Bank Overdraft Debt in Scotland: What Are Your Options?

Overdraft Debt and Scottish Law: Why It Matters Where You Live

If you live in Scotland and have a bank overdraft you cannot repay, the rules that apply to you are different from those in England and Wales. Scotland has its own debt legislation and its own formal debt solutions — administered by the Accountant in Bankruptcy (AiB), a Scottish Government agency. Understanding which regime applies is the first step to understanding what options exist.

A bank overdraft — whether authorised or unauthorised — is classed as unsecured debt in Scotland. That means it sits in the same legal category as credit cards, personal loans, and store cards. The bank does not hold security (such as a house) against an overdraft in the way a mortgage lender does. This classification matters because most formal Scottish debt solutions are built around unsecured debt.

Overdraft debts can escalate quickly. Banks typically charge interest and fees on unauthorised overdrafts, and once a bank decides to withdraw the facility or demand repayment, the full balance can become due at short notice. For many people, this is when the situation starts to feel unmanageable.

How Banks Recover Overdraft Debt in Scotland

When a bank overdraft is unpaid and the bank decides to pursue recovery, there are several steps that typically follow. Understanding this process can help someone in this situation know what to expect.

Informal contact and default notices

The bank will usually contact the account holder by letter, phone, or email requesting repayment. If no arrangement is reached, the account may be defaulted, which means the bank formally records that the account is in arrears. A default notice is issued under the Consumer Credit Act 1974 where the overdraft is regulated — though some overdrafts, particularly those without a fixed limit or on current accounts, may not be regulated in the same way.

Once a default is registered, it appears on the individual's credit file for six years. The bank may also pass or sell the debt to a third-party debt collection agency.

Debt collection and sheriff court action

If a debt collection agency takes over the account, they will pursue repayment through letters and calls. If no agreement is reached, the creditor — whether the original bank or a debt purchaser — can apply to the sheriff court in Scotland for a decree (the Scottish equivalent of a county court judgment in England).

Once a sheriff court decree is granted, the creditor gains enforcement powers. In Scotland, enforcement options include an earnings arrestment (deductions directly from wages), a bank arrestment (freezing funds in a bank account), or an inhibition (restricting the sale of heritable property). These are enforced by a sheriff officer, not a bailiff — Scotland does not use bailiffs.

Formal Debt Solutions Available in Scotland

For someone in Scotland whose overdraft debt — alone or combined with other unsecured debts — has become unmanageable, there are several formal routes. Each has its own eligibility criteria, costs, and consequences. The information below describes how each works; it is not a recommendation for any individual situation.

Debt Arrangement Scheme (DAS)

The Debt Arrangement Scheme is a Scottish Government debt management programme. It allows eligible individuals to repay their debts in full over an extended period through a Debt Payment Programme (DPP), while interest and charges are frozen. According to the AiB, DAS is available to individuals, sole traders, and partnerships.

Under a DPP, a single affordable monthly payment is made and distributed to creditors. Creditors cannot take further enforcement action while the DPP is in place. Overdraft debts are included as unsecured debts within a DAS arrangement. There is no upper limit on the total debt that can be included, though the repayment period must be reasonable. A DAS does not involve writing off debt — the full amount is repaid over time.

A DAS must be set up through an approved money adviser — this can be a free-sector adviser or a fee-charging insolvency practitioner. The Scottish Government's DAS Administrator must approve the programme.

Protected Trust Deed

A Protected Trust Deed (PTD) is a formal insolvency solution unique to Scotland. It is broadly comparable to an Individual Voluntary Arrangement (IVA) in England and Wales but operates under Scottish law. A PTD allows an individual to repay a portion of their unsecured debts over a fixed period — typically 48 months — after which the remaining balance is written off.

To qualify, the individual must be insolvent (unable to pay debts as they fall due) and resident in Scotland. The Trust Deed must be signed by a licensed insolvency practitioner, who acts as trustee. For the Trust Deed to become protected, it must be registered with the AiB and a majority of creditors (by value) must not object within five weeks. Once protected, all unsecured creditors — including the bank holding the overdraft — are bound by its terms.

A PTD will affect the individual's credit file for six years from the date it is granted. There are also implications for homeowners, as the trustee will assess any equity in property.

Sequestration (Scottish Bankruptcy)

Sequestration is the Scottish term for bankruptcy. It is a formal insolvency process administered by the AiB. Under sequestration, an individual's assets are transferred to a trustee, who realises them to pay creditors. Unsecured debts that cannot be repaid from those assets are written off at the end of the process — usually after 12 months.

To apply for sequestration, an individual must meet one of several qualifying conditions. According to GOV.UK, one route is the Minimal Assets Process (MAP) — a simplified, lower-cost form of sequestration for people with very low income and few assets. Under MAP, the applicant must have debts between £1,500 and £25,000, have a low income, and have no significant assets. The application fee for MAP sequestration was £50 as of the most recent published AiB rates.

Sequestration has significant consequences — it affects credit rating, may affect employment in certain sectors, and can result in the loss of non-essential assets including vehicles above a certain value. These are general descriptions of how the process works, not an assessment of any individual's situation.

Moratorium on Diligence

A Moratorium on Diligence is a short-term breathing space available in Scotland. It pauses enforcement action (diligence) by creditors for a period of six weeks, giving an individual time to explore formal debt solutions without creditors taking action such as earnings arrestment. According to the AiB, a moratorium can be applied for online and does not require a money adviser. It can only be used once in any 12-month period.

What Happens to Overdraft Debt in a Scottish Debt Solution

When a formal debt solution such as a DAS, Protected Trust Deed, or sequestration is in place, the bank holding the overdraft is treated as an unsecured creditor. The bank must be notified as part of setting up the arrangement, and once the relevant protections are in place, direct collection activity by the bank or any debt collection agency acting on its behalf must cease.

In a DAS, the bank receives its proportionate share of the monthly payments over the life of the programme. In a Trust Deed or sequestration, the bank receives a dividend from the available funds, and any remaining balance is written off at the end. The individual does not deal with the bank directly once the formal arrangement is in place — communication goes through the insolvency practitioner or approved money adviser.

Authorised vs Unauthorised Overdrafts: Does the Distinction Matter?

Whether an overdraft was authorised (agreed with the bank) or unauthorised (going beyond an agreed limit or using a facility not formally arranged) does not change its legal classification as unsecured debt in Scotland. Both types can be included in formal debt solutions.

The distinction may affect the interest rate charged and the fees added before the debt reaches a formal stage. Unauthorised overdrafts typically attract higher charges. However, once a formal Scottish debt solution is in place, interest and charges are frozen — meaning the balance stops growing regardless of whether the original overdraft was authorised or not.

Checking Eligibility and Getting Regulated Advice

The eligibility criteria for Scottish debt solutions depend on factors including the total level of unsecured debt, income, assets, and residency. None of these solutions is automatically suitable for every individual — suitability depends on a full assessment of someone's circumstances, which only a qualified money adviser or insolvency practitioner can carry out.

Free debt advice is available from MoneyHelper (moneyhelper.org.uk), StepChange Debt Charity, Citizens Advice Scotland, and National Debtline. These organisations can assess eligibility for all Scottish debt solutions, including DAS, Protected Trust Deed, and sequestration, at no cost to the individual.

For those who want to be connected with an FCA-regulated debt advice firm rather than the free sector, UK Debt Team refers individuals to regulated specialists who can carry out a full assessment. UK Debt Team does not itself provide debt advice.