This process essentially wipes the slate clean of all unsecured debts, meaning debts that are not backed by collateral such as your house or car.
In this guide, we’ll help you understand more about bankruptcy proceedings.
Note: This advice applies to residents in England and Wales. Different procedures and rules apply in Scotland and Northern Ireland.
What is a bankruptcy proceeding and when should I consider declaring bankruptcy?
Declaring yourself bankrupt can give you some breathing space when creditors are pressuring you and you need time to work out your next move.
You should consider bankruptcy proceedings, or at least seek advice from a legal expert, when your debt outweighs your assets and the situation is unlikely to improve in the foreseeable future.
However, bankruptcy may not be the right option if your job does not allow people who have been declared bankrupt, if your financial situation is likely to improve soon, or if you do not want your financial problems made public.
Bankruptcy isn’t for everyone.
Starting bankruptcy proceedings is a serious step that can have a major impact on your life, your work, and even your home. You should consider whether there may be other ways to deal with your debts before applying for bankruptcy.
For example, if you owe less than £20,000 and have few assets, you may be eligible for a Debt Relief Order instead, which costs £90.
Your current and future circumstances play a big part in deciding whether bankruptcy is the right choice for you, and it is important to remember that not all debts will be written off.
You will still need to repay certain debts, including:
- Secured loans and debts
- Court fines and fees
- Student loans
- Maintenance and child support payments
- Your mortgage, if your home is not sold
- Damages awarded against you for injuring another person
- Debt acquired through fraud
Bankruptcy usually will not directly affect your spouse or civil partner’s finances. Any money they have put into joint savings is returned to them, and it should not affect their credit rating. However, they may become fully liable for some types of joint debt, and any jointly owned property may be sold.
Because of the serious consequences of filing for bankruptcy, it is always best to seek advice from a legal professional who can guide you through the process.
How does bankruptcy work and what happens when I declare it?
Before you begin proceedings, it is important to understand how bankruptcy works.
The process for filing involves:
- Applying for bankruptcy online and paying the £680 fee
- A court officer investigating your finances
- An adjudicator deciding whether you need to pay anything towards your debts, and how much. Money is raised towards paying debts from any savings you have or by selling valuable assets such as your house or jewellery
- An official receiver taking control of your money and property. Your bank can use money in one account to pay money owed to them under another. Make sure to withdraw enough to cover living costs for the first few weeks, as your bank and building society accounts can be frozen immediately. You will still be given an allowance for living costs during the bankruptcy process. A notice declaring your bankruptcy will be made public.
Creditors, meaning people to whom you owe money, can also ask a court to declare you bankrupt. They often do this when they believe you have high-value assets that can be used to repay what you owe.
Proceedings can only be started this way if you owe more than £5,000. Creditors also need to show that they have tried to recover the money by other means, either by sending you a statutory demand for payment, sending bailiffs to enforce a court judgment against you, or both.
If bankruptcy proceedings are brought against you, you will be notified by the court.
Pros of declaring bankruptcy
Having your debts written off, apart from the exceptions mentioned above, is the main advantage of bankruptcy. Another benefit is no longer having to deal with your creditors yourself.
Even so, you should only choose bankruptcy if your debt is greater than your total assets and repayment is not realistic. Few creditors would be interested in a 60-year repayment plan, for example.
Any other benefits of bankruptcy fall into the essentials category. The courts will not sell general household items, so you will still have plates for dinner and sheets on the bed. Your pensions are not usually affected by bankruptcy, and you can keep work-related items such as tools.
You will not lose your car if you rely on it to get to work or care for someone, unless selling it would help pay off your debts and fund a cheaper replacement.
Cons of declaring bankruptcy
Declaring bankruptcy also means accepting major restrictions on what you can and cannot do.
You will not be allowed to be a company director, manage a business, or start a new one until the bankruptcy is discharged. Immigration status can also be affected.
You may need to make payments towards the debt for 3 years. Bankruptcy will also appear on your credit report for 6 years, limiting your access to further credit. This can extend to 15 years if you are subject to a bankruptcy restriction order.
If you own your home, you will likely have to sell it. If you rent, your landlord may end your tenancy early. Other belongings may also need to be sold unless they are exempt, and your employment may be terminated if your role does not allow bankrupt employees, such as jobs in the financial services industry.
Your bankruptcy may also be publicised in various places. Notices advising your creditors may be published online and in newspapers.
Make sure you can afford to file for bankruptcy. The cost of an application is £680.
If you have sought professional guidance and decided this is the right choice for you, filing for bankruptcy is straightforward. You simply complete the application on the government website.
Make sure you have payslips, pension statements, benefits receipts, bills, and any letters from your creditors or their bailiffs.
The matter will then be investigated by court officials, who will let you know the outcome and explain your next steps.
How long does bankruptcy last?
Bankruptcy will usually come to an end 12 months from the date of declaration, although it can be extended if you have not fully cooperated. After that, it is discharged and the restrictions no longer apply. You can use the Insolvency Register to check your discharge date.
If you file a standard bankruptcy application, the timeline usually looks like this:
- After 1 year, all your unsecured debts will be cleared, and you can run or manage a business again and take out loans of more than £500
- After 15 months, your bankruptcy details will be removed from the Insolvency Register
- After 3 years, a receiver or trustee must have decided whether you can keep your house or whether it must be sold
- After 3 to 4 years, depending on when payments started, any payments towards your debts from surplus income through an income payment arrangement or order (IPA or IPO) will come to an end
- After 6 years, all record of your bankruptcy will be removed from your credit report
Can I stop court proceedings for bankruptcy?
Sometimes you can ask the court where you were made bankrupt to cancel your bankruptcy.
You can ask to have the bankruptcy annulled if:
- The bankruptcy should not have been made
- All debts and fees have been paid, or another person or organisation has guaranteed their repayment. Repayments should be made through a solicitor.
- You have agreed a repayment plan with your creditors, known as an Individual Voluntary Arrangement
You cannot recover any assets that have already been sold before your annulment application. You must also inform credit reference agencies of the cancellation.
How do I find the right solicitor when declaring bankruptcy?
Because of the seriousness of declaring bankruptcy, it is strongly advisable to speak to a solicitor as soon as possible. They will be able to advise you on whether bankruptcy proceedings are necessary and how to submit your application properly. Most legal professionals charge a fixed fee for this service.
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