Help is available for individuals and companies facing financial difficulty. Frequently asked questions (FAQs) about insolvency can be accessed by following the link in the right hand column. For more detailed information you can speak to an insolvency practitioner, or contact one of the advice agencies listed.
Bankruptcy
Bankruptcy is a formal method of dealing with debts if 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.
The 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.
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.
What is a Trust Deed?
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 debtors 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 usually 36 months but can vary.
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 a special kind of trust deed that is binding on all creditors. 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.
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.
Alternatives
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).
Personal insolvency
The Scottish Government has issued information to help individuals in debt. If a creditor (someone you owe money to) is taking steps to recover the money you owe through a court or legal process or if they intend to petition for your sequestration (bankruptcy) they must, by law, provide you with a copy of the Debt Advice and Information Package (DAIP). The Debt Advice and Information Package is available at the link below:
Further information about debt and bankruptcy can be found on the Accountant in Bankruptcy website:
Other support is available from Money Advice Scotland.
Details about different types of personal insolvency can be found by clicking here:
Corporate insolvency
If you are a director of a company which is facing financial difficulty, or you act for such a company, you should seek professional advice at the earliest opportunity as it may be possible to take steps to avoid formal insolvency. You can contact an insolvency practitioner by accessing the link Find an Insolvency Practitioner.
Pre Packaged Administrations
Information and advice on Pre Packaged Administrations can be found by clicking here.