Bankruptcy

What it is

Bankruptcy is a form of insolvency in which your assets are placed under the control of a person called the Official Receiver (or a trustee in bankruptcy). The trustee sells your assets (with certain exceptions) and distributes the money to your creditors. In return, most of your debts are written off.

Bankruptcy can be initiated by you (debtor's bankruptcy petition) or, less commonly, by a creditor owed £5,000 or more (creditor's petition). In England and Wales, bankruptcy is handled through the bankruptcy court. In Scotland, the equivalent process is called sequestration.

Who it may apply to

Bankruptcy may be suitable if you:

• Have debts that you cannot repay and see no realistic prospect of being able to
• Do not own significant assets (or are willing to lose them)
• Have little or no disposable income to offer creditors
• Want a clean break and a fresh start within a relatively short period
• Have explored other options and found them unsuitable

How it works

To declare yourself bankrupt in England and Wales, you apply online through the government's bankruptcy service. You must provide details of your debts, income, assets, and expenditure. There is an application fee.

Once your application is accepted, you are officially bankrupt. An Official Receiver is appointed to manage your bankruptcy. They will assess your assets and income, sell what they can (subject to exemptions), and distribute the proceeds to creditors.

You may be required to attend an interview with the Official Receiver, either by phone or in person. They will ask about your financial circumstances and how your debts arose.

If you have disposable income, you may be subject to an Income Payments Agreement (IPA) or Income Payments Order (IPO), which requires you to make monthly contributions towards your debts for up to 3 years.

You are usually discharged from bankruptcy after 12 months. At that point, most of your remaining debts are written off and you are free from the bankruptcy restrictions.

Advantages and disadvantages

Bankruptcy is a powerful solution but comes with serious trade-offs.

Advantages

• Most debts are written off within 12 months
• Creditors cannot take further action against you once bankruptcy is in place
• You get a fresh start, free from overwhelming debt
• The process is relatively quick compared to an IVA or DMP
• Interest and charges stop accruing immediately
• You are protected from creditor contact and enforcement action

Disadvantages

The consequences of bankruptcy are significant:

Disadvantages

• You may lose valuable assets, including your home and car
• Your bankruptcy is a public record on the Individual Insolvency Register
• Your credit file is severely affected for 6 years
• You may have to make income contributions for up to 3 years
• Certain professions and roles are restricted during bankruptcy
• You cannot act as a company director without court permission
• Some debts are not written off (e.g. student loans, court fines, child maintenance)
• Bankruptcy can affect your ability to open a bank account

Eligibility and qualifying conditions

To apply for bankruptcy in England and Wales:

• You must be unable to pay your debts
• You can apply online regardless of the amount you owe
• There is no minimum debt level for a debtor's own application
• You must pay the application fee (currently £680)
• You must be a resident of England or Wales (Scotland and Northern Ireland have separate processes)
• Creditors can make you bankrupt if you owe them £5,000 or more

What happens to creditors

Once your bankruptcy is approved, all creditors included in it are legally prevented from contacting you, pursuing the debt, or taking legal action. All claims are handled through the Official Receiver or trustee.

Creditors must submit a claim to the trustee to receive a share of any money distributed from your assets or income contributions. They cannot pursue you personally for the debts included in the bankruptcy.

If a creditor was not informed of your bankruptcy, they should be told so their debt can be included. Even if a creditor is not included, the bankruptcy discharge generally covers all unsecured debts incurred before the bankruptcy date.

What happens to debts

On discharge from bankruptcy (usually after 12 months), most of your debts are written off. You are no longer legally liable for them. This includes credit cards, personal loans, overdrafts, utility arrears, and most other unsecured debts.

However, certain debts are not written off by bankruptcy:

• Student loans
• Court fines and penalties
• Child maintenance arrears
• Debts incurred through fraud
• Some claims for personal injury or damage

Costs and fees

The bankruptcy application fee in England and Wales is currently £680. This is paid to the Insolvency Service when you submit your online application. In some cases, you may be able to pay in instalments before submitting the application.

There may also be additional costs if your case is complex and a private trustee is appointed rather than the Official Receiver. The trustee's fees and expenses are paid from the money realised from your assets.

If you have very low income and cannot afford the fee, some charities may be able to help with a grant. Speak to a debt adviser about options for covering the fee.

How long it normally lasts

You are usually discharged from bankruptcy after 12 months. At that point, most of your debts are written off and the bankruptcy restrictions are lifted.

However, if you have disposable income, you may be subject to an Income Payments Agreement or Order that lasts for up to 3 years — even though you are discharged from bankruptcy itself after 12 months.

The bankruptcy remains on your credit file for 6 years from the date it starts. Your name stays on the Individual Insolvency Register for the duration of the bankruptcy and for 3 months after discharge.

Potential consequences

Bankruptcy has wide-ranging consequences that extend beyond the immediate write-off of debts:

• Your home may be sold if there is equity in it — if you own it jointly, only your share is at risk
• Your car may be sold if it is valuable, though you can usually keep a modest vehicle needed for work
• Your bank accounts may be frozen initially, and you may need to open a new basic account
• Your credit file is severely damaged for 6 years
• You must declare bankruptcy if asked by potential employers in certain sectors (e.g. financial services)
• You cannot act as a company director, or manage a limited company, without court permission
• Any assets you acquire during bankruptcy (e.g. inheritance) may be claimed for creditors

Alternatives

Before choosing bankruptcy, consider whether any of these alternatives are more appropriate:

• Individual Voluntary Arrangement (IVA) — formal solution that may protect your home
• Debt Relief Order (DRO) — for people with low income, low debt and few assets
• Debt Management Plan (DMP) — informal repayment at an affordable rate
• Administration Order — a court-based arrangement for debts under £5,000
• Breathing Space — temporary protection while you explore options