Facing financial difficulties can feel overwhelming, but knowing your options can help you regain control. If you’re considering bankruptcy, it’s important to understand the different types available to make an informed decision on whether it’s the right option for you.
In the UK, there are three types of bankruptcy processes: personal bankruptcy, liquidation and sequestration. Each of these is designed to address specific situations, depending on where you live and whether you’re an individual or a business. In this guide, we compare each type to help you understand the different types of bankruptcy available in the UK.
Personal Bankruptcy (England, Wales and Northern Ireland)
Personal bankruptcy is a process in England, Wales and Northern Ireland where individuals can have their debt written off so they can start fresh. To be eligible for this, you’ll need to meet certain criteria. You must:
- be a resident of England, Wales or Northern Ireland
- be able to afford the upfront fee to apply for a bankruptcy order.
To apply for bankruptcy, there is a certain procedure you’ll need to follow:
- Complete the necessary application forms
The forms you need to complete vary depending on if you live in England and Wales, or Northern Ireland. In England and Wales, you fill in a form on the Government website. In Northern Ireland, you’ll need to fill in a petition form and a statement of affairs. The statement of affairs can be submitted online at the Insolvency Service Public Portal.
- Pay the bankruptcy fee
In England and Wales, you pay a total of £680 which includes a £130 adjudicator fee and £550 bankruptcy deposit. In Northern Ireland, you pay up to £683, made up of a £151 court fee, £525 bankruptcy deposit and around £7 solicitor’s fee.
- Attend a High Court hearing (applicable to only Northern Ireland)
If you’re based in Northern Ireland, you’ll also need to attend a hearing at the Royal Courts of Justice in Belfast. At the hearing the court will either dismiss the petition, appoint an Insolvency Practitioner, delay the proceedings or make a bankruptcy order.
- Work with your Official Receiver
If a bankruptcy order is made, someone known as the Official Receiver (OR) will be responsible for administering your bankruptcy and protecting your assets.
Bankruptcy in England, Wales and Northern Ireland typically lasts 12 months and during that time, there are certain restrictions. For example, you can’t:
- get credit of £500 or more without declaring your bankruptcy to the lender
- be the trustee of a charity
- have power of attorney
- act as director of a business without permission from the court.
Once your bankruptcy period has ended, these restrictions will lift. However, bankruptcy does remain on your credit file for six years.
Sequestration (Scotland)
Put simply, sequestration is the Scottish equivalent of bankruptcy and while it works slightly differently to bankruptcy in England, Wales and Northern Ireland, the purpose is the same – to write off debt you can’t afford to pay. To be eligible for sequestration, you must:
- currently live or have lived in Scotland for the last 12 months
- have unsecured debts of more than £3000
- not have been made bankrupt in Scotland in the last five years.
The application process is a little different to the rest of the UK:
- Get debt advice
Before making your application, you have to get advice from a money advisor or insolvency practitioner (IP) who will be able to advise if another debt solution may be more suitable. If not, they will fill out a Certificate for Sequestration to confirm bankruptcy is the best option.
- Make an application
With the help of your money advisor or IP, you’ll need to make an online application to the Accountant in Bankruptcy (AiB), which is part of the Scottish Government. For this, you submit your Certificate for Sequestration and evidence such as payslips, bills, proof of tenancy and bank statements.
- Pay the fee
The fee for a sequestration application is £150 paid to the AiB. However, you may not need to pay this if you receive certain benefits.
- Wait for the decision
The AiB typically gets back to you within eight working days but may contact you if they need more information.
- Cooperate with your trustee
If the AiB approves your sequestration, a trustee will manage your bankruptcy. Your assets will be transferred to them and they may sell them to pay your debts.
Much like with bankruptcy in the rest of the UK, there are certain restrictions that you’ll need to follow. You aren’t allowed to:
- borrow more than £2000 without disclosing your bankruptcy to the lender
- be a Member of Parliament
- be a Justice of the Peace
- set up a limited company.
In addition, your sequestration will remain on your credit file for six years.
Liquidation
While bankruptcy is to clear individual debt, liquidation is a process businesses follow when they can’t keep up with debt payments. When a limited company liquidates, it can no longer continue business or employ people. Any remaining assets are used to pay off debts with the money left over going to shareholders. There are three different types of liquidation:
- Creditors’ voluntary liquidation (CVL) – your company can’t pay its debts and decide to liquidate it, involving your creditors in the process
- Compulsory liquidation – your company can’t pay its debts and is liquidated following a court hearing
- Members’ voluntary liquidation (MVL) – your company can pay its debts but you want to close it.
The process for each type of liquidation is as follows. For a CVL:
- Call a meeting with shareholders – 75% of them must agree to the liquidation
- Appoint an Insolvency Practitioner (IP)
- Send the resolution to the Companies House
- Advertise the resolution in the Gazette.
For compulsory liquidation:
- Submit a ‘winding-up’ petition online to the court
- Pay the necessary fees – £2,600 for submitting petition, £280 for a court hearing
- Attend a court hearing
- Cooperate with the Official Receiver who will liquidate your company.
For a MVL:
- Sign a declaration of solvency
- Call a general meeting with shareholders
- Appoint an Insolvency Practitioner (IP)
- Advertise the resolution in the Gazette
- Send your signed declaration to the Companies House.
Comparing the Three Types of Bankruptcy
Bankruptcy, sequestration, and liquidation are all processes designed to address insolvency, but they apply to different entities and contexts. Bankruptcy is a debt solution for individuals across England, Wales and Northern Ireland. It allows for the distribution of their assets among creditors and involves restrictions on financial activities until the process is complete. In Scotland, this process is referred to as sequestration, which is similar to bankruptcy but is specific to Scottish law.
Liquidation, on the other hand, applies to companies rather than individuals. It involves closing down the business, selling its assets, and distributing the proceeds to creditors.
Choosing the Right Option for Your Situation
The right type of bankruptcy for you depends on where you’re based and whether you’re an individual or a business. As bankruptcy is often viewed as a last resort, there may be other debt solutions that are better suited to your financial needs.
For further advice on options available and free debt advice, visit MoneyHelper. Alternatively, get in touch with us and we’ll be happy to offer expert help and support.
