Case Study

New Bankruptcy Laws for those on a Low Income

Monday 23rd June 2008

 

As of 1 April 2008, new regulations will come into effect which will make it easier for those on low incomes to declare themselves as bankrupt.  Under the Bankruptcy (Scotland) Act 1985 (Low Income, Low Asset Debtors etc.) Regulations 2008, a debtor can petition the court for sequestration where:

 

  • The total amount of debt is at least £1500
  • The debtor has not been sequestrated in the last 5 years
  • The debtor is unable to pay his debts
  • The debtor's weekly income does not exceed the national minimum wage, currently set at £220.80 per week
  • The debtor does not own any land
  • The total value of a debtor's assets does not exceed £10,000. Any single asset must not exceed the value of £1000

 

A person in receipt of income related benefit, income-based job seekers allowance, or a working tax credit, is treated as having no income.

 

The new regulations mark a significant change from the current position.  Currently, where no legal action has been raised against the debtor by a creditor, the debtor can only petition for sequestration with the concurrence of a qualified creditor.  However, under the new regulations, a debtor will be able to petition the court for sequestration without the concurrence of any of the creditors, as long as the criteria detailed above are satisfied.   

 

Where a debtor has been sequestrated, a landlord cannot raise a court action to recover rent arrears which have been accrued up to the date of sequestration. Where a tenant has accrued rent arrears of £1500 and meets the criteria detailed above, that tenant could petition for sequestration without the concurrence of the creditor, i.e. the landlord.  Similarly, a tenant who has accrued rent arrears of less than £1500 but who may have debts elsewhere taking their total debts above the £1500 threshold, may petition the court for sequestration should they meet the required criteria, without the concurrence of a creditor. Therefore the tenant could petition for sequestration, without the concurrence of the creditor (i.e. landlord) where the landlord has not yet obtained a decree against them for the rent arrears.  Whilst the Landlord has the right to make a claim in the tenant's sequestrated estate, in most cases there will be little or no prospect of any payment from that estate. In many cases the landlord may simply have to write off the arrears up to the date of sequestration, as irrecoverable.  However, the fact that the arrears are irrecoverable would not stop the pre-sequestration arrears forming the basis of a future eviction action.

 

Citizens Advice Scotland has said that they expect a rise in the number of people petitioning the courts for sequestration, when these new regulations come into force in April. However, those who choose to go down this route will still face the serious consequences of being sequestrated.  These will include losing control of all of their assets, being restricted in their use of bank accounts, being unable to act as a company Director, as well as having a severely detrimental effect on their credit rating for a number of years afterwards.  It is advised that debtors should always seek independent advice before petitioning the court for sequestration.

 

Landlords need to be aware of this change in the law, as they may find it increasingly more common for tenants who are in arrears to become sequestrated, as a way of dealing with their debt.  That, however, does not affect the Landlord's right to raise eviction proceedings against the sequestrated tenant for their failure to pay rent.  It will be a matter for the courts to decide if it is reasonable to evict in all the circumstances.

 

If you would like further information please contact:

 

Andrew Cowan: asc@tcyoung.co., 0141 221 5562
Jim Bauld:  jdb@tcyoung.co.uk, 0141 221 5562
Ruth Johnston:  rej@tcyoung.co.uk , 0141 221 5562