What is bankruptcy?

Published on: July 8, 2024 Last updated: July 8, 2024 Reading time: 6 minutes

Bankruptcy is a legal option for individuals to deal with debts they cannot pay. It is for individuals only and does not apply to companies or partnerships.

Going bankrupt means that you won’t be liable for most of your debts. This means you won’t have to pay them.

There are some debts that can’t be included in a bankruptcy order, such as:

social fund loans
student loans
child maintenance arrears
debts that have resulted from fraud

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Your Assets

If you have any assets, they will be reviewed to see if they can be used to pay off your debts.

You may be allowed to keep some assets (such as tools or equipment) if you need them to carry on working.

If it’s decided you have assets that can be used, these will be shared among those you owe money to (your creditors).

When can a bankruptcy order be made?

A bankruptcy order can be made for one of three reasons

You cannot pay what you owe and want to declare yourself bankrupt.
Your creditors apply to make you bankrupt because you owe them £5000 or more.
An insolvency practitioner makes you bankrupt because you’ve broken the terms of an Individual Voluntary Arrangement (IVA)

Where in the UK is Bankruptcy an option?

Review the table below to understand where you can apply for bankruptcy in the UK.

You live in England and Wales currently	You can apply for bankruptcy in England or Wales.
You don’t live in England or Wales now, but have lived there, or had a business within the last 3 years.	You can apply for bankruptcy in England or Wales.
You live in Northern Ireland	You cannot apply for bankruptcy in England or Wales. Northern Ireland has its own solution for bankruptcy.
You live in Scotland	You cannot apply for bankruptcy in England or Wales. Scotland’s similar option is known as Sequestration.

Does it cost to apply for bankruptcy?

It costs £680 to apply to become bankrupt. This fee must be paid in full before your application can be submitted.

If you’re not able to pay the fee in full, you can pay by instalments. You can contact the Insolvency Enquiry line, who may be able to help by:

Telephone: 0300 678 0015
E-mail: insolvency.enquiryline@insolvency.gov.uk

If you owe less than £50,000 and have no assets, you might be able to get a Debt Relief Order (DRO). There is no cost for a DRO.

What’s the process for bankruptcy?

There are several stages within the bankruptcy process. We’ve listed them below.

Application	You can apply to make yourself bankrupt online. You’ll need to give information about your: debts employment/income pension bank accounts assets outgoings
Payment	It costs £680 to apply for bankruptcy. This fee can be paid in instalments, but the application will not be processed until the full amount is paid.
Review	Once your application is submitted and the fee is paid, the Adjudicator (an official from the Insolvency Service) will review your application. They have 28 days to make a decision.
Bankruptcy Order	If your application is accepted, the Adjudicator will issue a bankruptcy order, and you will officially be declared bankrupt.
Official Receiver	After the bankruptcy order is made, the early stages of a bankruptcy are normally handled by an official receiver. They will also be your trustee unless an insolvency practitioner is appointed to take over that role.
Interview	The official receiver will conduct an interview with you, usually over the telephone, to discuss your situation.
Asset Sale	The trustee will realise (sell) any assets (except any reasonable domestic items and items needed for your job).
Discharge	Usually, you will be discharged from your bankruptcy after 12 months, at which point most of your debts will be written off.
Insolvency Register	Your details will typically stay on the Individual Insolvency Register (IIR) for three months after your discharge from bankruptcy.

What impact would bankruptcy have?

Bankruptcy can have a significant impact on various aspects of your life.

Financial Impact: Bankruptcy can affect your spending patterns and future financial decisions.
Credit Rating: A bankruptcy stays on your credit file for six years. This means it will be harder to get credit during this period.
Loss of Assets: When you declare bankruptcy, you are expected to sell your non-essential assets (property and belongings) to repay what you owe. This means you could lose valuable possessions or even your home.
Employment: Some professions do not allow individuals who have been made bankrupt to practice, especially if a credit check is required.
Emotional Impact: The process of bankruptcy can be stressful and emotionally draining. It can affect your relationships with family and friends, especially if they have provided you with financial support.

It’s important to seek professional advice before proceeding. There are other debt solutions available that might be more suitable for your situation.

Responsibilities during Bankruptcy

When a bankruptcy order is made, there are things that you must do. It’s very important that you co-operate with the people managing the process.

During bankruptcy, you must:

Share Information	You need to tell the official receiver about your money and belongings. This includes how much you earn, what you spend, what you owe, and what you own.
Report Changes	If you start earning more money while you’re bankrupt, you need to let your trustee know.
Tell Lenders	If someone offers to lend you more than £500, you must tell them that you’re bankrupt.
Go to Court	If you’re asked to go to court to explain why you owe money, you must go.

Remember, it’s very important to follow these responsibilities. If you don’t, you could get into trouble. If you do not meet the terms of these responsibilities, the bankruptcy could get extended.

Restrictions in Bankruptcy

There are also things you are not permitted to do whilst you’re in a bankruptcy order.

It’s a criminal offence to break these restrictions, and there’s a chance you could be prosecuted if you do.

During a bankruptcy order, you cannot:

borrow more than £500 without telling the lender you’re bankrupt
act as a director of a company without the court’s permission
create, manage or promote a company without the court’s permission
manage a business with a different name without telling people you do business with that you’re bankrupt
work as an insolvency practitioner (an authorised debt specialist)

Restrictions last until your bankruptcy ends - but they can be extended if:

you don’t follow the requirements
you’re found to have been careless or dishonest.

The official receiver will tell you if the restrictions will be extended.

Are there any alternatives to Bankruptcy?

Bankruptcy may not be the right option for you. There are alternative debt management options available, such as:

Breathing Space
Debt Relief Order
Individual Voluntary Arrangement (IVA)
Debt Management Plan

It is important that you seek debt advice before deciding which option to take.

Our Sources of Additional Support can direct you to some organisations who may be able to help.

Summary

Bankruptcy is a significant decision with long-lasting consequences. The effects of bankruptcy are long-lasting and not all debts are covered.

The bankruptcy process involves several steps. If it’s approved, it is crucial that you adhere to the responsibilities and restrictions of the order. This helps you to avoid legal issues or potential extensions of the bankruptcy period.

Understanding the process, responsibilities, and potential impacts can help you make an informed choice. Always explore all available options and make sure you seek advice to ensure you choose the right option for your circumstances.