What is Bankruptcy?

This is frequently regarded as a ‘fresh start’ approach to debt but can also be a frightening prospect. Consequently, we have summarised exactly what Bankruptcy is below and detailed some of the possible alternatives:

How do I declare Bankruptcy?

If you wish to declare Bankruptcy, you should complete an application online, providing information on your income, debts, and outgoings. It must also include any letters from enforcement agents or bailiffs.

An official adjudicator from the Insolvency Service reviews your application and it is their decision whether you should be made bankrupt.

There is a fee for applying for Bankruptcy, it costs £680 and would need to be paid prior to your application.

We can't help you set up bankruptcy, but we can still detail everything you need to know.

What happens when you declare Bankruptcy?

When you declare Bankruptcy, an Official Receiver will assess your income, assets, and outgoings. They will use this information to decide how they can be used to meet your debts.

How long does Bankruptcy last?

The length of time for most of your outstanding debts to be written off is usually one year, allowing you the chance to make a fresh start.

You remain under restrictions of Bankruptcy until you are officially discharged.

Though it only lasts approximately one year, Bankruptcy affects your credit rating and credit reference agencies will keep the details on file for a minimum of six years.

What debts are included in Bankruptcy?

When you go bankrupt, any unsecured debts in your name will be added. These include personal loans, payday loans, catalogues, and credit cards.

Other debts could include:

Council tax and utility arrears – These would be written off when you go bankrupt.
Parking charge notices.
Gambling debts.
Attachment of earnings – If you currently have money deducted from wages as part of debt repayment, this stops when you go bankrupt.
HMRC – Tax arrears, PAYE, or VAT debts are written off in the process.
Benefits overpayments – If you owe money as a result of benefits overpayments, these would be included in the Bankruptcy.

What debts are not included in Bankruptcy?

Debts not included in Bankruptcy include secured debts - such as a mortgage or charging order.

Benefits overpayments via fraudulent claims are not included.
Guarantor loans – An unsecured debt which would be included in the Bankruptcy. However, the guarantor would be responsible for paying the balance.
Joint debt – Money owed in joint names. Your liability for the debt comes to an end once you go bankrupt. However, the other account holder is 100% liable.
Student loan debts.
CSA arrears.
Court fines and penalties (speeding fines).

The advantages

The advantage of a Bankruptcy order is that you can make a fresh start, which in most cases would be after a year. The other advantages include:

You no longer have to deal directly with creditors.
You can keep certain things such as ‘exempt goods’ – household items, a car and tools for work.
You are still able to keep an amount from your income to live on.
If you are required to make payments from your income, this would only be for three years.
No payments are required if your only income is welfare benefits.
Court action from creditors would have to stop following a Bankruptcy order being issued.
No debts would have to be paid back which are covered by Bankruptcy.

The disadvantages

There are disadvantages to Bankruptcy. For example:

The £680 fee.
If you have a high enough income, for three years you may be expected to pay funds towards your debts.
Your credit rating would be affected for six years.
If you are a homeowner, the home may need to be sold. This is dependent on it’s worth after any debts secured on the home are repaid.
If you rent, your tenancy could come to an end.
Some of your possessions may have to be sold.
Some jobs do not let people who have been made bankrupt continue working.
Business owners may have to close their business and sell off assets.
Immigration status can be affected by declaring Bankruptcy.
Bankruptcy is published publicly via the Insolvency Register.
A Bankruptcy restriction order against you can last up to 15 years, which will restrict your financial affairs.

Is an IVA better than Bankruptcy?

For some people, dependent on their situation, an IVA (Individual Voluntary Arrangement) may be a better option than Bankruptcy. Homeowners or business owners may find it better to choose an IVA rather than potentially lose their home or assets.

An IVA offers more flexibility than Bankruptcy and, depending on your circumstances, personal possessions and other assets could be kept rather than using them to pay your creditors.

Furthermore, you can continue to use your bank account if you have an IVA. There is no need to notify your bank about an IVA, whereas with Bankruptcy your account is likely to be closed and you may find it difficult to open another.

There are, of course, risks with an IVA. For example, it may not be suitable if your circumstances are likely to change or you’re unable to keep up with the payments.

What is the right choice?

The best option is to talk things through with a debt adviser before you make your decision, often this is because your debt solution depends on your circumstances.

They are there to give you the support you need and help you regain control of your finances. Although we can only help you with an IVA, we can still determine if bankruptcy may be the best solution for you.