A guide to understanding bankruptcy

If you have serious debt problems, one way to clear them and make a fresh start is to declare yourself bankrupt. But bankruptcy is typically considered a last resort. Your home and possessions could be at risk, so it’s not a decision to take lightly.

Here’s our guide to understanding bankruptcy and its implications.

If you have serious debt problems, one way to clear them and make a fresh start is to declare yourself bankrupt. But bankruptcy is typically considered a last resort. Your home and possessions could be at risk, so it’s not a decision to take lightly.

Here’s our guide to understanding bankruptcy and its implications.

Rob Silvey
Money expert
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Posted 29 DECEMBER 2020

What is bankruptcy?

Bankruptcy is a way of clearing your debts if there’s no other way of paying them.

Any assets you have will be taken and shared among your creditors to pay off the debts you owe. An official receiver (or trustee in Scotland) will be appointed to take control of your assets, asses your finances and make the appropriate payments on your behalf.

Depending on your level of debt and available assets, this could involve selling your car and home.

Bankruptcy lets you make a fresh start, free of debt. However, it can have serious implications, so it’s often viewed as a last resort option.

Also, be aware that bankruptcy doesn’t cover all debts. For example, you’ll still need to pay:

  • magistrate court fines
  • maintenance and child support payments
  • student loans from the Student Loans Company
  • secured loans and other secured debts
  • your mortgage and other essential bills.

It’s important to seek expert debt advice before applying for bankruptcy.

How can I be made bankrupt?

There are three ways to be made bankrupt:

  • Declare yourself bankrupt.
  • If you owe £5,000 or more, your creditors can apply to make you bankrupt. The limit is usually £3,000 or more in Scotland but has now been temporarily raised to £10,000 or more in response to the coronavirus pandemic.
  • If you break the terms of an individual voluntary agreement (IVA), an insolvency practitioner can make you bankrupt.

Scotland also has a form of insolvency called Minimal Asset Process (MAP) which you can apply for if you have very low debt and very few assets.

How much does it cost to file for bankruptcy?

You’ll need to pay a fee to declare yourself bankrupt. Costs vary, depending on where you live in the UK:

  • England and Wales - £680
  • Scotland - £200. In response to the coronavirus pandemic, fees have been reduced and removed entirely for people on certain benefits. These are temporary changes that will last until at least 30 September 2020. (Please note, this information was correct at the time of publication on 29 December 2020.)
  • Northern Ireland - £676

How do I apply for bankruptcy?

To apply for bankruptcy, you’ll need to fill in an online application and pay the associated fee. You’ll need to submit information about your incomings, outgoings and debts.

An official adjudicator will then decide whether to accept or reject your application for bankruptcy.

What happens after I go bankrupt?

If your application is approved, a bankruptcy order is made. You’ll be officially declared bankrupt and, in England and Wales, your bank and/or building society accounts will likely be frozen immediately.

You’ll be assigned an official receiver or trustee, who will take over the control and administration of your finances to pay off your debts.

You must attend any interviews with your official receiver and fully cooperate with them during the bankruptcy. This includes providing full disclosure about your finances and giving them any information they ask for.

Certain restrictions will also apply during your bankruptcy:

  • If you want to borrow more than £500 (£2,000 in Scotland), you must inform the lender of your bankruptcy.
  • You can’t act as a company director or create, manage or promote a company without the court’s permission.
  • You can’t manage another business without telling people you’re bankrupt.
  • You might not be able to work in certain positions. For example, roles that are controlled by the Financial Conduct Authority or as a solicitor.

Be aware that breaking the restrictions is a criminal offence and could lead to prosecution.  

How long does bankruptcy last?

Normally, you’ll be discharged of bankruptcy after 12 months. This means that you’ll be freed of any debts included in your bankruptcy. You should also be relieved of any restrictions placed on you during the bankruptcy.

How long will bankruptcy stay on my credit report?

Information about your bankruptcy will stay on your credit report for six years.

This could mean you’ll have difficulty getting credit in the future.

The impact of bankruptcy

Bankruptcy may seem like a simple solution to wipe out your debts, but it could have serious implications:

  • you could lose your home and your car
  • you could find it difficult to rent a property
  • you could find it difficult to get a loan, mortgage or credit card
  • you might struggle to open a new bank account
  • you’re unable to apply for certain jobs.

Bankruptcy isn’t the only way to deal with debt. There are other options.

Other ways to pay off your debts

Depending on the amount of debt you owe and the money and assets you have, there are alternatives to bankruptcy.

  • Debt management plan An agreement with your creditors, managed by a debt management company authorised by the FCA, allows you to pay off your debts in monthly payments. Only unsecured debts are eligible.
  • Individual Voluntary Arrangement (IVA) Allows you to pay of all or part of your debts via an insolvency practitioner. An IVA can give you more control over your assets than bankruptcy.
  • Debt Relief Order (DRO) If you owe less than £20,000, you don’t have your own home, have very little spare income and no assets to sell, you can apply for a DRO.
  • Debt consolidation loan Lets you transfer multiple debts, such as credit cards or overdrafts, into one single loan with manageable monthly payments. However, you need to be sure you can keep up with repayments each month.

Where can I get advice on bankruptcy?

Charities such as Citizens Advice, National Debtline and StepChange offer free advice, help and information on bankruptcy and managing your debts.

You can also find detailed information on applying for bankruptcy on:

If you have debt problems and are considering bankruptcy, always seek the advice of a debt expert before deciding on the course of action to take.

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