What is bankruptcy?

Bankruptcy is an option to consider when you have reached the stage of being unable to repay your debts over a realistic period. Bankruptcy may be an option where you simply cannot reach agreement with your creditors and your financial situation has become very difficult to manage.

You are likely to be under a lot of pressure, with a number of your creditors competing to collect their debt from you.

In Scotland, the word ‘bankruptcy’ is used loosely to describe two different situations.

Sequestration

Sequestration is the word used to describe the legal process by which you are formally declared insolvent (bankrupt). Insolvent means that you cannot pay your debts as they become due. In this fact sheet we will use the words ‘bankruptcy’ and ‘sequestration’.

Choosing bankruptcy

For some people in debt, bankruptcy can be something that they try very hard to avoid. For others, it is the most sensible solution to their debt problem. Before you can decide to go bankrupt, consider all the possible ways you could deal with your debt problem. This will include taking into account:

• the total amount of your debts;

• the likelihood of being able to repay your debts; and

• your ability to deal with your debts.

Also, take into account:

• your disposable income;

• the likely length of a repayment programme; and

• your age and health.

You should also consider your assets and the effects of losing them in bankruptcy. Assets could include:

• your house;

• your business; and

• other valuable items.

No single criterion should completely out-weigh the other. It may be a mistake to choose bankruptcy just because of the size of your debts. You should weigh up the advantages against the disadvantages. Talk to a local money advice centre, law centre, citizens advice bureau or phone us for advice.

Bankruptcy is often a straight forward procedure and the advantages are likely to be:

• relief from the stress and anxiety of being in debt;

• having your debts written off, or ‘discharged’, after 12 months; and

• being able to build a new life.

The main disadvantages of bankruptcy are:

• the possible loss of certain assets, particularly your home;

• that the trustee has wide powers over your financial affairs;

• that certain types of job can be affected;

• that you cannot hold public office (for example, as an MP, MSP, councillor, or member of a school board) and you cannot serve as a company director unless the sheriff court agrees;

• you cannot apply for credit of more than £500 unless you tell the creditor about your status; and

• the bankruptcy will be listed on your credit reference file for six years. Even after this period it can still be difficult to get credit, such as a mortgage. This is because lenders may ask whether you have ever been bankrupt.

How do I go bankrupt?

In order to petition for your own bankruptcy you must:

• have debts of over £1,500;

• live in Scotland, or have lived in Scotland sometime during the last year; and

• not have been sequestrated in the last five years.

In addition, you must also be able to show that you:

• are eligible under the low income and low asset rules; or

• are ‘apparently insolvent’; or

• have been given a formal ‘certificate for sequestration’ by an approved person, such as a money adviser, to say that you cannot pay your debts.

How much does it cost?

From 1 June 2012, you have to pay a fee of £200 to make yourself bankrupt. It may be possible to pay the fee by instalments. There are no exemptions for the fee. There are full details in the bankruptcy application pack about how to pay the non-refundable fee. Payment can be made by cash, cheque, debit card or postal order and you can pay by post, in person or at a bank.

What are ‘low income low asset’ bankruptcies?

Low income low asset (LILA) bankruptcies are a special scheme for people wanting to go bankrupt who meet certain criteria. You must have a gross weekly income of no more than the standard national minimum wage for a 40-hour working week, and low assets. The big advantage of this route into bankruptcy is that you do not have to prove ‘apparent insolvency’.

You will be able to make an application for your own bankruptcy under the LILA scheme if:

• you do not own your own home;

• you have no asset worth more than £1,000;

• your total assets are worth less than £10,000; and

• you have a ‘low income’.

• A car up to the value of £3,000 that you reasonably need will not be counted as an asset when you apply for bankruptcy under the LILA scheme.

You will be classed as having a low income if your earnings (before deductions for tax and national insurance contributions) are no more than £247.60 per week. If you receive:

• Income Support;

• income-based Job Seeker's Allowance;

• income-related Employment and Support Allowance;

• Working Tax Credit;

• Housing Benefit;

• Council Tax Benefit; or

• Pension Credit;

you will automatically meet the low income test, even if your actual income is more than £247.60 per week.

What is apparent insolvency?

‘Apparent insolvency’ is a legal term meaning that you cannot pay your debts as they become due. You will only be apparently insolvent in certain circumstances. The most common circumstances are as follows.

• You have received a ‘charge for payment’ and the 14-day time limit for payment has passed without you paying the debt. A charge for payment is a formal request in writing that you pay the amount owed. It will have the words ‘charge for payment’ printed across the top.

• A creditor has served a notice on you called a ‘statutory demand’, requiring you to pay off a debt within 21 days of the date of the demand and you have not paid the debt.

What is a certificate for sequestration?

A ‘certificate for sequestration’ is a formal document confirming that you cannot pay your debts as they fall due.

A certificate for sequestration can only be issued by an ‘authorised person’, who could be:

• an insolvency practitioner;

• a money adviser working at a citizens advice bureau or local council; or

• a money adviser working for any accredited advice agency.

Before granting you a certificate for sequestration, the authorised person must:

• provide you with a copy of the Scottish Government's Debt Advice and Information Package;

• advise you about alternative options to bankruptcy; and

• explain the effects of bankruptcy to you.

This certificate lasts for 30 days from the date it is signed by the authorised person. Therefore you must complete your bankruptcy application within this time.

Filling in your own petition

The application pack that you need to complete can be downloaded from the Accountant in Bankruptcy's website. Alternatively, you can contact the Accountant in Bankruptcy or National Debtline and ask to be a sent a copy through the post.

How will I become bankrupt?

Bankruptcy will normally be awarded within five working days of the Accountant in Bankruptcy receiving a correctly completed application with all the necessary supporting information.

Once you have been declared bankrupt, it means that you have to hand over your assets to the person who is going to administer your bankruptcy. They are called the trustee. The trustee will be either the Accountant in Bankruptcy or an insolvency practitioner. If you nominated an insolvency practitioner in your bankruptcy petition to act as your trustee, it is likely that the Accountant in Bankruptcy will make them your trustee, as long as they agree to this. If you are applying for bankruptcy under the low income low asset rules, your trustee will most likely be the Accountant in Bankruptcy.

Once your trustee is appointed, they take over your financial affairs and control them until you are discharged, or until all your assets are disposed of.

Your trustee will arrange a meeting with you. At the meeting, they will:

• check the details on your application form;

• tell you what their role will be;

• discuss what you obligations are; and

• answer any questions you may have.

Do I have assets?

Once you are bankrupt, your assets transfer to the trustee. The trustee may wish to sell any assets you have. Assets are the things that you own, such as: money, savings, your home or any property, vehicles, life policies, jewellery and shares. Also, if you are owed any money, this is also regarded as an asset.

Certain goods are not treated as assets in bankruptcy and the low income low assets scheme. These are items such as: clothing, bedding, furniture and household equipment for basic domestic needs. Items you need to earn a living (for example, tools and books) can be excluded up to a total value of £1,000. A vehicle that you need to travel to and from work, or to do your job, can also be excluded up to the value of £3,000.

• If you have valuable and non-essential household items, they may be sold by the trustee to raise money to pay to your creditors.

• If you have tools or books and these are valued at a total of more than £1,000, they may be sold by the trustee even if they are needed by you to carry out your employment. In these circumstances you would normally be allowed to buy cheaper replacements.

• If you have a vehicle and it is valued at more than £3,000, it may be sold by the trustee even if it is needed by you to get to work, or to do your job. In these circumstances, you would normally be allowed to buy a cheaper replacement.

Will I have to pay anything from my wages?

This will only happen if your income is above average and it appears that you might have available income after paying ordinary household expenses.

Your trustee will look at your income and compare it with how much you and your family need to live on to maintain a reasonable standard of living. If your trustee thinks that there is a surplus, they will expect you to make a contribution towards the cost of your bankruptcy and towards paying your debts. This is called an ‘income payments agreement’. You will have the option of having deductions taken from your wages.

If you cannot reach an agreement with your trustee, the sheriff will be asked to decide the amount you should pay. This is called an ‘income payments order’. Your trustee may ask the sheriff to order that payments are taken directly from your wages.

Will my job be affected?

Your employment will not be affected by bankruptcy unless:

• you have a contract of employment which contains a clause about bankruptcy (for example, when you have a responsibility for handling money or are in a position of trust);

• you hold a public office (for example, you are an MP, MSP, councillor or member of a school board);

• you are a company director; or

• your trade or profession has a rule which prevents you from practising whilst bankrupt (for example, solicitors and accountants).

Property and your home

Once you have gone bankrupt, any property which you own, including your home, transfers to the trustee. This gives them an interest in the property which may allow them to sell it.

If you own your own home, it may be sold, depending on whether it has any value or ‘equity’ in it.

If your spouse lives in the family home, he or she must agree to allow the sale. If one of your children lives in the family home, you must agree to allow the sale. If agreement is not given, the trustee has to apply to the sheriff court for an order allowing sale. The court can either:

• grant the order (possibly with conditions);

• refuse to grant the order; or

• postpone granting an order for up to three years to allow you and your family to find somewhere else to live.

In the case of jointly-owned property, the trustee is only entitled to the bankrupt's share of the equity in the property. It may be possible for any joint owner, or family and friends, to make an offer to buy out your share of the equity.If there is no equity, the trustee has no reason to sell the property. If you are discharged from your bankruptcy and the house remains unsold, it is still an asset and, if house prices rise, it may be sold in the future. Your trustee still has the duty to sell any assets that are transferred to them. If your trustee decides that they are not going to sell your home, they will formally abandon it and it will be transferred back to you. They must make a decision about your home within three years of you becoming bankrupt.

What if I rent my home?

If you are a tenant, the trustee will normally have no interest in the house as long as you can prove that it is rented. However, other problems can arise for tenants who are bankrupt and in some cases these can affect whether or not you will lose your home. In this section we explain these problems.

Can being bankrupt cancel my tenancy?

Some private sector tenancy agreements contain an ‘irritancy’ clause which allows the landlord to terminate your tenancy on the grounds of bankruptcy.

What if I have rent arrears?

If you have rent arrears, in some situations it is possible for your landlord to start repossession action even after you go bankrupt. Speak to your landlord to check how they would treat your arrears if you go bankrupt.

Do I have to pay my rent if I am bankrupt?

Once you are made bankrupt, you are still responsible for keeping up your rent payments. When your trustee is assessing what income you have available to pay creditors, they will take into account your rent payments. However, if your trustee thinks you are paying too much rent, you may have to move. This is because the trustee can apply to the sheriff court to set a limit on how much rent you pay. If you do not pay your rent regularly, your landlord could start repossession action.

Other effects of bankruptcy

Utilities

• Your electricity and gas suppliers may insist that you have pre-payment meters installed.

• If you had a fuel pre-payment meter before you were made bankrupt and this had been set to collect arrears, it should be adjusted to take account of current usage only after you are made bankrupt.

• Your telephone company may allow the supply to remain in your name but may insist on a deposit. It may be necessary to stop and then re-start the telephone supply. It may be possible for another person, for example a spouse, relative or third party, to take responsibility for payment of the telephone bill.

All outstanding electricity, gas and telephone bills at the date of bankruptcy are treated as ordinary debts and included in your bankruptcy.

Council tax

You will still be liable for your present and future council tax. But any council tax arrears due at the date you became bankrupt are included in the bankruptcy. The council will not be able to enforce this debt once you are bankrupt.

Bank accounts

You may have to close your bank or building society account when you are made bankrupt. Your trustee may allow you to open another account, usually an ‘instant access’ type, where there is no cheque book, cheque card or overdraft facility.

What will happen to my credit rating?

Credit reference agencies hold information about bankruptcy for six years from the date your bankruptcy was granted. This can significantly affect your ability to get further credit.

Details of your bankruptcy will also appear in the ‘Register of Insolvencies’, which is a public register. Your details will remain on this register until one year after your trustee has completed their duties.

How long will my bankruptcy last?

Your bankruptcy will normally last for one year. After this time you will no longer be liable for the debts included in the bankruptcy. This is called ‘discharge’. Some debts will not be written off at the end of your bankruptcy. After discharge, if you gain new assets, the trustee will have no claim on them. However, your trustee continues to have a duty to sell any assets that were transferred to them because of your bankruptcy.

Will any debts be excluded from my bankruptcy?

Although your liability for most debts will be written off once you are discharged, there are exceptions to this. Even after discharge you will still be personally liable for:

• fines, penalties, compensation and forfeiture orders imposed by any court;

• any debt that has been incurred through fraud;

• student loans;

• any obligation to pay maintenance to an ex-spouse due under a court order (not child support agency arrears); and

• money owed to a creditor whose debt is secured on your property (such as a mortgage or secured loan).

Bankruptcy offences

Being bankrupt puts certain obligations and responsibilities on you. You will be expected to cooperate with the trustee at all times and keep them informed about any changes in your circumstances. This includes telling them that you have moved house, or that your financial circumstances have changed. If you fail to do this, you may be guilty of a criminal offence.

Also you must not:

• take out credit for more than £500 without telling the lender or supplier that you are bankrupt;

• start up a limited company, or be involved in the day-to-day management of a limited company, without permission of the sheriff court; or

• act as an MP, MSP or as a member of a local council, a Justice of the Peace, or a member of a school board.

This is not a complete list of your responsibilities. Your trustee will give you a full list of what is expected of you.

If your trustee considers that you may be guilty of a bankruptcy offence, they may report you to the Procurator Fiscal. They can also impose restrictions on you.

Bankruptcy restrictions

You will usually be discharged from bankruptcy after one year; but, if your trustee considers that your behaviour has been dishonest or blameworthy in some way, they may report you to the Accountant in Bankruptcy. The Accountant in Bankruptcy may apply to the sheriff for a bankruptcy restrictions order to be made against you. If the sheriff makes a bankruptcy restrictions order, you will have some restrictions placed on you and these will continue after you are discharged. Restrictions can apply for between 2 and 15 years.

Examples of behaviour that could lead to a bankruptcy restrictions order being made include:

• not cooperating with your trustee whilst you are bankrupt;

• incurring debts when you knew that you had no reasonable chance of repaying them;

• giving away assets or selling them at less than their value;

• deliberately paying off some creditors in preference to others;

• gambling or making rash speculations, or being unreasonably extravagant;

• failing to keep proper records;

• fraud;

• causing your debts to increase by neglecting your business affairs;

• failing to supply goods or services that you have been paid for; or

• carrying on a business when you ought to have known that you could not pay your debts.

A bankruptcy restriction order means you are not allowed to:

• start up a limited company or be involved in the day-to-day management of a limited company, without permission from the court;

• act as an MP, MSP or as a member of a local council, a Justice of the Peace or a school governor in England or Wales;

• act as an insolvency practitioner;

• apply for credit of more than £500 without telling the lender that you are subject to a bankruptcy restriction; or

• fail to inform anyone that you wish to do business with the name, or trading name, under which you became bankrupt.

Click here to read our bankruptcy fact sheet in full

Further information is also available via the Accountant in Bankruptcy: http://www.aib.gov.uk

This information only provides a brief overview, it should not be considered as full bankruptcy advice. If you believe that bankruptcy is likely to be the best option to help you with your debts it would be vital to seek impartial advice from one of the debt advice charities such as the Citizens Advice Bureau, ourselves or your local council's money advice service.

From 1 April 2015, you have to pay a fee of £90 to make yourself bankrupt under the MAP rules. If you go bankrupt under the standard process, the fee is £200. It is possible to pay the fee by instalments, but there are no exemptions to paying it. Contact us for advice about possible sources of financial help if you cannot afford the fee.

There are full details in the bankruptcy application pack about how to pay the non-refundable fee. Payment can usually be made by cash, cheque, debit card or postal order and you can pay by post, in person or at a bank.

MAP bankruptcy

‘Minimal Asset Process’ (MAP) is the name given to a special type of bankruptcy in Scotland. You need to have a low level of debt and very few assets to use this process.

In order to go bankrupt using the MAP process, you have to meet the following criteria.

Your total debts are at least £1,500 but no more than £17,000.

Your total assets are worth no more than £2,000. Basic household items and furniture you need for everyday living are not counted.

You don’t have any individual assets that are worth more than £1,000. (A car that you reasonably need will not be counted as long as it is not worth more than £3,000).

You don’t own any land or buildings.

You have a valid certificate for sequestration. This is a formal document confirming that you cannot pay your debts as they fall due. See the later section Certificate for sequestration.

Your budget sheet shows that you have no money available after your essential bills to pay to your creditors. If your income is made up of only benefits, and have received them for at least six months before your application, you automatically meet this condition.

You have not been made bankrupt under the minimal asset process rules in the last ten years.

You have not been made bankrupt under other rules in the past five years.

If you do not meet the criteria for the MAP bankruptcy process, but still want to go bankrupt, you must owe at least £3,000 in total to all your creditors. This applies to both the 'certificate for sequestration' and 'apparent insolvency' routes.

There are advantages to going bankrupt using the MAP process. For example, you only have to pay a £90 application fee compared to the usual fee of £200. Also, your bankruptcy period usually comes to an end after 6 months.

Standard bankruptcy

If you cannot use the MAP process, you may still be able to go bankrupt using the standard process.

You still need to meet certain criteria.

Your total debts must be at least £3,000.

You must not have been made bankrupt under other rules in the past five years.

You must either be apparently insolvent or have a certificate for sequestration.

Apparent insolvency

‘Apparent insolvency’ is a legal term meaning that you cannot pay your debts as they become due. You will only be apparently insolvent in certain circumstances. The most common circumstances are as follows.

You have received a ‘charge for payment’ and the 14-day time limit for payment has passed without you paying the debt. A charge for payment is a formal request in writing that you pay the amount owed. It will have the words ‘charge for payment’ printed across the top.

A creditor has served a notice on you called a ‘statutory demand’, requiring you to pay off a debt within 21 days of the date of the demand and you have not paid the debt.

Certificate for sequestration

A ‘certificate for sequestration’ is a formal document confirming that you cannot pay your debts as they fall due.

an insolvency practitioner;

a money adviser working at a citizens advice bureau or local council; or

a money adviser working for any accredited advice agency.

Before granting you a certificate for sequestration, the authorised person must provide you with a copy of the Scottish Government’s Debt Advice and Information Package; advise you about alternative options to bankruptcy; and explain the effects of bankruptcy to you.

This certificate lasts for 30 days from the date it is signed by the authorised person. Therefore you must complete your bankruptcy application within this time.

If you go bankrupt under the MAP bankruptcy rules, you have to pay a fee of £90.

If you go bankrupt under the standard process, the fee is £200.

You can pay the fee by instalments.