The festive period is a time for celebrating with loved ones, enjoying food and drink, and exchanging gifts. But it can also bring financial challenges. With rising living costs, interest rates at levels not seen for over a decade, and inflation still high, the cost of Christmas can present a further struggle, leaving many overstretched and facing unmanageable debts and insolvency come January.

Dealing with debt can be overwhelming, particularly when bankruptcy – or sequestration in Scotland – is threatened. However, seeking early advice is crucial. By acting quickly, more potential solutions are available, with more time to manage the situation and decide how to proceed. Even for those already subject to sequestration, correct advice can help navigate the process, while potential options may still be available to retain assets such as homes, or even to recall the sequestration, depending on the circumstances.

There are many misconceptions and assumptions about insolvency and addressing unmanageable debts, but understanding the key features of bankruptcy and alternative options can bring clarity to a process that is unfamiliar and daunting for most people.

Bankruptcy, or sequestration, is a form of insolvency relating to an individual, but also applies to partnerships, trusts, and deceased individuals' estates. Creditors owed more than £5,000 can present a petition for sequestration to a sheriff court, or those in debt may apply for their own sequestration if they meet certain criteria.

Nicky-Ray Watson is a Senior Associate, Brodies LLP

Once sequestration is granted, an insolvency practitioner, known as the trustee, is responsible for dealing with the person’s estate for the benefit of creditors. The trustee will investigate a person’s financial affairs and seek to recover funds through a contribution from income and realising assets, including their home. Assets previously transferred to family, friends, or third parties could also be of interest and recoverable if full value was not given at the time.

Restrictions are imposed on individuals while they are ‘undischarged bankrupts’, such as holding certain positions, being a company director, and applying for credit, while some employment contracts may include termination clauses following insolvency.

At the end of the sequestration process, which is indefinite, the trustee will take their costs from recovered funds, then pay creditors a dividend for their claims, plus interest. Leftover funds will be returned to the sequestrated individual. Any unsecured debts not paid are written off, subject to certain exceptions.

Many people might not realise there are alternatives to avoid sequestration. For example, agreements can be reached with individual creditors to halt enforcement action and repayments can be made to them. Scotland also has other statutory debt solutions. The Debt Arrangement Scheme allows debts to be repaid in full over time, with interest frozen, and protection from legal action by creditors. A Protected Trust Deed offers an agreement with creditors to repay debts in full, or part. It is binding on creditors, who cannot take action to pursue their debt or sequestrate while its terms are complied with.

A moratorium can also be applied for, allowing a six-month period of relief during which creditors cannot take action to recover your debts. It provides breathing space for you to organise your finances, and time to consider the most suitable statutory debt solution.

Being on the verge of bankruptcy is worrying, and it is tempting to bury your head in the sand. However financial difficulties will not disappear, and unless action is taken, they are likely to worsen. Acting early and seeking advice is key to addressing those problems, and brings clarity to your next steps.

Nicky-Ray Watson is a Senior Associate, Brodies LLP

Seek early advice when you face sequestration - Nicky-Ray Watson

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