 6 months, for example if you lose your job or you become ill.
What will happen to my home
If you rent your home, you should check your tenancy agreement to see if it says anything about bankruptcy. Some tenancy agreements have a clause that allows a landlord to end an agreement if a tenant becomes bankrupt. You will need to continue to pay your rent during your bankruptcy.
If you own your home, and there is equity in it, it will usually have to be sold. (The equity is the amount of money that you would get after selling your home and paying off your mortgage). Your trustee will then pay the proceeds to your creditors. If you own your home jointly with someone else, the trustee will usually offer to sell your share to the other person. If the other person is unable or unwilling to buy your share, the trustee may have to apply to court for a court order for the house to be sold.
If you have family living with you in your home, such as a spouse, civil partner and/or children, the trustee must apply to court for an order to sell the house. The court can decide to delay the sale for up to 3 years or to not allow the sale at all. This is only likely if there are special circumstances, such as you having a disabled child and the house having been specially adapted for them.
If you're self-employed
If you are self-employed as a sole trader, the trustee can either:
- take over the business - the trustee can take over the running of the business
- grant a licence to someone else - the trustee can grant a licence to someone else to run the business
- sell the business - the trustee can sell the business as a going concern, or
- close the business - the trustee can decide to close the business and sell the assets.
The trustee will do whatever is in the best interests of the creditors. The trustee is only likely to allow the business to continue if this will lead to a financial gain for the creditors.
What will happen to my possessions including my car
Although the trustee can sell some of your possessions, you will be able to keep many of them and household goods as well. You can usually keep anything that you need for your work, for example joiner’s tools.
You can normally keep your car if you need it for some reason such as to go to work or you have a disabled child. It must be worth less than £3,000.
How much does bankruptcy cost
If you get some benefits like Universal Credit, Employment and Support Allowance or tax credits, you don't have to pay a fee to be made bankrupt.
If you don’t get any of these benefits, the fee is £150 for standard bankruptcy or £50 for the Minimal Assets Process. This goes to the Accountant in Bankruptcy.
Are you applying for British citizenship
If you become bankrupt, this may mean that your application for British citizenship is turned down. It may also prevent you from acting as a sponsor for a dependent who wants to enter the UK. If you are worried about the impact on your immigration status, you should get legal advice.
What happens at the end of bankruptcy
Most of your debts will be wiped out after your bankruptcy is over and you won't have to pay them back. This is called 'discharge'. Some debts won't be written off, such as student loans and criminal fines.
If you went bankrupt under the Minimal Asset Process, you’ll normally be discharged after 6 months. This type of bankruptcy is for people who have low incomes and little property.
If you went bankrupt under the standard type of bankruptcy, you’ll usually be discharged after 12 months if you cooperated with your trustee. If you had to pay contributions during your bankruptcy, you’ll usually have to carry on paying these for 4 years from the date you were made bankrupt.
You can apply for a certificate of discharge from the Accountant in Bankruptcy. You can find contact details on the Accountant in Bankruptcy website.
Going bankrupt will affect your credit rating for 6 years. This can make it harder to get credit like a mortgage or a loan in the future. Read about how to get information removed from your credit reference file if its kept too long.
Alternatives to bankruptcy
Bankruptcy is not the only option to help you sort out problems with debt. Other options include:
- a debt payment programme under the Debt Arrangement Scheme (DAS) - this may suit you if you can afford to pay off your debts in full from your disposable income in a reasonable time. You will not have to sell off any of your belongings or property such as your home. There is more information on our page about DAS
- a protected trust deed – this is similar to bankruptcy in that your money and property are transferred to a trustee who will manage your affairs for the benefit of your creditors. You will have to pay contributions towards your debts for 4 years. It is only likely to be a good option if you have enough disposable income to make a regular contribution towards your debts. You must have debts of £5,000 or more. Having a protected trust deed will not prevent you working in as many types of jobs as bankruptcy. Read more about trust deeds on our trust deeds page
- voluntary agreement direct with your creditors – this is where you set up an informal repayment schedule with your creditors. It means that you are in control of your finances but it does also mean that you have to negotiate with all your creditors and if you aren’t able to keep to your repayment plan there is nothing to stop them taking action to recover the money you owe them. A money adviser at your local Citizens Advice Bureau can also set this up for you.
- debt consolidation – this is where you borrow money to pay off existing debts. This is also called re-financing. It may mean that you pay back interest at a higher rate and for a longer time than for some of the other options. You must take independent financial advice if you are thinking of doing this. There is more information about debt consolidation on our page about options for dealing with debt.
If you are considering any of these options, you should get advice from a money adviser. You can find your nearest money adviser on the 'find an adviser' page on Scotland's Financial Health Check website.
There are free sources of advice, such as Citizens Advice Bureaux, money advice centres and law centres. There are also freephone helplines such as the National Debtline and the Stepchange Debt Charity helpline.
More information about bankruptcy is available on the Accountant in Bankruptcy's website.