What is bankruptcy?

What you need to know about bankruptcy?Bankruptcy is a legal status for insolvency individuals this usually lasts for a year and can be a way to clear debts you can’t pay. You can only be made bankrupt if your debts are £5,000 or over.

This can be a relief for debtors who are struggling to make ends meet, but it also has some disadvantages. For instance, bankruptcy can stay on your credit report for up to ten years, making it difficult to get loans or lines of credit during that time.

In addition, certain types of debt, such as child support or alimony payments, are not dischargeable in bankruptcy.

As a result, it’s important to consider all of your options before filing for bankruptcy. However, for some people, it may be the best way to get a fresh start.

Before you go bankrupt, seek debt advice from an expert as soon as possible if you need it.

How does bankruptcy work?

Bankruptcy is a legal process that allows individuals or businesses who cannot pay their debts to seek relief from their financial obligations. The process involves filing a bankruptcy petition with a court, after which an Official Receiver is appointed to assess the debtor’s financial situation.

The Official Receiver will evaluate the debtor’s income, assets, and outgoings to determine how they can be utilized to pay off outstanding debts. Creditors will need to make a formal claim to the trustee for any money owed to them, and direct payments cannot be made to creditors during the bankruptcy period.

After a period of time (usually one year), most of the debtor’s outstanding debts will be written off, allowing them to make a fresh start. However, until the debtor is discharged from bankruptcy, they will remain under bankruptcy restrictions, such as not being able to apply for credit over a certain amount without informing the lender of their bankruptcy status.

One common bankruptcy myth is that it permanently ruins your financial future, when in reality, it can provide a fresh start for individuals overwhelmed by debt.

How can bankruptcy happen?

Bankruptcy can occur through two ways:

  • A lender can apply to make you bankrupt, even if you are not willing to. They may do this to recover any money you owe them. A
  • You can declare bankruptcy yourself. In England and Wales, this process can be done online through the Government’s website, whereas in Northern Ireland and Scotland, bankruptcies are made through the courts and AIB (Accountant in Bankruptcy), respectively.

However, before considering bankruptcy, it is essential to seek advice from a free, independent debt adviser, such as your local Citizens Advice Bureau or National Debtline, or consult a reputable solicitor, accountant, insolvency practitioner, or financial adviser.

How to go bankrupt

To apply for bankruptcy, you must complete an online application and create an account. The application requires you to provide information about your debts,

You’ll need to provide information about your:

  • debts
  • employment/income
  • pension
  • bank accounts
  • assets
  • outgoings
  • and any letters from bailiffs or enforcement agents.

An official adjudicator from the Insolvency Service will review your application and determine if you meet the criteria for bankruptcy. Typically, you will receive a decision within 28 days of submitting your application.

It’s important to note that bankruptcy may not be the optimal solution for managing your debts. There are various alternatives to consider, and seeking guidance from a professional insolvency advisor is highly recommended.

How much does it cost to go bankrupt?

Going bankrupt incurs a fee, which is payable to the Insolvency Service. The current cost to go bankrupt in the UK is £680, which must be paid when submitting the online application.

This fee can be paid in instalments, but the application cannot be processed until the full amount has been received. It’s important to note that this fee is non-refundable, even if the application is unsuccessful.

Additionally, there may be additional costs associated with bankruptcy, such as legal fees or administration costs, which can vary depending on individual circumstances.

What happens if you are declared bankrupt?

The exact terms of a bankruptcy order vary from one individual to the next, as conditions are determined by the amount owed, the value of the assets owned by the individual, and their current employment status.

Once you’ve been legally declared bankrupt, you’re essentially cleared of your major debts and provided with the opportunity for a fresh financial start. However, a debt-free life isn’t the only caveat that comes with declaring bankruptcy. Your major assets can be sold off, you still have to pay for certain personal liabilities, and your credit score is negatively affected for years to come.

Let’s take a detailed look at what happens when you’re declared bankrupt:

  • Major debts and liabilities can be written off.
  • Creditors can no longer chase you for payments.
  • You continue to pay for personal liabilities such as child support, student loans and outstanding fines.
  • Assets – including your house and car – can be sold to repay debts if they’re deemed non-essential.
  • If you rent from a landlord, your lease may be terminated.
  • All your bank accounts are closed down, and everything is consolidated into one bank account.
  • You have no control over your finances.
  • Any business you own can be sold or closed down to pay debts.
  • If you’re employed, an Income Payment Order can be issued to repay creditors.
  • You are classed as an undischarged bankrupt for a minimum term of 12 months.
  • Bankruptcy remains on your credit score for six years.
  • Personal bankruptcy is made public and you are excluded from certain roles in society, such as practising law or being elected as a Member of Parliament.

If you’re declared bankrupt then you agree to abide by the terms of the bankruptcy order issued by the court. Failure to meet the requirements of the order can have severe, legal repercussions and could result in bankruptcy orders being extended.

Read more: Difference between a debtor’s and a creditor’s bankruptcy petition?

What happens after I go bankrupt?

spin this content in the same format: After you go bankrupt, an Official Receiver will be appointed within two weeks of receiving your bankruptcy order.

They will assess your:

  • income assets
  • outgoings
  • assets

In order to decide how they can be used to meet your debts. You might also be asked to attend an interview with the official receiver. Your creditors have to make a formal claim to the trustee for the money they are owed. You can’t make direct payments to them and they can’t ask you for payments.

After a period of time (usually one year), most of your outstanding debts are written off and you can make a fresh start. Until you are discharged from bankruptcy you will remain under bankruptcy restrictions. For example, you won’t be able to apply for credit of £500 or more without telling the lender about the bankruptcy.

How will bankruptcy affect my life?

Filing for bankruptcy is a serious step that can have significant impacts on your life in several ways.

  • First and foremost, you may have to part ways with valuable possessions. However, you may be allowed to keep necessary items required for daily living and working (including your car, if it’s essential for your job), but you may have to opt for cheaper alternatives. Though it can be tough to let go of your belongings, always remember the end goal: a life free of debt.
  • Another impact of bankruptcy is that it becomes public knowledge. Your bankruptcy will be listed in the London Gazette (or the Belfast Gazette if it’s processed in Northern Ireland) and on the Insolvency Register. However, unless there’s a significant public interest in your case, it’s unlikely to be featured in local or national news.
  • Bankruptcy may also lead to the closure of your bank accounts, which can create difficulties in managing day-to-day activities. Fortunately, you may be eligible to open a basic bank account designed for individuals with bad credit, allowing you to store and pay money without accessing overdraft facilities.
  • Moreover, the courts may impound your passport if they believe you’re going abroad to sell your possessions, but this is unlikely to happen in most cases.
  • Finally, it’s worth mentioning that bankruptcy can be an emotionally stressful experience, from completing paperwork to informing friends and family. However, some individuals find that bankruptcy provides them with a fresh start, relieving the weight of debt off their shoulders.

Will my bankruptcy affect my spouse and others?

Bankruptcy can affect your spouse and others in various ways, depending on individual circumstances. If you have a joint debt with your spouse or a joint bank account, your bankruptcy may impact them, as they will be solely responsible for the debt or may have to close the joint account. If you own property jointly, the trustee may have the right to sell your share of the property to pay off your debts.

However, if the property is jointly owned as tenants in common, then only your share can be sold. Additionally, if you have a business, your bankruptcy may affect your employees and partners, and the trustee may sell your business assets to pay your creditors.

It’s essential to discuss the potential implications of bankruptcy with a qualified advisor to understand how it may affect your spouse and others.

How long will bankruptcy affect my credit file?

Bankruptcy can have a significant impact on your credit file, and it can take a long time to recover from its effects. Bankruptcy stays on your credit file for a minimum of six years from the date you are declared bankrupt, and during this time, it can be challenging to obtain credit or borrow money.

Even after the six-year period has elapsed, some lenders may still consider your bankruptcy when assessing your creditworthiness. It’s important to note that the severity of the impact on your credit score can depend on various factors, including your individual circumstances and the type of credit you’re seeking.

In general, it’s advisable to take steps to rebuild your credit score gradually after bankruptcy, such as using a credit-building credit card, keeping up with repayments, and ensuring your credit report is accurate.

Who will see that I’m bankrupt?

Several parties and entities may be informed of your bankruptcy, including :

  • creditors
  • banks and building societies
  • utility providers, such as water, gas, and energy companies, may also be informed.
  • Professional organisations that you are a member of
  • Local authority, as well as Citizens Advice Bureau, may be notified.
  • If you rent your home, your landlord may be informed of your bankruptcy.

It’s worth noting that, in general, the information provided about your bankruptcy will be limited to what is necessary and relevant to each party, and personal details are not usually disclosed.

Frequently asked questions

Can I keep my home if I declare bankruptcy?

It depends on the equity in your home and whether it's considered an asset that can be sold to pay off your debts. If you have little or no equity in your home, you may be able to keep it. However, if you have significant equity, you may be required to sell your home to pay off your creditors.

Will bankruptcy clear all of my debts?

Bankruptcy can clear many types of unsecured debts, including credit card debts, personal loans, and utility bills. However, there are some debts that cannot be included, such as student loans, court fines, and child support payments. Additionally, any secured debts, such as a mortgage or car loan, will not be cleared by bankruptcy.

Will declaring bankruptcy affect my employment?

In general, declaring bankruptcy should not affect your current employment, unless you work in certain professions, such as finance or law, where bankruptcy may be seen as a lack of financial responsibility. However, some employers may perform credit checks as part of the hiring process, and a bankruptcy on your record could impact their decision. It's always best to check with your employer or HR department to understand their policies regarding bankruptcy.


Going bankrupt as a sole trader, self-employed or individual can be a daunting experience. If you’re in debt and are unable to pay your creditors, bankruptcy may be an option to consider. As a sole trader or self-employed individual, your business and personal debts are often linked, and bankruptcy can help you wipe the slate clean and start over.

However, bankruptcy can have serious consequences, including the loss of assets and a negative impact on your credit rating. It’s important to seek professional advice before filing for bankruptcy and to understand the implications of this decision on your business and personal life. Additionally, there may be other debt solutions available, such as debt management plans or individual voluntary arrangements, which could be more suitable for your circumstances

Steve Jones Profile
Insolvency & Restructuring Expert at Business Insolvency Helpline

With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.