Bankruptcy is one solution to serious debt problems. Your assets are shared out fairly between those you owe money to. If you are a homeowner, your home could be sold, even if you own it with someone else.
Alternatives to bankruptcy
If you have debt that you can no longer manage, you should also consider if solutions other than bankruptcy would be better for you.
Always seek professional advice if you are faced with serious debt problems.
Find out more about getting help with debts.
Bankruptcy is one solution to overwhelming debt problems.
If you cannot pay your debts and you have unsecured debts of £750 or more, either you or someone you owe money to can apply to the court for you to be made bankrupt.
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 a trustee. This is an official appointed by the court. This could be the official receiver or an insolvency practitioner.
Your trustee deals with claims made by your creditors. Any money that can be raised from you is 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 that you owed at the time you were made bankrupt.
Find out more from Gov.uk about bankruptcy.
Effects of bankruptcy
When you are made bankrupt, your possessions and financial assets such as life insurance policies may 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.
When you are bankrupt there are several restrictions on how you conduct your financial affairs, including your ability to borrow money or run a business. Much of your income is paid to your creditors, leaving only a reasonable amount of money for your living expenses.
Bankruptcy makes it difficult to get credit or loans in the future.
Bankruptcy orders are usually in place for one year. When you are freed from bankruptcy or 'discharged' most of your debts are written off.
Debts that are not written off include:
- student loans
- debts you incur after the bankruptcy order was made
- family liability such as maintenance orders and child support arrears
- court fines
- debts arising from fraud
- mortgage payments
You can apply to the court for a bankruptcy order yourself. You must pay a deposit of £525 and a court fee of £115.
It is possible to apply to the court to have the court fee waived, but the deposit must always be paid.
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. This is 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 judgment 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 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 must 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
If you dispute the claims made under the statutory demand, you can apply to the court to have it set aside. If this is successful it prevents your creditor applying for you to be made bankrupt.
Homeowners and bankruptcy
Your home could be sold to help pay your debts.
The sale could be delayed until after the first year of bankruptcy if you have a spouse, civil partner or children living with you, 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 is 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.
Where to get help
For more information about managing your debt, contact:
You can also use Shelter's advice services directory to find an adviser in your area.
Find out more from Gov.uk's Insolvency Service on personal debt, bankruptcy, company liquidation, investigation and enforcement.
Last updated 01 Jan 2015 | © Shelter