Bankruptcy is a way of dealing with debt problems that you don’t think you’ll be able to pay off in any other way. If you decide to go bankrupt, it can write off almost all debt and lets you make a fresh start with your finances.
The decision to go bankrupt is often seen as a final step if no other way of managing your debts has worked. Deciding to become bankrupt has serious consequences for you, your money, your home, and the things you own; so it’s vital that you fully understand what’s involved. You should always seek qualified debt advice from industry experts with debt solutions experience.
Here, we’ve explored some of the most common questions people have about bankruptcy – including how it works, what the bankruptcy process looks like, and what happens after you’ve been made bankrupt.
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What is bankruptcy?
Bankruptcy is a formal debt solution available to people living in England, Wales, and Northern Ireland. If you live in Scotland, you’ll need to look into Sequestration – it’s a similar process but has a few slight differences.
Bankruptcy is called a ‘formal’ debt solution because – like an Individual Voluntary Arrangement or Debt Relief Order – it’s legally binding.
This means when you’re made bankrupt, you and the people who owe money to (your creditors) must stick to certain bankruptcy restrictions and conditions.
Bankruptcy is available to people who have debts totalling at least £5,000.
You can choose to apply for bankruptcy yourself – although in some cases, one or more of your creditors might try to apply to make you bankrupt. They would do this as a last resort way of forcing you to pay back what you owe.
How does bankruptcy work?
When you are made bankrupt, control of your money and things you own (your assets) is handed over to an ‘official receiver’.
An official receiver is someone who works for the Insolvency Service handling your bankruptcy. They also have a duty to report to the court overseeing your official bankruptcy order.
When control of your finances is handed over to the receiver, your creditors will no longer contact you. All communication will be done through the receiver – and they will not have the option to take any further action against you.
Your creditor will look at how much debt you owe and work out a way of paying as much back as possible.
This will usually mean selling any high-value things you own – such as your home and your car, then using the money generated to repay as many of your debts as possible.
If you earn enough, you may also be expected to set up an ‘income payments agreement’ (IPA). This is a way of making payments towards your debts while your bankruptcy is on-going.
What happens if I declare bankruptcy?
If you decide to declare yourself bankrupt, this is referred to as ‘voluntary bankruptcy’ and the process is officially called a ‘debtors petition’.
As you can probably already tell from the information about how bankruptcy works, it’s a serious financial step that will have a big impact on your life.
Your bank account will usually be immediately frozen – and moving forward, you’ll only be able to have a very basic account. Even joint accounts will be frozen, so you’ll need to talk to your bank about how this will work.
You will find it either very difficult or impossible to get any further credit during the bankruptcy process too.
If you work, you may need to declare your bankruptcy to your employer. Certain professional roles cannot be held by someone who is bankrupt – including many legal roles, accountancy and financial positions, and some civil service and armed forces jobs. You cannot be the director of a company while you are bankrupt either.
How to declare bankruptcy?
If you decide it’s the right thing for you, you will need to apply for bankruptcy online using a form on the government website.
You’ll need lots of information to complete the application, including details of the debt you owe, your income details, what you outgoings are, and usually some information about the assets you own.
If any debt collectors, bailiffs, or high court enforcement officers have been in touch with you, you’ll also need copies of any letters they’ve sent or left with you.
This information will be sent to an ‘official adjudicator’ at the Insolvency Service. This person will review the application and decide whether or not to make you bankrupt. They will usually let you know their decision within one month.
To apply for bankruptcy in Northern Ireland, England and Wales, you’ll need to pay a £680 application fee upfront.
Does bankruptcy clear all debt?
Going bankrupt will clear most debts – but not all of them.
When you go bankrupt, the following types of debts are usually included:
- Credit card debt
- Utility bill arrears (things like gas, electric, water rates, etc.)
- Store cards
- Rent arrears
- Catalogue debts
- Benefits overpayments
Which debts cannot be included in bankruptcy?
Not all debts can be included in bankruptcy.
If you have any of the following kinds of debt, you’ll need to make payments as usual:
- Child maintenance commitments
- Criminal fines, compensation orders, and victim surcharges (from magistrates’ court or Crown Court)
- Student loads
- Social fund loans
- TV licence arrears
- Mortgages and other loans secured against your home (assuming you want to keep your home)
- Court-ordered payments (as part of a divorce, for example)
It’s worth remembering that debt taken out after the date of your bankruptcy order won’t be included. Also, debt that has been taken out fraudulently won’t be included either.
How long does bankruptcy stay on your credit report?
Bankruptcy will show on your credit report for six years from the time it began.
When you are officially discharged from your bankruptcy, you can begin rebuilding your credit score.
The pros and cons of bankruptcy
Like all debt solutions, bankruptcy has advantages and disadvantages – and trustworthy debt advice will always show you the downsides as well as the positives.
We’ve listed the pros and cons here to help you decide whether or not bankruptcy is something you’d like to explore in more depth with a debt or money advice service.
Advantages of using a Bankruptcy
- Going bankrupt gives you a fresh start with your finances. After your bankruptcy discharge, you will be debt-free.
- You will not longer have to communicate with the companies you owe money to; all on-going communication will be handled by an official receiver.
- You may be able to keep your home if it has little equity tied up in it.
- Your creditors can no longer take any legal action against you to recover any debt.
- You’ll be left enough money to live on and make essential purchases with.
- You’ll be able to keep one car as long as it’s worth £1,000 or less.
- If you’re self-employed, you’ll be able to keep anything you need to continue doing your job and earning an income.
Disadvantages of using a Bankruptcy
- You can only go bankrupt if you live in Northern Ireland, England and Wales. If you live in Scotland, you will need to explore Sequestration instead.
- It’s likely that your home or other assets will be sold to help settle your outstanding debt – especially if you have a lot of equity.
- If your income allows, you will be expected to make a monthly payment toward your debt.
- If you own a car worth £1,000 or more, it may be sold to help settle your debts.
- Bankruptcy can have an impact on certain jobs. For instance, you cannot be a director of a company while bankrupt, and you may not be able to hold certain jobs in financial or legal professions.
- Your bankruptcy will be recorded publicly on the Individual Insolvency Register.
- Bankruptcy will seriously damage your credit rating and will appear on your credit file for six years.
- Bankruptcy costs £680, and you will need to pay this upfront.