What Is Bankruptcy?

What is bankruptcy

This page was last updated on 1 July 2022

What is bankruptcy?

Whether it is a decision you have taken or a situation that has been imposed on you, bankruptcy can be a trying experience. It can involve stressful things like a bankruptcy court action, restrictions on your ability to borrow money and the forfeiture of your possessions.

In order to help break down the process, this article will offer clear, simple bankruptcy advice organised under helpful question headings starting with ‘What is bankruptcy?’. 

Before you start making phone calls to debt support organisations for advice, it might be useful to familiarise yourself with some of the language relating to personal bankruptcies although there is no need for you to have any knowledge in this area. You can do this by reading the article.

Topics that you will find covered on this page

You can listen to an audio recording of this page below.

What is bankruptcy? 

Bankruptcy is a legal status which has a duration of one year in England and Wales. It can be an option for taking care of debts that you are incapable of paying.

Going bankrupt involves using money raised from the sale of your non-essential possessions as well as your excess income to pay off your debts.

What is the difference between involuntary and voluntary bankruptcy?

Bankruptcy may be voluntary or involuntary. If it is the former, the person who is in debt brings the bankruptcy petition to the court because they are unable to cover the debt.

However, in the case of an involuntary bankruptcy, you may receive a bankruptcy order from a creditor. This is because you owe money, and they want to initiate the process of being paid back.

Alternatively, you may receive a bankruptcy order from an insolvency practitioner. This would be because you have broken the terms of an individual voluntary agreement, which is an agreement with your creditors to pay what you owe.

As you can see, bankruptcy is sometimes but not always a case of being made bankrupt by another party.

Here is a short video explaining the bankruptcy process.

How much debt do I need for bankruptcy to be an option?

There isn’t actually a minimum amount of debt that is necessary to be eligible for bankruptcy. You just need your debt to amount to more than the sum of your excess income and the price of your belongings.

To be declared bankrupt by others, your debts have to amount to more than £5000.

How do I declare myself bankrupt?

If you want to declare yourself bankrupt, rather than being declared bankrupt, it is only possible to apply for bankruptcy online. You have to fill out a form on the government’s website.

Going bankrupt will cost £680 in England and Wales. In order to fill out the form, you will need information about your income, the cost of your outgoings and your debt.

Why would declaring bankruptcy be a good idea?

Declaring bankruptcy can be an opportunity for a fresh start if you are in a position where it is impossible to pay your debts.

It might be a good idea to declare bankruptcy if you feel it is unlikely that your financial situation will get better and if you do not own many valuable belongings. 

bankruptcy and insolvency

What happens if I declare myself bankrupt?

If you declare yourself bankrupt, as opposed to being declared bankrupt, there are several key steps to the bankruptcy process.

After applying, the first step is that you’ll receive a copy of your bankruptcy order and an official receiver will ask you some questions to clarify your financial situation. Henceforth, it will be possible for your assets to be used to recoup your debts.

Another step of the process is that individuals declared bankrupt have their name and details published on the individual insolvency register. Your records will be removed within approximately three months from the end of your case.

What restrictions do I have to follow if I am bankrupt?

There are certain rules you have to follow as part of bankruptcy cases.

While you may be able to borrow money while bankrupt, if you find any income lenders willing to lend more than £500, you have to tell them that you are bankrupt.

You also may be able to act as the director of a company. But you’ll only be able to do this with the approval of a court. The same principle applies for setting up and managing a company.

You also have to be transparent about your bankruptcy with potential business partners. It is forbidden to manage a business under a different name to try and avoid this disclosure.

Somewhat unsurprisingly, you are not allowed to work as a debt specialist if you are bankrupt. Quite clearly you might not be in the best position to offer advice in this area during a bankruptcy.

Unfortunately breaking any of these rules might lead to prosecution as any transgression would count as a criminal offence.

"There isn’t actually a minimum amount of debt that is necessary to be eligible for bankruptcy. You just need your debt to amount to more than the sum of your excess income and the price of your belongings."

Where can I go to get some debt advice?

Before deciding on bankruptcy, a process which can change your life significantly, it is important to seek some debt advice.

One source of debt advice is a credit reporting company called Experian who are widely considered to be  industry experts when it comes to bankruptcy and insolvency and debt advice. The insolvency service can offer advice and support to those who are struggling financially.

You can also find an adviser at an organisation like Citizen’s Advice. This organisation works in your interests and its services are free. They may also have more experience breaking ideas down for the people that approach them.

declaring yourself bankrupt

Why is it important to discuss bankruptcy with an expert?

The nature of bankruptcy and the changes it makes to your everyday life mean that it is very important to consult an expert before engaging in the process. Personal bankruptcy can mean that major possessions that you own such as houses, flats and cars will have to be sold off so you can raise the funds to pay off your outstanding debts. 

As such, if your valuable holdings are worth more than the amount you owe, or if your income is sufficient to continue making debt repayments, it is highly likely that bankruptcy is not the most appropriate solution for you to take. 

It is important to consider the restrictions that bankruptcy places on your financial situation such as making it harder to borrow more money in the future.

It is also possible that bankruptcy does not suit the particular debt that you are struggling with because some kinds of debt, for example student loans, are not covered by bankruptcy. So you might still have debts to pay even after filing for bankruptcy.

An expert can help walk you through each of these criteria to make the right decision. In general, as a good rule of thumb, bankruptcy should be viewed as a last resort and is not a decision to be taken lightly.

You don’t necessarily have to pay for expert advice. Citizens Advice Bureau offers free, specialized advice. 

declare bankruptcy

How does bankruptcy affect my credit score and credit file?

Your bankruptcy will be visible on your credit file or credit report for six years. However it might be on your credit report for longer than six years if it takes more than that length of time for you to be discharged.

As a result, if you declare bankruptcy or are made bankrupt, you will struggle to borrow money. This is because lenders look at your credit details before lending you any money.

Furthermore, employers and landlords may ask to see your credit information before entering into a contract with you.

What debts should you include when declaring yourself bankrupt?

When filing for bankruptcy, you should include the following debts:

  • Credit card debt 
  • Utility arrears/debt
  • Debts accrued on store cards

Should joint debts be included in my bankruptcy?

You are not prevented from including joint debts in your bankruptcy. However, this does mean that creditors can pursue the other person who owes money in order to recover the debts.

The creditors are also allowed to ask the other person to pay off all the debts that are owed rather than just their half. This might be something you want to consider.

If both you and your partner are in debt, you cannot jointly apply for bankruptcy to resolve all the 

Debts, in other words, your joint debt. Each of you will need to initiate the process separately.

going bankrupt with no assets

What will happen to my personal assets during bankruptcy?

A major priority during bankruptcy is to recover the money owed to creditors. As a result, bankruptcy might result in the sale of your personal assets.

Your possessions will be evaluated and divided into particular categories. As stated in the ‘What is bankruptcy’ section, assets that are categorised as non-essential have a high chance of being given up. This is especially true if the sale of such assets will help raise income to reimburse your creditors.

What will happen if I fail to report all of my possessions during a bankruptcy case?

When you apply for bankruptcy, it is extremely important that you are transparent about your finances with your trustee.

Any oversight when reporting your finances, should be corrected immediately. There can be fines or even imprisonment for those who mislead their trustee during the bankruptcy process. 

Which assets are most vulnerable to forfeiture?

Assets that are essential to your daily life will not be up for sale. This includes things like crockery and furniture.

However, assets that can be classified as luxury and high-value will almost certainly be up for grabs. 

These include jewellery, excess vehicles and stock. 

One exception in the case of vehicles is if a car is essential for your ability to get to work.

bankruptcy advice

What does a trustee do?

After you file for bankruptcy, someone called a trustee will be appointed to your case. A trustee will either be a licensed insolvency practitioner or an official receiver that is appointed by the court. 

As the word would suggest, a trustee is entrusted with  the responsibility of overseeing your bankruptcy. The primary goal of the trustee is to work out a debt solution to pay off your debts.

The trustee receives your payments which it then distributes between your creditors.

The trustee takes care of the sale of all of your unnecessary assets, with the money from the sale going back to your creditors.

What are the duties of an official receiver?

An official receiver tends to be involved in the initial phase of bankruptcies. Here are some of their duties:

  • An official receiver might gather and take care of assets for creditors after someone has been made bankrupt.
  • They may be entrusted with investigating the insolvency and accounting for why it happened
  • They may play the role of trustee if an insolvency practitioner has not been appointed to the case.

Will the money in my savings accounts be affected by going bankrupt?

If you have put some money aside in one or more savings accounts, this money will be used within your bankruptcy to pay off your lenders.

Depending on how much you have saved, you might be able to avoid bankruptcy by simply using your savings to pay off what you owe. 

file for bankruptcy

Learn More About Debt Management In The UK

Debt Management plans

A debt management plan is a means of helping you solve your debts. It involves negotiating an agreement between you and some or all of your creditors in order to pay off your debts. 

mortgages if you are bankrupt

There is no hard and first rule when it comes to what lenders will accept your mortgage application if you want to get a mortgage after bankruptcy. Mortgage lenders who lend to discharged bankrupts generally consider each unique case individually. 

debt relief orders

Debt relief orders (often abbreviated to DRO) are a method of debt reduction if your debts are more than you can manage and you cannot afford to pay them.

What is an IVA?

An IVA is a kind of debt solution: more specifically, it is a legally binding agreement between you and your creditors to pay back your debts over a particular time period. This article explores the impact of having an IVA and what it could mean for your day to day life.

what is bankruptcy

Bankruptcy is a legal status which has a duration of one year in England and Wales. It can be an option for taking care of debts that you are incapable of paying.

impact of credit rating an IVA

An IVA won’t affect your credit score forever. It will normally only be kept on your credit file for six years in total.  This is because an individual voluntary arrangement usually lasts for five years, and after it ends it will remain on record for one more year.

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