When you’re in financial trouble, the natural tendency is to spend time trying to find a way to satisfy your creditors and stop the harassment without resorting to declaring insolvency. However often the time spent doing that can backfire.
Many people imagine that Sequestration is running away from financial problems and that it could seem like the end of the world for them, but actually nothing could be further from the truth. Sometimes sequestration is the only sensible and logical course of action under the circumstances, and the sooner it is considered the better because there will be more opportunities open to you if you don’t delay.
For example, the following is a list of some of the advantages that sequestration can offer when it is used under the right circumstances.
A financial adviser, Insolvency Practitioner or Money Adviser may look at your finances and recommend you need to apply for sequestration immediately before the situation gets any worse. You could try debt payment plans, you could try a Trust Deed, you could try to negotiate with creditors yourself, but if you have debt which is owning you instead of the other way round and you are defaulting on payments every month, you might find that you are prolonging the agony for yourself.
If you find it difficult to deal with confrontation, you’ll probably find dealing with your creditors very difficult and unpleasant. Debt Collectors and their agents often work on commission, so they can make more money for themselves if they canget you to make payments, een if it means that paying them means you are unable to pay someone else. If you get to the stage where you are doing that and you feel bullied into making payments using money that should go on essentials like heating and food, then you need to talk to a financial advisor as soon as possible. Our financial advisers can refer you to an Insolvency Practioner if your circumstances suggest that is appropriate. Not only have you got to a point where Sequestration may be the best option, but you also need someone very firm and knowledgeable about your rights to help you deal with your debts and those who want you to pay them.
When you’re Sequestrated a creditor will have to submit to the sequestration and stop pursuiing you. There are still a number of creditors who hope you don’t know enough about the process that they can extract some money from you, but with a few exceptions they will have to leave you alone. Common exceptions to this are if you owe money for secured loans (such as a mortgage), student loans, benefits overpayments or have to repay money as part of court order. Other creditors of unsecured debts such as credit or store cards, loans and overdrafts must leave you alone and deal only with your Trustee. However, you may find that if you have any property on HP the company that you hired it from may be able to collect it.
Apart from some statutory exceptions, your unsecured debts will be bound in your sequestration. That doesn’t mean they are just automatically wiped out though – if you have assets which could be released to pay some money to your creditors your Trustee will take action, which could include recovering them and selling them. If you are able to afford them, you will be required to make payments towards your debts from your income for 36 months. Although you are discharged from bankruptcy after 12 months you will continue to make your payments as long as you can afford them until the 36 months are completed. The big thing that you will notice, is that your Trustee will deal with your creditors and you won’t have to.
A lot of people think Sequestration lasts a whole six years, the time it stays on your credit report and it puts them off from seriously considering this option. Nothing could be further from the truth. People often mix up the length of time the Order stays on your credit record with how long it takes to be discharged. You will be discharged after 12 months depending on your circumstances and from then on, your bankruptcy will appear on your credit record for six years.
Parting with your assets can be difficult and is often one of the reasons people avoid sequestration as a legitimate solution to the trouble their finances are in. However, which assets you give up depends entirely on their worth. For example, if you have equity in your property it is very likely your Trustee will want to release it up to the value of debts and costs, but if it will cost more in fees and penalties to release that money, they may not bother. Likewise if you own joint assets, say with your spouse, they may be able to buy out your share of the asset thereby releasing cash to your creditors and allowing you to continue to enjoy it. You will normally be allowed to keep items you need for day-to-day living, such as clothes, furniture, household linens, floor covering, anything used for cooking or cleaning, educational items and children’s toys. You can also keep any tools you need for your trade if you are self-employed, up to a value of £1,000. You may be able to keep a vehicle if it is reasonably required by you and it has a value of up to £3,000.
In appropriate cases, Sequestration gives something that no other Scottish debt management solution gives – almost instant relief from the stress of dealing with debt. Debt Arrangement Schemes and Trust Deeds can often sometimes prolong the pain, although if you are determined to go down this route they can teach you how to stick to and manage a strict budget, which is a very useful skill to have. However, they also include fees to pay for their day-to-day administration by the Office Holder, which will often be quite high in Trust Deeds.
No-one is going to pretend there are not disadvantages of sequestration, but then all debt management solutions do have them and they must be considered.
This is a big one. For six years after your discharge your award of bankruptcy will remain on your credit record, making it difficult for you to get credit. However, if you’ve got to the point where you are considering sequestration it is likely you have already done damage to your credit record if you have defaulted on any loans or payments. It is also unliley that you will want to obtain debt again in a hurry.
If you own any assets, such as property, land, stocks and shares, jewellery, antiques, classic cars or have investments in businesses, you will have to allow your Trustee to assess them for their value and if necessary sell them to give the money to your creditors. Depending on how much equity you have, you may have to sell your home. A second property or holiday home will almost certainly have to be sold.
If you hold a position of financial responsibility or public trust you may find there is a clause in your employment contract that forbids you to undertake any type of debt management option that would have you declared insolvent. These types of clauses may be found in the Police, Fire Service and Prison service. Also, certain positions including MP, MSP, Justice of the Peace and School Governor are not open to bankrupts. If you are bankrupt you cannot be a company director or be involved in the promotion, formation or management of a company.
Until you are discharged 12 months after being sequestrated you will not be able to obtain more than £500 in credit at any time unless you declare to the lender that you are bankrupt. This will feel harsh to you when you are used to having high credit limits on credit cards, but you will probably not want to look for credit again immediately after sequetration and once you have been discharged you can start to slowly build up your credit record. You may even find that you cannot get even a basic credit card and that you may have to get a prepaid credit card that you load with money first and then spend. While you may feel sore about this type of restriction, used the right way these cards can be a good way to help build up your credit rating.
Once you are sequestrated you cannot take part in the formation, promotion or management of a limited company.