When is bankruptcy right for you?

What is bankruptcy?

Bankruptcy (which, in Scotland, is also known as sequestration) is a legal declaration that someone can’t pay their debts.

There are two ways to be made bankrupt; you can apply to the Accountant in Bankruptcy to make yourself bankrupt, or your creditors or Trustee in a Trust Deed can make you bankrupt.

If you’re declared bankrupt in Scotland – whether you’ve applied for this yourself or a creditor has made the application – then control of things that you own, including your home if you own it, is passed to your Trustee (the person that administers your bankruptcy). Your Trustee can then sell your possessions to pay your creditors the money that they’re owed.

You could also need to make regular payments from your income.

Who can be made bankrupt?

Any person can be made bankrupt (if they’re in debt and meet the relevant criteria, more on this later), as can any sole trader, businesses, partnerships, trusts and other organisations can also be made bankrupt if they’re not A Limited Company.

It’s also possible for a dead person’s estate to be made bankrupt by the executor of their will.

All bankruptcies are recorded on a public register.

Is there more than one kind of bankruptcy?

In short, yes. There are two kinds of bankruptcy in that you can apply for in Scotland, traditional bankruptcy – sequestration, or full administration as it is known, or Minimal Asset Process, also known as MAP.

What is a Minimal Asset Process, and do I qualify?

A Minimal Asset Process (MAP) is a way of becoming bankrupt that requires you to meet certain criteria to prove that you have ‘minimal assets’.

To qualify for a MAP, you can’t have any individual asset that’s worth more than £1,000. Or any assets with a total value of more than £2,000.

This excludes a vehicle worth up to £3,000 that you reasonably require: to get to work, for example.

You can’t own, or jointly own, your house or any other property or land and you can’t have debts of more than £17,000; however, due to COVID-19 this £17k threshold has now been increased to £25,000.

In addition to meeting the above criteria, to qualify for bankruptcy using a Minimal Asset Process, you’ll need a Certificate for Sequestration (signed by a qualified money adviser), and, to have been on benefits for at least six months, or have been assessed as not required to make a contribution towards your bankruptcy.

In a bankruptcy that’s awarded using a Minimal Asset Process, as long as you cooperate with your Trustee, you’ll be discharged after six months. Your Trustee will, however, stay in office for a further six months and you’ll be under the following restrictions during this time:

• You won’t be allowed to borrow more than £2,000, either solely or jointly, without disclosing your status as a discharged bankrupt.
• You won’t be able to engage in business unless certain criteria are met.

I don’t qualify for bankruptcy via Minimal Asset Process

The other way to make yourself bankrupt in Scotland is by using the full administration route.

To be able to make yourself bankrupt using this method you’ll need to meet all the following criteria:

• Owe at least £17,000 (£25,000 with post-covid changes in place) or owe more than £1,500 but have assets worth more than £2,000.
• You must have received debt advice or money advice from a money adviser.
• You must live in Scotland or have lived in Scotland for the year immediately preceding your application date.
• You can’t have been made bankrupt in the last five years.
• You must pay the application fee.

How can someone else make me bankrupt?

Your creditors can apply to make you bankrupt if you meet all three of the following criteria:

• Owe them at least £3,000.
• Have been provided with the statutory booklet ‘Debt Advice and Information Package’ by them.
• Are apparently insolvent.

You can also be made bankrupt by the Trustee of your Trust Deed (if you’re in one), if you don’t cooperate with the Trust Deed’s terms.

The Trustee will have to show that the bankruptcy would be in the best interests of your creditors and that you’ve failed to comply with your obligations under the trust Deed.

What happens once I’ve been made bankrupt?

In the case of full administration, once you’re bankrupt, your assets will be ingathered by your Trustee and sold to pay the costs of managing your debts and bankruptcy.

Your assets include items such as money, savings, property, vehicles, life policies, jewellery, shares and any PPI you may have.

You’ll usually be able to keep things you need for day-to-day living, like clothes, furniture, kids’ toys and items for cooking etc. You’ll also be able to keep tools you need for trade – up to the value of £1,000 – and a vehicle that’s reasonably required that’s worth no more than £3,000.

During your bankruptcy, you’ve got to tell your Trustee about any new assets that you acquire, for example, a lottery win or an inheritance.

What if I own my house?

If you own your house, or any other property, control of it will pass to your Trustee, along with the rest of your assets – as outlined above.

If you do own your house, alone, or with someone else, it’s best to seek legal advice before being made bankrupt.

How long does bankruptcy last?

If you’ve been made bankrupt by Minimal Asset Process, you’ll be discharged after six months, otherwise, you’ll usually be discharged after one year.

Once you’re discharged from bankruptcy, you’re no longer liable for any debts that you had when you were made bankrupt.

If you’ve been made bankrupt by full administration, you can be discharged from the obligations of bankruptcy after 12 months, but the process from beginning to end will usually last 4 years. The obligations of Scottish bankruptcy:

• You can’t be a Director of a Limited Company.
• You can’t sit in certain public offices & positions, such as a Civil Servant, MSP or MP.
• You can’t obtain credit in excess of £2,000 without advising that you’re an undischarged bankrupt.

When is bankruptcy right for me?

Bankruptcy is a last resort when it comes to debt relief, and usually, there are other options available for you.

Some of the alternatives include a Debt Arrangement Scheme and a Scottish Trust Deed.

If you’re considering bankruptcy and need help and advice about your debts, then fill in our quick debt advice form, and one of our advisers will call you back with free, no obligation advice.