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.

Written by

Alex Hasty

Insurance comparison and finance expert

Last Updated

1 MARCH 2022

8 min read

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. This could end on 31 March 2022, unless there is an extension. Please note, this information was correct at the time of publication on 1st March 2022.
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 31 March 2022. Please note, this information was correct at the time of publication on 1st March 2022.
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, 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.

What is the impact of going bankrupt?

While declaring bankruptcy comes with many serious implications, there’s a reason some people turn to it. Let’s discuss the pros and cons of going bankrupt:

Pros	Cons
✓ Could relieve you of your legal obligation to pay off debts	♦ You could lose your home and your car
✓ The pressure of dealing with creditors is taken away from you	♦ You could find it difficult to rent a property
✓ Could help save some of your ‘exempt’ possessions	♦ You could find it difficult to get a loan, mortgage or credit card
	♦ You might struggle to open a new bank account
	♦ You could be unable to apply for certain jobs
	♦ You could be forced to continue making payments towards your debts for three years (if your income is high enough)
	♦ Bankruptcy will remain on your credit report for six years

As you can see, there are far more disadvantages to going bankrupt, but it can help you if your situation demands it. However, bankruptcy isn’t the only way to deal with debt. There are other options.

Other ways to pay off debts and avoid the consequences of bankruptcy

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 £30,000, 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.

Surviving bankruptcy

Your period of bankruptcy normally lasts one year. Once the year is up, you’ll be “discharged”. If you’re unsure of your discharge date, you can check using the Individual Insolvency Register. To get your proof of discharge, you should email the Insolvency Service ([email protected]) and ask them for a confirmation of discharge letter. This is available for free.

Once you’ve been discharged, you won’t have to pay off any of the debts which were covered by the bankruptcy. However, there may be other fees or fines to pay, like court fees, depending on your circumstances.

After this, it’s about rebuilding. Your credit score will have suffered from declaring bankruptcy, so you’ll probably find it difficult to apply for financial products like loans, credit cards and mortgages. A good place to start would be to find out what your credit score is with a free credit check.

Once you know what your credit score is, it’s time to help it recover. There are several ways of building your credit score, but some simple ways are to set up direct debits (and pay them on time), avoid using too much of your overdraft (if you’re provided with one) and using a credit building credit card. These sorts of things will help prove to lenders that you’re more responsible with money and build your credit score over time. It won’t be a quick and easy fix, so manage your expectations, but you can recover in time.

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:

the Government’s Insolvency Service website for England and Wales.
Accountant in Bankruptcy (Scotland’s Insolvency Service).
nidirect government services for Northern Ireland.

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.

Frequently asked questions

Can I make a PPI claim after bankruptcy?

If you’re hoping to make a claim for a PPI policy you took out before you went bankrupt, you almost certainly won’t be able to. Even if you can, you probably won’t get to keep any of the compensation that results from a claim. This is because it would be classified as an asset of yours, which means it’ll be owned by your official receiver as part of your bankruptcy estate.

If you’ve already made a claim for PPI, you must tell your official receiver about the claim. You also need to tell the company you’re claiming against about your bankruptcy. Any compensation will almost certainly be paid directly to your official receiver.

Can you have a bank account if you declare yourself bankrupt?

Once you’ve declared bankruptcy, it’s likely that your bank will freeze your accounts. Some banks may allow you to keep your existing account after a period, but it’s entirely their decision. You’ll need to speak to your bank directly to find out.

You may be able to open a new bank account, but you’ll probably find this harder than before you declared bankruptcy. Banks may ask if you’ve filed for bankruptcy, and they could impose conditions, limits or restrictions to your account. For example, you might not get access to an overdraft.

Will my bankruptcy affect my partner?

Being declared bankrupt could affect your partner, if any of your debts or assets are jointly owned. For debts taken out jointly, you’re both responsible for the repayments, which means you’re both held accountable for failing to keep up with them.

In terms of having their assets repossessed, they should be able to keep possessions that are solely theirs, as well as financial assets like their savings and salary. Unfortunately, assets that are jointly owned, including your home, will be at risk of repossession, to be sold off and help pay towards outstanding debt. If you’re declaring bankruptcy, you’re not allowed to simply gift your possessions to your partner, to avoid losing them. If your partner is desperate to hold onto something, they may be able to buy out your half from the official receiver.