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Bankruptcy is a legal insolvency process used to tackle unaffordable debt. Almost all types of debt can be written off. You pay a substantial application fee. You’ll also be required to make payments from your income if you can afford to. Your assets may be sold to contribute towards the administrative costs and your debts.
Bankruptcy could be your fastest and cheapest route to becoming debt free. It could also impose serious consequences upon you. In this page we’re covering the bankruptcy process in England and Wales. You can also apply to become bankrupt in Northern Ireland or Scotland, but some aspects of the process and costs are different.
To qualify to become bankrupt you must live in England or Wales (or operate a business there). You can also apply if you left England or Wales in the past three years and do not live in an EU state (except Denmark). There is no minimum level of debt required to apply. You’ll need to pay an application fee of £680. The fee can be paid in instalments but you cannot submit your application until it’s fully paid. Local advice agencies can occasionally access grant funding for application fees.
You’ll need to satisfy the Adjudicator (in your application) that you are technically insolvent. Insolvency is proven if you cannot pay your debts when they fall due. It’s also proven if your total debt exceeds the value of your assets. Bankruptcy applications are submitted online. Support is available if you lack sufficient online access or skills.
We recommend that you obtain expert debt advice before applying for bankruptcy. This will help to identify the negative consequences that are relevant to you. It will also reassure you that no other debt solution better fits your needs.
Your application is submitted online. An adjudicator reviews your application (within 28 days) and decides whether to make the bankruptcy order. Once the order is made, you become officially bankrupt. This is recorded on a publicly available online register.
The Official Receiver will contact you. You’re required to cooperate with them while they assess your situation. It’s their job to identify whether you can contribute towards your debts and the bankruptcy administration costs. Your contribution could be a monthly payment based upon your surplus income. You may also have to contribute via the sale of assets that you own (or receive while bankrupt). The Official Receiver oversees your case, but may pass day-to-day responsibility to a different bankruptcy trustee.
After one year you’ll usually get discharged. You’ll no longer be subject to bankruptcy restrictions and your qualifying debts are written off. However, if you’re deemed able to afford a monthly payment this will continue for two more years.
Some potential advantages and benefits of bankruptcy include:
• You don’t have to deal directly with your creditors
• Included creditors cannot take legal action against you
• Unsecured debts get written off
• No regular payment required (if you cannot afford one)
• Deals with most types of unsecured debts
• Creditor consent not required to go ahead
Some potential disadvantages and risks of bankruptcy include:
• Assets (like your home or car) may have to be sold
• Your personal details get added to a public register
• Your credit rating will be seriously affected
• Employment may be affected if you work in certain sectors
• Restrictions against using further credit
• A restricted budget for up to three years
• High application fee (£680)
• You can’t keep windfalls, such as an inheritance
IVAs and bankruptcy offer different benefits and drawbacks. An expert debt adviser can work with you to highlight the specific effects each process will impose upon you.
A major difference between these processes is the effect that they have on your assets. An IVA deals more flexibly with assets such as your home or car. For example, an IVA might get extended for a year “in lieu” of the equity in your home. This means that you make twelve extra monthly payments and keep your home. In bankruptcy the trustee will look to gather in your share of any equity. This might work if a relative can buy your share of the equity from the trustee. If that option isn’t available, your home may have to be sold. Many homeowners are more inclined to use an IVA rather than becoming bankrupt.
Creditors have the ability to block an IVA from going ahead. They also have the ability to request amendments to your proposals, for example an increased monthly payment. Neither of these creditor-based factors are relevant with bankruptcy. Provided that the adjudicator approves your application, it will go ahead. Any monthly payment in bankruptcy is set independently of any creditor input. Bankruptcy might therefore be an attractive option if your creditors aren’t likely to support a reasonable IVA proposal.
The bankruptcy process is typically much faster than an IVA. You’ll usually get discharged from your debts after one year. In an IVA your discharge only occurs once you’ve completed your obligations. This is likely to take at least five years. If you can afford a monthly payment, this payment will continue for a total of three years in bankruptcy. The IVA payment term will usually continue for a minimum of five years. Bankruptcy could therefore help you to become debt free sooner and at a lower overall cost.
An additional factor to consider is the more certain “finality” of bankruptcy. Once your application gets approved, you’re on a defined path to becoming debt free. The completion of an IVA takes several years and isn’t guaranteed until you reach the end of the process. For example, if you become unable to make your IVA payments the process may fail. If your IVA fails, you’ll need to find a new way to deal with the debts.
Almost all types of unsecured debts are automatically included. They include:
• Credit cards
• Bank overdrafts (including joint overdrafts)
• Bank loans
• High cost loans (like 118 118 Money or Everyday Loans)
• Credit union Loans
• Guarantor loans (like Amigo, UK Credit, and George Banco)
• Payday loans
• Store cards
• Catalogue accounts
• Purchased debts (debts bought from other lenders)
• Debt collection agencies (collecting debt for other lenders)
• Council tax arrears
• Income tax, national insurance, and other HMRC liabilities
• Tax credits or benefit overpayments (if not fraudulent)
• Mortgage shortfall debts
• Money owed to family and friends
• Unpaid bills (like medical or legal costs)
• Utility arrears (like gas, electricity, and water)
• Business debts (for sole traders)
Your own liability for a joint loan, joint overdraft, or guarantor loan gets dealt with by bankruptcy. Be aware that the joint borrower or guarantor will remain liable for the full amount owed. You will be unable to continue direct payment of a joint debt or guarantor loan while you are bankrupt.
You will need to continue paying the following types of debt. They will not be discharged by becoming bankrupt:
• Any loan secured against your property (like a mortgage).
• Any loan secured on goods that you still need (like a car).
• Student Loans Company loans
• Charging orders secured against your property
• Magistrate court fines
• Criminal fines
• TV licence arrears
• Child maintenance arrears
• Court ordered confiscation orders
• Social fund loans
• New debts after you become bankrupt
• Personal injury compensation orders
• Court ordered payments in respect of family proceedings
You cannot be chased for fraudulent debts while bankrupt. However, once you’ve been discharged, any fraudulent debts can be recovered from you again. Rent arrears are included in bankruptcy. However, the landlord could still seek to evict you if the rent arrears aren’t paid. If possible, a plan should be made to clear the arrears to avoid the risk of eviction.
There is no such thing as joint bankruptcy. If a couple both wish to become bankrupt, they each need to submit their own application. They also each pay the £680 application fee.
Most people can become bankrupt without jeopardising their employment. Check your contract of employment for bankruptcy or insolvency clauses. Also check with any trade union or professional body of which you’re a member.
Bankruptcy has the potential to cause disruption if you’re a self-employed sole trader. This is especially the case if you employ staff, lease premises, or rely on credit from suppliers. You also cannot serve as a company director until you have been discharged. This could seriously affect owner-manager directors of small limited companies.
People working in disciplined types of work may have restrictions or disclosure obligations. This could apply, for example, if you work in the military, the police, or the prison service.
Those working in certain professions also need to be cautious about the impact of becoming bankrupt. For example, this could apply if you are a solicitor or an accountant. The financial services sector also tends to impose restrictions, for example if you work for a bank, or as a financial or mortgage adviser.
Your bank account is likely to be frozen when you become bankrupt. You’ll need to open a current account at a bank that you don’t owe any money to. The banks are only likely to offer you a basic account that provides no credit facility. These bank accounts should however offer you basic functionality, like a debit card and online access.
Bankruptcy takes into account the assets you own, such as a house or car. Money saved in an approved pension scheme is almost always treated differently. Provided that the money is left in the pension scheme it shouldn’t have to be paid over. This situation changes if you take money from the pension, either as an income or a lump sum. This money gets treated as income and may have to be paid over.
If you come into money or assets, it will have to be paid over. A common example of a windfall is an inheritance. The money gets used to cover administration costs and to repay your creditors.
You’re not going to lose regular household goods as a result of becoming bankrupt. There’s a common myth that a van will arrive to clear possessions from your home. This is untrue. However, if you own any particular possessions of significant value they could be put at risk.
After you’ve become bankrupt, your prior conduct is reviewed. For most people this will present no problem. However, if the official receiver believes that your conduct has been particularly blameworthy or dishonest, sanctions can be imposed. Examples of such behaviour include:
• Borrowing money that you knew you could not repay
• Repaying certain creditors at the expense of others
• Unacceptable neglect of your business affairs
• Failing to cooperate with the official receiver
• Fraudulent activity
• Excessive levels of gambling losses
• Giving away assets (or selling them for less than they’re worth)
Where such conduct is identified, a Bankruptcy Restriction Order or Undertaking could follow. The restrictions associated with being bankrupt could get extended for up to fifteen years. There may be additional restrictions applied. This information is made public via an Insolvency Service register.
Creditors can attempt to impose bankruptcy on a debtor. A creditor owed at least £5,000 can apply to the court for a bankruptcy order to be made against you. This is expensive and time-consuming, so is typically used as a last resort.
An IVA is another option to deal with serious debt problems. This debt solution may treat your assets more flexibly than bankruptcy. You’ll also enter the process having agreed an affordable monthly payment. However, an IVA will not be available unless you can afford to contribute towards your debts. It also typically runs for longer than bankruptcy and might therefore cost you more overall.
A Debt Relief Order could be a better option than bankruptcy. The application fee is much lower at £90. This debt solution is aimed at those little spare income and few assets. Your debt total has to be £20,000 or less. If you qualify for a Debt Relief Order, this may well be your best option to address your debts.
Debt management plans are a less formal way to tackle debts. They may be attractive if your debt level is modest and can be cleared within a reasonable period of time. They may be viable if your assets or job would be put at risk by entering an insolvency process. No debt usually gets written off, so this could turn into a long-term payment plan.
If you’re considering your debt solution options, please contact us. Our advisers can help you to identify viable debt solutions that meet your needs. They’ll also explain the costs and risks associated with each of the options. All debt advice is provided to you on a confidential basis.
Author: Andrew Graveson
Qualified Debt Adviser & IVA-Guide.co.uk Founder
Page Last Updated: 15/04/2020