Michael Reid

My recent article regarding personal financial challenges and potential utilisation of the Debt Administration Scheme provoked feedback and questions.

Many wondered what other options might be available because, for those either living in rented accommodation or residing in a house with substantial negative equity, a DAS might be unsuitable.

The ongoing effects of the cost of living crisis mean that many are struggling to meet their monthly obligations and the notion of a 7-10 year repayment programme can seem unattractive.

Howsoever credit cards and personal loans have been utilised, the reality is that repaying them, combined with fairly punitive interest rates, can consume a significant amount of one’s monthly income, particularly when an increasing amount is required for food, utilities and travel.

Some commentators over the years have reflected upon the ease of obtaining personal credit (UK credit card debt was £64.5 billion) and blamed credit-providers for the problem, but it is also fair to say that the level of interest charged provides a cushion of cover for such providers.

This article focuses upon the individual rather than the finance provider.

It is a recurring feature of every interview with someone facing financial problems that a combination of stress and anxiety make it difficult to see the overall picture and act rationally. For many, using the debt relief mechanism of sequestration (Scottish term for bankruptcy) can provide an opportunity to write off virtually all debts, while paying a manageable contribution over a standard period of four years offers hope that not all is lost.

The contribution, which is based upon the State model of assessing if there is anything available when comparing your income and essential outgoings, means that a fixed sum is paid on a weekly/monthly basis and utilised toward both the costs of the sequestration process and a payment to all creditors.

As far as the State is concerned, as long as you are paying what is realistic from your income, the amount paid to creditors over the four-year period has no bearing on the level of debt i.e. relates only to one’s ability to pay.

Sequestration can provide both emotional and financial relief, and allows you to clear your head, focus upon the future, and try not to get into the same position again.

Some debts are excluded from the sequestration process e.g. student loans, fines and overpaid State benefits but these will be factored into the contribution calculation when the initial interview takes place.

Before the introduction of the Bankruptcy (Scotland) Act 1985, a sequestration used to be advertised in a local newspaper. People found this distressing and demeaning. The public advert requirement was removed and thus, the only publicity of a person’s sequestration is an entry in the Register of Insolvencies on the Accountant in Bankruptcy’s website (www.aib.gov.uk), and communication with every known creditor.

There are relatively few restrictions on a person whilst an undischarged bankrupt. For example, the principal restrictions are that one cannot be a director of a limited liability company in the UK or take credit for more than £2,000 without advising the credit-grantor of the undischarged bankrupt status.

Statistics issued recently by the Accountant in Bankruptcy reveals that there were 2,360 awards of sequestration during the year ended 31 March 2023, which is not dissimilar to both 2020/21 and 2021/22.

In terms of access to sequestration, the State requires a Certificate for Sequestration to be issued by a qualified individual e.g. a licensed insolvency practitioner, and means that an individual can commence the process under their own hand. Indeed, when looking at the 2022/23 figures mentioned above, about 85% of sequestrations were instigated by the person seeking debt relief rather than a creditor.

Given the fact that, despite a standard four-year period for paying a contribution, you can be discharged from sequestration (and your debts) 12 months after it commences, this process can prove attractive to many individuals who are seeking to regularise their debt position and escape from a debt burden that may seem insurmountable.

As usual, it is vital to seek experienced and qualified advice as soon as possible and weigh up the options before reaching an informed decision.

Michael Reid is managing partner at Meston Reid & Co