If the amount you owe to creditors is more than any assets you own, bankruptcy may be a good option for you. It usually lasts 12 months and creditors won’t be able to contact you during this time.

What is Bankruptcy?

Bankruptcy is a formal insolvency solution, meaning your outstanding debts included in the Bankruptcy are written off. There are various types of bankruptcy depending on where you live and whether you’re an individual or business, including: 

• Personal bankruptcy –  available to individuals living in England, Wales and Northern Ireland 
• Sequestration – the equivalent to bankruptcy for people based in Scotland
• Liquidation –  a legal process that companies follow when they can’t keep up with debt payments and have to cease business.

Bankruptcy is typically viewed as a last resort. It’s a legally binding solution and is intended for those who can’t repay their debts using income or assets in a reasonable period of time. It typically lasts for 12 months, and during that time, your assets may be sold and you’ll have to follow certain restrictions. You will also be recorded on a bankruptcy register, known as the Individual Insolvency Register. 

After you go bankrupt, you may be asked to make monthly payments towards your debt, known as an Income Payment Agreement (IPA). If you have more than £20 left each month after living costs, you’ll likely be asked to put this amount into your IPA. This lasts for a maximum of three years and can start any time in the 12 months after you declare bankruptcy. If you don’t pay, your Official Receiver (OR) may apply for a court order, known as an Income Payment Order (IPO). 

Who Should Consider Bankruptcy?

If you’re struggling with your finances, whether that’s due to loss of income, unexpected illness or accident, rent increase, overspending or something else, bankruptcy may be the right option for you. You are eligible for bankruptcy if: 

• The amount of debt you owe is more than the sum of your assets
• You can afford to pay the £680 application fee
• You live in England, Wales or Northern Ireland.

There are a number of reasons why you may become bankrupt. You may choose to declare yourself bankrupt if you can’t afford what you owe and it’s the best option for your situation. However, other people can also file for your bankruptcy. For example: 

• Your creditors can apply to make you bankrupt if you owe £5,000 or more
• An Insolvency Practitioner can make you bankrupt if you’ve broken the terms of your Individual Voluntary Agreement (IVA). 

Common Misconceptions About Bankruptcy

For many people, declaring bankruptcy can help to give them a fresh start in life and rebuild their credit score. However, there are a number of misconceptions about bankruptcy that can make it seem scarier than it is. It’s important to weigh up the facts, rather than common myths, when deciding to go bankrupt. 

• You’ll lose everything

While the Official Receiver may sell some of your assets to settle some of your debts, you won’t lose everything. You will be allowed to keep things you need for everyday life, such as clothing, bedding, furniture and electrical goods. If your vehicle and equipment such as your laptop are essential for work, you’ll also be able to keep those. 

• It’s only for the reckless

Often people declare bankruptcy for reasons beyond their control. Common causes include job loss, serious mental or physical illness, business failure, relationship breakdown and the rising cost of living. Unexpected life events can have a significant impact on your finances, meaning spending beyond your means can be unavoidable.

• You can’t work when you’re bankrupt

While bankrupt, you are restricted from working in certain roles, such as the director of a company, an Insolvency Practitioner, charity trustee and registrar of births, marriages and deaths. However, for most regular employment, you are able to work, and having that stable income can help you to rebuild your financial security.

• Everyone will know

Although your bankruptcy is recorded on the Insolvency Register and advertised in the Gazette, both of which are publicly available, people would have to actively search for you which is unlikely. Creditors may search these databases when completing a credit check but the majority of people likely won’t know unless you tell them.  

• You won’t be able to get credit in future

It’s true that bankruptcy remains on your credit file for 6 years from the date of the order. However, this doesn’t mean it’s impossible to get credit in the future. After discharge, you can start to rebuild your credit. You may encounter high interest rates at first but these will lessen as your credit score improves.

How Bankruptcy Differs from Other Solutions

If you’re struggling with debt, bankruptcy isn’t the only option available. There are a number of different debt solutions which have different processes and may be the better choice for your situation. It’s therefore worth considering all the options available before making a decision.

Individual Voluntary Arrangement (IVA)

Although both are a formal solution to deal with debt, there are a few key differences between IVAs and bankruptcy. While bankruptcy lasts 12 months, IVAs tend to be around 5 to 6 years. Rather than selling your assets to pay off your debt, IVAs allow you to make monthly payments at a rate you can afford to pay off your creditors. 

Once you’ve completed your IVA, any remaining debt is written off. Like bankruptcy, it does remain on your credit file for 6 years from the start date. However, It can be a great alternative as there are fewer restrictions. 

Debt Relief Order (DRO)

A DRO relieves you from making any debt repayments, except debt such as student loans, child maintenance and court fines, for 12 months. After this time has passed, if you’re still unable to repay, the debt is written off. 

Similar to bankruptcy, this debt solution lasts 12 months and will remain on your credit file for 6 years. However, to be eligible for a DRO, you must owe no more than £50,000 and not own your own home or have any other valuable assets. Bankruptcy, on the other hand, has no debt limit and you are still eligible if you have assets and a mortgage. 

Debt Consolidation Loan

A Debt Consolidation Loan involves taking out a new loan in order to repay your existing debts. You then pay off this new loan in one monthly sum, rather than paying out to multiple creditors. It allows you to remain in control of your finances and typically takes around 3 to 5 years to repay.

Unlike other debt solutions such as bankruptcy and IVAs, a Debt Consolidation Loan shouldn’t impact your credit file, as long as you keep up with the monthly payments. However, this solution isn’t for everyone as it requires you to have the funds to make a payment towards your debt every month. 

Key Considerations Before Declaring Bankruptcy

Filing for bankruptcy can have a significant impact on various areas of your life. Before making your application, it’s therefore important to seek professional advice on how it will affect things like housing, employment and credit. 

Mortgage

When you become bankrupt, the Official Receiver (OR) will likely sell any assets you have to repay some of your debt. However, there are a number of options available depending on what type of mortgage you have and the equity value of your home. 

If you own a home with a mortgage solely in your name, the OR will likely want to sell the house to recoup the entire equity. However, you don’t necessarily have to lose your home. If it is jointly owned, the OR will only take your share and the co-owner can buy your share of it if they are financially able. A friend or family member may also be able to pay the equivalent equity to the receiver.

Homes with little or no equity value (below £1,000) will likely not be repossessed. The OR has control of your property for 3 years and if it still holds no equity value at the end of that period, you may be able to keep it. If it increases in equity value during those 3 years, however, the OR may review whether it can be sold.

Renting

As long as your payments to your landlord are up to date, you should be able to remain in your current tenancy during your bankruptcy. 

However, if you currently have outstanding rent arrears, these will be included in your bankruptcy. This means that your landlord will know about your bankruptcy and may be able to evict you, though they can’t take legal action against you.  Some tenancy agreements have an ‘insolvency clause’, which gives the landlord the right to terminate your tenancy or refuse to renew it. 

You should also be aware that because your bankruptcy is recorded on the Insolvency Register and your credit file, it might be difficult to find future tenancies. However, in some cases this can be addressed if you provide a guarantor or a larger deposit.

Employment

For the majority of jobs, you are able to continue working when bankrupt and you don’t even have to tell your employer if you go bankrupt. However, it’s important to check the terms of your contract as it may state that you’re obligated to inform your employer or that you can’t go bankrupt while in that position. 

There are also certain jobs you aren’t allowed to do due to bankruptcy restrictions. These include: 

• Company director
• Charity trustee
• Insolvency Practitioner
• Justice of the Peace
• School governor
• Member of Parliament
• Magistrate.

Credit

While bankrupt, it will be difficult to get any credit over £500 as you are required to inform the creditor of your bankruptcy if it’s over that amount.

Bankruptcy also stays on your credit file for 6 years from the date the order was made. This means you may find it hard to get credit during this time and you’ll likely have to agree to stricter terms or higher interest rates.  

However, there are a few ways you can rebuild your credit, such as getting a credit builder card, which typically has low credit limits and high interest rates. If you pay off your card in full every month, you won’t have to pay any interest and it can help to improve your credit score. Over time, as your credit score rebuilds, you should be able to get credit with lower interest rates.

FAQs About Bankruptcy

Below, we answer some of our most frequently asked questions about bankruptcy. You can visit our detailed FAQs for more insights on debt solutions. 

Can bankruptcy help with all types of debts?

No, not necessarily. Secured debt such as your mortgage and hire purchase are typically not included in a bankruptcy. While most unsecured debts are included, there are some exceptions, such as:

• Student loans
• Social fund loan
• Debts taken out fraudulently
• TV license arrears
• Magistrate court fines
• Debts taken out after you declared bankruptcy
• Child maintenance arrears.

How long does it take to recover from bankruptcy?

After you declare bankruptcy, it can take some time to fully recover. The timeline is typically as follows: 

• After 12 months – you’re typically discharged from bankruptcy and no longer have to follow the restrictions
• After 15 months – your details are removed from the Individual Insolvency Register
• After 2 years and 3 months – deadline for your Official Receiver to decide what to do with your home equity, whether they sell it, apply a charging order or give you the equity back
• After 3 years – deadline for your Official Receiver to take action on your home equity
• After 3 to 4 years – if you have an Income Payment Arrangement (IPA), this is when you’ll pay the last instalment
• After 6 years – details of your bankruptcy are removed from your credit file. 

This timeline can vary, depending on if you break a bankruptcy rule. If you do this, you may be given a Bankruptcy Restrictions Order (BRO) which extends the length of your bankruptcy. It can last between 2 and 15 years. 

If you agree with the BRO and accept the allegations, you can offer to complete a Bankruptcy Restrictions Undertaking (BRU), which is typically shorter and means you don’t have to go to court. Both BROs and BRUs stay on your credit file for 6 years.

Can debts be added after you’ve gone bankrupt?

This depends on when the debt started. If it began after you went bankrupt then you can’t usually include it. However, if you forget about a debt that started before you went bankrupt, you can usually add it to your bankruptcy.

Will filing for bankruptcy stop bailiffs?

Yes. Once you have been declared bankrupt, you’re granted legal protection and your creditors can’t contact you directly. Therefore, any use of bailiffs or other attempts to recover money you owe must cease while you are under your bankruptcy agreement. Your debts are instead managed by your Official Receiver.

Which restrictions will I have to follow during bankruptcy?

During bankruptcy there are a number of restrictions placed upon you that you must adhere to. For example, you are not allowed to:

• Borrow over £500 without disclosing your current bankrupt status
• Work in certain jobs, such as Insolvency Practitioner, Consumer Credit license holder, Charity Trustee
• Act as a company director or running a company without court permission
• Rebrand if you are self-employed or without disclosing your bankruptcy to the people you do business with
• Buy a house under a right-to-buy scheme.