Bankruptcy

This content applies to England only.

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Bankruptcy is one solution to serious debt problems. In time, bankruptcy will free you from overwhelming debt so you can make a fresh start. Your assets will be shared out fairly between those you owe money to.

If you are faced with unmanageable debt, you should also consider if other solutions would be better for you. Always seek professional advice if you are faced with serious debt problems.

What is bankruptcy?

Bankruptcy is one solution to overwhelming debt problems. If your financial position means that you cannot pay your debts, either you or someone you owe money to can apply to the court for you to be made bankrupt if you have unsecured debt(s) of £750 or more.

If the court orders that you are made bankrupt, your creditors (the people you owe money to) have to try to reclaim money they are owed through your trustee, an official appointed by the court. This could be the official receiver or an insolvency practitioner.

Your trustee will deal with claims made by your creditors. Any money that can be raised from you will be shared out fairly between your creditors to repay what you owe. Bankruptcy usually lasts for a maximum of a year. When you are freed from your bankruptcy, you can no longer be pursued for your debts.

What are the effects of bankruptcy?

If you are made bankrupt, your possessions and financial assets such as life insurance policies will often be sold to pay your creditors. If you are a homeowner, your home could be sold, even if you own it jointly with someone else.

There will be a lot of restrictions on how you conduct your financial affairs, including your ability to borrow money or run a business. For the time you are bankrupt, much of your income will be paid to your creditors, leaving only a reasonable amount of money for your living expenses. Bankruptcy will make it very difficult for you to get credit or loans in the future.

Bankruptcy orders are usually in place for a maximum of one year. When you are freed from bankruptcy or ‘discharged’ most of your debts are written off, with the possible exception of:

student loans
damages for personal injuries
family liability such as maintenance orders and child support arrears
liabilities arising from fines or fraud
secured loans
some benefits and tax credit overpayments
council tax for the remainder of the current year in some cases.

You can start afresh financially when your bankruptcy is discharged, but a record of your bankruptcy will remain on your credit reference file for six years.

Voluntary bankruptcy

You can apply the court for a bankruptcy order yourself, but will have to pay a deposit of £345, and a court fee of £150. It is possible to apply to the court to have the court fee waived, but the deposit must always be paid.

You should always take advice from a specialist adviser before beginning the process as other formal alternatives or informal solutions may be more suitable, depending on your circumstances.

Involuntary bankruptcy

Your creditors may start bankruptcy proceedings against you if you owe them more than £750 in unsecured debts. A number of creditors may combine their debts to reach this threshold and apply to the court together.

Your creditors can apply to start bankruptcy proceedings against you only if:

they give you 21 days notice that they intend to take bankruptcy proceedings against you. They have to send you a ‘statutory demand’ - a written demand for payment that gives you an opportunity to arrange an acceptable repayment schedule setting out how you intend to repay your debt.
a county court judgement has already been made against you and court bailiffs have been sent to seize your goods, but the bailiffs were unsuccessful in doing so.

If you receive a statutory demand

A statutory demand is a document from one or more of your creditors asking for their debts to be repaid and has to be served before bankruptcy proceedings can begin. Many creditors will issue a statutory demand as a way of trying to get you to deal with your debts.

If you receive a statutory demand for payment, you will have to act within 21 days to ensure that the creditor does not issue bankruptcy proceedings. You can prevent bankruptcy proceedings if you repay the debt in full or reduce the debt to below £750.

You may also be able to prevent your creditor taking bankruptcy proceedings if you:

offer to repay the debt in instalments
try to settle the debt by negotiating to pay less than you owe
set up an individual voluntary arrangement (IVA)
apply for an administration order
offer your creditor a voluntary charge on your property (if you have one) – but always seek advice before considering this.

See our pages on alternatives to bankruptcy and debt solutions for more information.

If you dispute the claims made under the statutory demand, you can apply to the court to have it set aside, which if successful will prevent your creditor applying for you to be made bankrupt.

What happens to your home if you are made bankrupt?

If you own your home, it could be sold to help pay your debts. If you have a wife, husband, civil partner or children living with you, the sale could be delayed until after the first year of bankruptcy, so that other housing can be found.

If your home cannot be sold, your trustee may obtain a legal charge over your share in it instead. When you sell your home, the value of your share in the property will be paid to your trustee, including any increase in its value.

If your trustee doesn’t sell your home, obtain a legal charge over it, or come to an arrangement with you – usually within 3 years – it may be returned to you.