If you are finding it hard to keep up with your debts, you may be considering bankruptcy. Often viewed as a last resort, you are typically eligible for bankruptcy if you don’t have any other way to repay your debts, are able to pay the initial fee of £680 and are a resident of England, Wales or Northern Ireland. If you live in Scotland, there is an equivalent to bankruptcy, known as sequestration.   

Filing for bankruptcy is a decision that shouldn’t be taken lightly. Before coming to a conclusion, it is important to fully understand what the process involves and how much impact it could have on your life. In this guide, we help you to make an informed decision by discussing the key pros and cons of bankruptcies in the UK. 

Pros of Bankruptcy

Although the topic of bankruptcy can often create stress and uncertainty, it can be a positive solution for those who are struggling to make ends meet. There are many advantages to filing for bankruptcy, allowing you to start over and write off a significant amount of debt. 

Advantages of bankruptcies include the following:

Debt Relief and Fresh Start

When you declare bankruptcy, most unsecured debts, such as credit cards, overdrafts, utility arrears and store cards, are written off after 12 months. This can be an opportunity to wipe the slate clean and start building up your credit score again. 

Protection from Creditors

If you’re struggling to keep up with payments, contact from your creditors can often cause a great deal of stress and anxiety. The good thing about bankruptcy is that you no longer have to deal directly with your creditors and they aren’t allowed to take action against you, such as sending letters, authorising debt collections and starting new court action. You therefore don’t have to worry about creditors chasing you.

No More Interest Accumulation

Debt can build up quickly, especially if the creditors charge high interest rates, making it more difficult to pay off. When you file for bankruptcy, creditors aren’t allowed to add any interest or charges on debt included, meaning you don’t have to worry about it accumulating. 

Cons of Bankruptcy

As well as the positives, there are also disadvantages of bankruptcies in the UK. Becoming bankrupt does mean there’s some restrictions on what you can and can’t do. For example, you can’t be a director of a company without the court’s permission or borrow more than £500 without letting the lender know you’re bankrupt.

Other disadvantages of bankruptcies include: 

Impact on Credit Score

While bankruptcy usually only lasts around 12 months, it stays on your credit file for six years starting from the date your bankruptcy begins. When you apply for credit, lenders will look at your credit history and likely mark you as a high-risk borrower. You therefore may struggle to get credit and may be charged high interest rates. If you’re taking out a mortgage in the future, it is also common to be asked if you’ve ever been bankrupt, even if it was more than six years ago.

Loss of Assets

When you become bankrupt, your assets and belongings will become property of the person who deals with your bankruptcy, known as the ‘official receiver’. They will try to sell your assets to make payments towards your creditors. You will still be able to keep essential items needed for daily living, such as cooking essentials, furniture and clothes.                   

Bankruptcy on Public Record

Your bankruptcy will be listed on the Insolvency Register, which is a public record. It will include details such as your name, address, occupation and date of bankruptcy order. While anyone can find you on the Insolvency Register, it is mostly creditors who will be actively searching for you.

How to Weigh the Pros and Cons

As outlined above, declaring bankruptcy has its pros and cons. Before making your final decision, it’s important to consider both sides carefully, as there may be other options available to you. For example, if the main reason you find bankruptcy attractive is protection from creditors, it may be worth taking out an Individual Voluntary Agreement (IVA) instead. 

Ultimately, you’ll need to think about whether the debt relief outweighs the damage to your credit score and public record. 

Is Bankruptcy Right for You?

Whether bankruptcy is the right choice for you depends on your personal circumstances. Not every debt is covered by bankruptcy meaning that while you’re bankrupt, you’ll still need to pay debt such as student loans, magistrate court fines and child support payments. While most debts are covered, consider which financial areas you’re struggling with the most and whether bankruptcy could offer relief. 

Additionally, filing for bankruptcy may have different pros and cons depending on whether you have a mortgage or rent your home. If you have a mortgage, you will need to keep paying it as well as any other debts secured against your home. The official receiver may also want to sell it to pay back your bankruptcy debts. 

If you rent your home, on the other hand, you’re unlikely to lose it by going bankrupt and you should be allowed to keep enough money to pay rent. Rent arrears are covered by bankruptcy but if you are in arrears, your landlord could still evict you. 

Next Steps and Seeking Advice

Once you’ve considered the pros and cons of bankruptcy in the UK, it’s important to seek professional advice. Declaring bankruptcy can have a significant impact on your life and is a big decision to make. Services such as MoneyHelper offer free debt advice. Alternatively, you can contact us and we can advise on the debt solutions available and whether bankruptcy is the right choice for you.