What is Bankruptcy?

Bankruptcy is a legal process that offers a lifeline for those struggling with unmanageable debt. The regulated process can give you a fresh start and a path towards financial recovery.

This guide will explain what bankruptcy is and how filing for bankruptcy works. It’ll also walk through the implications for your finances and provide bankruptcy alternatives.

What is bankruptcy?

Bankruptcy is a legal proceeding to deal with debts that you can’t afford to pay off. The process can:

• Free you from having to pay some of your debts
• Freeze some debt repayments until your bankruptcy ends
• Help you pay off remaining debts faster

Bankruptcy doesn’t apply to partnerships or companies, but it does apply to individuals. Partnerships and companies go through the insolvency process instead.

How does bankruptcy work?

Bankruptcy ensures everyone you owe funds to (your creditors) receives shares of your assets. Here’s how the process works.

1. Filing for bankruptcy

You can file for bankruptcy, or one of your creditors may do this. Either way, an official receiver will write to you within two weeks of the bankruptcy order being made. They will instruct you on any actions you need to take. You may need to:

• Provide the official receiver with a complete list of your assets and information about your finances
• Explain any rises in income during your bankruptcy to your trustee
• Tell anyone who offers you a loan over £500 that you are bankrupt
• Agree to attend court and explain why you owe money if requested

2. Receiving an invitation to an interview

You will receive an invitation to an interview with your official receiver. This interview will take place either in person or by telephone.

If a creditor makes you bankrupt, the official receiver may phone you before the interview. This call is to determine whether anything needs to be arranged urgently. The official receiver may also send a questionnaire that needs to be completed before the interview.

You can contact the official receiver to confirm or rearrange your interview. Let them know if you need any special arrangements or more time to collect paperwork.

3. Attending your interview

In-person interviews usually take two to three hours, and telephone interviews take 30 minutes or longer. During the interview, you will review or complete your questionnaire first. 

Then, an insolvency specialist will ask questions about the situation that caused your bankruptcy. This specialist will usually be a solicitor or an accountant. They’ll also ask for all requested paperwork, which the official receiver will keep. This paperwork may be examined and recorded during the interview or later.

If you can’t provide all the necessary information during the interview, you may need a second appointment. This may also be the case if the examiner needs more time to complete their enquiries.

4. Sending a report to the creditors

The official receiver will write a report detailing your assets and debts for your creditors. This usually takes less than eight weeks but may take up to 12.

If they believe you may have broken the law in your financial dealings, they will also report to the insolvency service.

5. Selling your assets

The trustee will then sell your assets. This person may be your official receiver or an insolvency practitioner. 

They won’t sell reasonable domestic items or items you need for your job. However, they may replace valuable items that you need with lower-priced alternatives.

You will be able to keep your car if you use it for your work or vocation. You will also be able to keep your car to meet domestic needs where alternative transport isn’t practical. However, you may not be able to keep it if it’s under a finance agreement.

If you own your home, the trustee may sell it if this is the only way to pay your creditors.

6. Paying your creditors

The trustee will invite creditors to make a formal claim and will handle payments for you. The only direct payments you will need to make include:

• Payments to secured creditors, such as a mortgage lender
• Non-provable debts, such as maintenance payments, student loan payments, and court fines
• Budgeting or crisis loans payments owed after 19 March 2012 to the Department for Work and Pensions

The trustee will deduct various fees before creditors receive funds. Then, if there is any money left over, you will receive it.

If all debts are paid, including interest, you can apply to cancel your bankruptcy.

7. Being discharged from bankruptcy

You will receive a letter confirming you’ve been discharged from bankruptcy after 12 months, even if you still owe money. The only debts you will still be liable for are:

• Debts created after the bankruptcy order
• Student loans
• Funds owed under family proceedings
• Court fines
• Money owed for personal injuries
• Debts gained by fraud

However, assets that you had during your bankruptcy may still be used to pay off debts.

When would someone file for bankruptcy?

An individual may decide to file for bankruptcy if:

• They can’t afford to pay back the money they owe
• Their creditors apply to make them bankrupt as they owe at least £5,000
• They’ve broken the terms of an individual voluntary arrangement (IVA)

It is only possible to file for bankruptcy in England or Wales if you live in, have lived in, or have had a business in these countries in the past three years. Other countries may not recognise the bankruptcy order in England and Wales.

What happens when you file for bankruptcy?

Aside from the process described above, the following also happens when you file for bankruptcy.

You can’t use your bank accounts

When you file for bankruptcy, your bank accounts will be frozen. Your trustee will claim funds in the accounts as assets. However, they can ask to release money for your daily needs and to anyone you share a joint account with.

You can open a new bank account after your bankruptcy order date. When doing so, you must notify the bank that you are bankrupt. Alternatively, you may be able to use your old account.

Your pension should be excluded from bankruptcy

Most pension schemes, like the UK state pension or schemes approved by HM Revenue and Customs, can’t be claimed by the trustee.

Even if your pension scheme isn’t approved or registered, you may still be able to exclude it from bankruptcy. You can apply for an exclusion order from the court or make a qualifying agreement with the trustee.

You may need to pay an IPA or IPO

If you can afford it, your trustee may ask you to make debt repayments through an Income Payment Agreement (IPA). You would make these payments on top of payments made during the bankruptcy process.

You won’t be asked to pay through an IPA if your main or only income is state benefits.

If you can’t agree on repayment amounts for an IPA, your trustee may apply for an Income Payment Order (IPO). In this case, you must make payments out of the income you have left after covering all essential costs. 

If you don’t make the payments, the trustee can apply to extend your bankruptcy.

How do you file for bankruptcy?

You can apply for bankruptcy online, which costs £680.

If another party has applied to make you bankrupt, you’ll receive a copy of the petition.

How long does bankruptcy stay on your credit report? 

Your bankruptcy will stay on your credit report for six years after the bankruptcy order is made. The official receiver will notify credit agencies like Equifax when your bankruptcy ends.

Alternatives to filing for bankruptcy

Bankruptcy isn’t the only way to handle debt. There could be alternative options available to you before filing for bankruptcy.  Each alternative offers different levels of protection and debt management.

A Debt Relief Order (DRO)

A debt relief order may be a good idea if you owe less than £50,000, have under £75 spare income each month, and don’t own your home.

Debt relief orders allow you to stop making payments towards debts, including interest, for 12 months. You will only need to cover rent, bills, and debts not included in the order. These include court fines and student loans.

There are restrictions that need to be followed whilst you have a DRO such as; not borrowing more than £500 without telling the lender about your DRO, not acting as the director of a company or opening a bank account without telling the bank or building society about your DRO. 

A Debt Management Plan

A debt management company authorised by the Financial Conduct Authority (FCA) can set up a debt management plan with your creditors. The company works out your monthly incomings and expenditure using financial information provided by you to create a payment plan agreement. The agreement will allow you to pay a small amount of debt back each month or make repayments in a few months’ time if the creditors agree to it. 

It is worth noting that some companies can charge a set up fee and/or an ongoing maintenance fee so make sure you understand the costs of your plan and how you are going to pay it. 

An Administration Order

An administration order allows you to pay funds in monthly installments. You should be eligible if a court judgment has been made against you for debts under £5,000.

An Individual Voluntary Arrangement

An insolvency practitioner can oversee your debt repayments via an individual voluntary arrangement (IVA). You make regular payments to this practitioner, who divides the funds between your creditors.

The Breathing Space Scheme

The Breathing Space Scheme gives you 60 days of protection from your creditors while making repayments. You can apply for this scheme if you don’t have an IVA or a DROd

Deciding whether bankruptcy is right for you

While bankruptcy provides relief from difficult financial situations, it’s not a decision to take lightly. If you’re considering bankruptcy, it’s essential to:

• Seek professional financial advice
• Understand the full implications of each debt relief method
• Review all available options
• Consider your long-term financial goals

Bankruptcy may not be the end of your financial journey, but could potentially be a new beginning. Whether you choose this or an alternative debt solution, the most important step is taking action.

Use our list of financial advice resources to find the right solution for you.