Bankruptcy law in Scotland

Changes to the law on bankruptcy in Scotland are to be introduced from 1 April 2008 - see our summary here.

If you have a lot of debt and very little disposable income, you may have been considering bankruptcy as a way out of your debt problems. But what exactly is bankruptcy and how would it affect you? Are you sure it is the only or best solution to your problems?

You may want to make yourself bankrupt because you do not feel there is any realistic prospect of paying off your debts. However, there may be other alternatives. Even where negotiated repayments with your creditors has failed, you have choices. As bankruptcy has serious consequences, you should consider your options carefully before committing yourself. Each of the options below has the effect of cancelling unpaid debt at the end of a set period (usually 3 years).

· First, you could consider an informal or “quasi-bankruptcy”. This involves you or your adviser contacting all your creditors to offer them 3 years worth of payments from your disposable income in full and final settlement of all your debts.

Advantages

Creditors get more money than in a bankruptcy;

Avoids legal consequences of bankruptcy for you.

Disadvantages

Needs all creditors to agree in writing;

You would need a reasonable amount of disposable income.

· Second, there is the “voluntary trust deed”. In this, you would sign your “estate” (your income and any assets you have) over to a trustee (usually a firm of accountants or similar). The trustee administers your “estate” on behalf of your creditors, making payments to them, for a period of (at least) three years. The trust deed achieves “protected” status (which means your creditors must accept it) so long as a majority (or at least a third in value) of your creditors do not object.

Advantages

Avoids legal consequences of bankruptcy for you;

Can force some creditors to agree.

Disadvantages

Can be blocked by creditors objecting;

Trustee needs to be paid;

Income and assets go to pay creditors; may lose house if home owner.

· Third, you may formally petition the court for your own sequestration (personal bankruptcy). There are certain requirements which must be fulfilled before you can do this. Your total debt must exceed £1,500. There must also be an expired charge for payment (which follows a court decree) outstanding against you (with no payments made to that debt); or a poinding following on a summary warrant - often for Council Tax arrears. There are other ways of fulfilling the requirements, but these two are the most common. If you do not fit the description above, you cannot petition for your own bankruptcy.

In bankruptcy, the Accountant in Bankruptcy (a court official) administers your “estate” on behalf of your creditors, making payments to them, for a period of three years.

Advantages

No disposable income required;

No consent from creditors needed.

Disadvantages

Income and assets go to pay creditors; may lose house if home owner;

Disqualified from certain posts, e.g.: member of parliament; solicitor; company director; office bearer for charity;

Seriously affects credit rating.

There are also court fees to pay for bankruptcy, although you may be able to obtain Legal Aid (ABWOR) to cover this cost. See your solicitor for more details.

Bankruptcy is not always necessary or appropriate, even where there are high levels of debt. You should take advice before deciding.

This information is designed to give a general guide to bankruptcy. It does not set out in detail the rights and obligations placed upon debtors and creditors in these circumstances. If you wish further information on bankruptcy, a publication “Bankruptcy Information Pack” is available from the Office of the Accountant in Bankruptcy. For detailed advice on your individual case, you should consult a solicitor or trained money adviser.