Bankruptcy is a legal process for individuals, not companies, who cannot repay their debts. If someone is in a lot of debt, declaring bankruptcy can be a way to clear it. An individual may also be forced into bankruptcy by their creditors.
How does someone become bankrupt?
You can only be declared bankrupt by a court order. You can apply to declare yourself bankrupt if you owe more than you can pay and want a way out; applications are made online. Alternatively, a creditor can apply to make you bankrupt if you owe them at least £5,000.
How does it help?
Bankruptcy means being free of debts that may have been hanging over you for years. It does have consequences, but for many people it provides welcome peace of mind and a genuine fresh start.
What happens in a bankruptcy?
Once a bankruptcy application is approved, a bankruptcy order is issued. That order means an official called a trustee in bankruptcy seeks to realise your assets in order to pay creditors.
The trustee will sell most valuable assets, such as property, cars or expensive belongings. However, you are usually allowed to keep the basic things needed for everyday life, such as clothes, work equipment and a modest car where it is essential for work. You can still work and earn during bankruptcy, although you may be asked to pay surplus income to the trustee to help pay off debts.
Bankruptcy typically lasts twelve months, during which certain financial restrictions apply. After that, most remaining debts are written off.
What are the effects of bankruptcy?
During and sometimes after bankruptcy there are restrictions. You are unlikely to be able to obtain certain types of credit, and you may not hold certain positions, particularly in finance, or act as a company director.
Bankruptcy also affects your credit score for six years, which can make it hard to get loans, mortgages or other credit in future.
After twelve months you are discharged, meaning you are released from most of your remaining debts. Discharge does not return your assets to you. Anything that vested in the trustee at the date of the bankruptcy order stays under the trustee’s control until it has been realised or dealt with, even after discharge. There may still be restrictions where the trustee suspects that you were not honest about your finances.
Before you decide, look at the alternatives
Bankruptcy is not always the right answer, and it is rarely the only one. An individual voluntary arrangement allows many people to keep control of their affairs and protect assets. We will set out both routes honestly, with the consequences of each, and let you choose.