What happens after you are discharged from your sequestration?

What restrictions are there during sequestration in Scotland? Eoghann Green, a senior associate in restructuring and insolvency at Brodies LLP, explains what happens after you are discharged from sequestration.

What is sequestration in Scotland?

Sequestration is the term used in Scottish law for entering bankruptcy. Technically, it is the insolvent individual's estate (money, property and possessions) that is sequestrated with said party being made bankrupt; however generally in Scotland the process is referred to as sequestration. The following parties can be subject to sequestration:

an individual
a deceased individual's estate
a trust
a partnership
limited partnerships
any other non-incorporated body

Upon sequestration, a debtor's entire estate falls to an appointed trustee to administer for the benefit of the debtor's creditors (persons owed money), subject to certain limited exceptions, such as trade tools valued at less than £1,000 or certain essential household items.

The trustee will realise the sequestrated estate and pay a dividend to creditors upon realisation of the same. Notably this will include any interest held solely or jointly by a debtor in heritable property. If there is any money remaining in the sequestrated estate at the end of this process, it is returned by the trustee to the debtor.

In the meantime, all unsecured debts incurred prior to the date of sequestration (subject to certain limited exceptions, for example student loans or criminal fines) are written off. The sequestration process also puts a stop to all diligence and future diligence by creditors for sums due up to the date of sequestration, for example any attempts by creditors to arrest funds or attach the debtor's assets.

What restrictions are there during sequestration?

When a debtor is sequestrated, various restrictions are applied for the protection of third parties. For example:

an individual cannot remain or become a company director
an individual cannot remain or become an MP or MSP
when seeking or obtaining more than £500 of credit a debtor must inform the lender of their sequestration, despite it being on public record

A debtor is also automatically subject to a Debtor Contribution Order (DCO), which is fixed at a level based on the debtor's income. A DCO can be varied at any stage, for example it may be fixed at nil if the debtor is unemployed upon commencement of the DCO process but can change upon the debtor gaining employment (or vice versa). The DCO collects a percentage of the debtor's income to their sequestrated estate for the duration of the DCO (generally four years). If a debtor fails to make payment under a DCO, a trustee can request payment directly from their employer.

As part of the sequestration process the debtor must cooperate with their trustee, including attending an interview and providing information on their assets and liabilities. Failure to cooperate can result in a sequestration being extended and/or orders being imposed by the courts, including an examination before the sheriff to obtain information about the debtor's sequestrated estate.

Aside from the formal legislative restrictions noted above, the process is a matter of public record in Scotland (all sequestrations are recorded and available to the public to view in the Register of Insolvencies), so there can be other non-legislative implications and restrictions resulting from a debtor's sequestration.

For example, an individual working in financial services or casinos may have their contract of employment terminated or otherwise restricted upon their employer finding out about their sequestration. This can cause problems for a debtor, especially if the first their employer hears about the sequestration is when the trustee requests payment from their offices under a DCO. Other professions such as lawyers or accountants will also be subject to restrictions or may even be prohibited from practicing as a result of sequestration.

How long does sequestration last?

A debtor will generally be automatically discharged from their sequestration after 12 months, however this can be extended if they have failed to cooperate with their trustee, or shortened to six months if the debtor entered sequestration through a process known as Minimal Asset Process (MAP) where a debtor has little or no assets and creditor claims total less than £25,000 (this figure was increased temporarily from £17,000 during the Covid-19 pandemic).

The trustee will remain in office for as long as is required to realise the debtor's sequestrated estate. Additionally, it should be noted that upon discharge of a trustee they can seek reappointment subject to certain conditions should previously unknown assets be discovered at a later date, which vest in the sequestration and require to be realised for the benefit of the debtor's creditors.

What happens after you are discharged from your sequestration?

The discharge of a debtor does not bring the sequestration process to an end, as the debtor's trustee will remain in office to realise the sequestrated estate. Additionally, the discharge of the debtor does not end a debtor's obligations (if any) under a DCO to make payment from their income to their sequestration.

Once the trustee has realised the debtor's entire estate and paid any dividend to creditors, they will seek their discharge as trustee and return any surplus in the sequestrated estate to the debtor.

About the author

Eoghann Green is a senior associate in restructuring and insolvency at Brodies LLP.

What is a Minimal Asset Process (MAP) bankruptcy in Scotland and how does it work?

What is the Debt Arrangement Scheme (DAS) in Scotland?

What you need to know about protected trust deeds in Scotland

How does the winding up petition process work in Scotland?

Find out more

Bankruptcy (Scotland) Act 2016 (Legislation)

Image: Getty Images

Publication date: 28 June 2021

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.