Bankruptcy. What is it?
How does Bankruptcy work?
Bankruptcy is a form of insolvency, and normally only suitable if you can’t pay back your debts in a reasonable time. Any assets you own, such as your house, will normally be sold to pay off your debts. This means that if your assets are worth more than your debts, or if all of your regular payments are up to date and you can afford to keep paying them, bankruptcy is unlikely to be the best option for you.
When you make yourself bankrupt, almost all of your unsecured debts are written off, allowing you to make a fresh start. But personal bankruptcy rules mean you will face certain restrictions.
What is bankruptcy?
If you’re in severe financial difficulty and are considering going bankrupt, you’ll probably have lots of questions about it. Here we’ll tell you more about what bankruptcy is.
Bankruptcy works differently depending on where you live in the UK. If you’re living in Scotland please visit our page on sequestration (Scottish bankruptcy). If you live in England, Wales or Northern Ireland the information below outlines the bankruptcy process.
When you go bankrupt almost all of your debts are written off. Deciding to go bankrupt is a big step that involves fees and can impact different areas of your life, such as your job or home.
Is bankruptcy suitable for me?
Bankruptcy is a form of insolvency and is normally only suitable if you can’t pay back your debts in a reasonable time.
Assets you own, such as your house or car will usually be sold to pay off your debts. This means if your assets are worth more than your debts, or if all of your regular payments are up to date and you can afford to keep paying them, bankruptcy is unlikely to be the best option for you.
After you’ve been declared bankrupt, your creditors will write off your unsecured debts. This allows you to make a fresh start. Bankruptcy usually lasts for 12 months and you’ll have many financial restrictions during this period. When your bankruptcy ends, you’ll be ‘discharged’ from it.
If you go bankrupt you may find it difficult to take out any further credit, as bankruptcy will remain on your credit file for six years
Bankruptcy is a debt solution and a form of insolvency. It’s a legal procedure mainly suited to people whose circumstances are unlikely to change, and who have little hope of paying off their debts within a reasonable time.
Common questions about bankruptcy
Bankruptcy fees vary depending on where you live in the UK.
In England and Wales you pay a total of £680, made up of a £130 fee to the adjudicator and £550 to the official receiver.
In Northern Ireland the total cost is £676 made up of a £151 court fee and £525 bankruptcy deposit. Solicitor’s fees are around £7.
How does bankruptcy work?
When you go bankrupt almost all of your debts are written off, allowing you to make a fresh start. However, declaring yourself bankrupt is a big step that involves fees and can impact many areas of your life, such as your job or home.
In the UK, personal bankruptcy normally lasts for a year. During this time, you can’t borrow more than £500 without letting the creditor know you’re bankrupt.
You must also declare any changes in your circumstances to the official receiver.
You could be asked to sell valuable assets such as your home or car, but you’ll be able to keep the things you need for day-to-day living.
Does going bankrupt clear all your debts?
Most debts are included in bankruptcy. When you’re discharged from bankruptcy, these debts are written off.
Some debts aren’t included in bankruptcy, these include child maintenance arrears, criminal fines and TV licence arrears.
What happens after a bankruptcy discharge?
Your debts are written off and the restrictions placed on you during your bankruptcy are usually lifted. If your bankruptcy was caused by dishonest or reckless behaviour, the official receiver can extend the bankruptcy restrictions through a bankruptcy restriction undertaking (BRU) or order (BRO).
This can last up to 15 years. The record of your bankruptcy stays on the Insolvency Register (England and Wales) or Bankruptcy Register (Northern Ireland) for a further three months after you’re discharged, or longer if you have a BRU or BRO. You may still have to make payments towards your bankruptcy, and the official receiver will decide if you have to do so.
How do I go bankrupt?
You apply for bankruptcy by submitting an application to the Insolvency Service in England and Wales, the Accountant in Bankruptcy in Scotland or the High Court in Northern Ireland.
Common questions about bankruptcy
What debts are included in bankruptcy? Bankruptcy will write off most of your debts.
Can you petition for joint bankruptcy? Joint bankruptcy is not available unless it’s for business partners. You can include joint debts in a bankruptcy but this will impact the other person on the credit agreement.
What is voluntary bankruptcy? Entering into voluntary bankruptcy means applying to make yourself bankrupt.
Can my creditors make me bankrupt? Your creditors could make you bankrupt as a last resort if you can’t, or won’t, pay your debts.
Considering bankruptcy? Get free advice.
Going bankrupt is a big step to take and you shouldn’t start to make yourself bankrupt without getting expert debt help.
We can help you decide if bankruptcy is right for you or recommend a more appropriate debt solution for your circumstances. Try our online debt advice tool for advice tailored to your needs.
Joint bankruptcy is only available to business partners. If you’re a couple, and both want to go bankrupt, you must petition for bankruptcy individually.
Unless you and your spouse or partner are also business partners, you cannot apply for joint bankruptcy. This means that you must submit two sets of forms and pay two lots of bankruptcy fees.
Can joint debts be included in bankruptcy?
Bankruptcy will have an effect on your finances as a couple if you have any joint debts. A joint debt is one that both of you applied for at the same time and in which you are both named on the credit agreement.
If you have a joint debt and only one of you goes bankrupt, the other person named on your credit agreement will become responsible for the whole amount of the debt. This person will then have to make arrangements to pay the total amount back by themselves.
This situation wouldn’t happen if you both went bankrupt. However, if bankruptcy was confirmed as the most suitable solution to deal with your debt, you’d each need to apply individually for your bankruptcy and both of you must pay separate bankruptcy fees.
Which debts are included in a bankruptcy?
You may be wondering what types of debt are included in bankruptcy. Bankruptcy writes off most types of debt, but not all of them.
Some debts included in bankruptcy are:
- Credit cards
- Utility arrears
- Store cards
- Benefit overpayments (if they’re not fraudulent)
If you forget to list a debt in your bankruptcy application, don’t worry. The debt will still be included in your bankruptcy. It’s always best to be honest with the official receiver or trustee looking after your bankruptcy, so let them know about any debts you’ve forgotten to include on your forms.
Which debts are excluded from bankruptcy?
The following debts will not be cleared by a bankruptcy. You’ll need to keep paying these.
- Child maintenance arrears, if the arrangement was set by the CSA or Child Maintenance Service
- Criminal fines, compensation orders and victim surcharges from a magistrates’ court or crown court
- Debts you take out after the date of your bankruptcy order
- Debts taken out fraudulently, for example benefit fraud
- Mortgages and other debts secured against your home, if you want to keep the house
- Social Fund loans
- Student loans
- TV Licence arrears
- Court orders telling you to pay compensation to someone for personal injury
- Payments ordered by a court as part of family proceedings, for example in divorce cases
Apart from a few other rare exceptions, all other debts will be written off by bankruptcy.
Are any secured debts included in bankruptcy?
If you have a car or other goods on a hire purchase or logbook loan agreement, the finance company will often cancel it when you go bankrupt. If they do you’ll have to hand the item back, but the debt will be included in your bankruptcy so there’ll be nothing more to pay.
In some cases you may be allowed to keep a vehicle or other goods bought on hire purchase or logbook loan. If you’re allowed to keep the goods, you’ll have to keep paying the debt.
Mortgages and secured loan debts are included in your bankruptcy if you:
- give back the keys to your home, also known as ‘surrendering your property’, or
- if your house gets repossessed
However, if you stay in your home, you’ll need to keep paying these as normal. If you don’t, the lender can repossess it.
Will joint debts be included in bankruptcy?
A joint debt is one that two people applied for at the same time and so are both named on the credit agreement. If any of your debts are in joint names with someone else who isn’t bankrupt, the debts won’t be written off, but you won’t have to pay them.
This means any joint debts would become debts in the other person’s name only and they’d be responsible for paying off the remaining amount of the debt in full.
If you have any joint debts, you should think carefully about how this would affect the other person before you decide to go bankrupt.
Can a creditor make me bankrupt?
Your creditors could make you bankrupt as a last resort if you can’t, or won’t, pay your debts.
If a creditor applies for your bankruptcy, the effects on you are the same as if you made yourself bankrupt, but the creditor pays the fees instead of you.
Most bankruptcy applications are made by people in debt who want to go bankrupt. Creditors are less likely to apply for bankruptcy because they have to pay a large fee up front. Because of this, most creditors would only consider doing this if they’re sure you have enough assets or income to guarantee the bankruptcy will get them all their money back.
How does a creditor apply for bankruptcy?
Creditor bankruptcy if you live in England, Wales or Northern Ireland.
A creditor can make you bankrupt in England, Wales or Northern Ireland if you owe them more than £5,000.
Two or more creditors can ‘club together’ if the amounts you owe are under these limits, but this is rare. For example, if you have live in Wales and have two debts of £3,000, the creditors could apply for your bankruptcy together so the total debt passes the £5,000 minimum.
There are four ways that a creditor can petition for your bankruptcy in England, Wales or Northern Ireland:
The process varies depending on which country you live in.
- Send you a statutory demand – this letter gives you 21 days to pay the debt or come to an agreement to pay it, for example by instalments. If you don’t, the creditor can apply or ‘petition’ for your bankruptcy. This is the most common way that creditors will apply for your bankruptcy. If you receive a statutory demand you need to contact us as soon as possible
- You set up an individual voluntary arrangement (IVA) to repay your debts, but it failed because you didn’t make the payments. In this case, if your creditors agree to it, the insolvency practitioner dealing with your IVA can petition for your bankruptcy. Bankruptcy using this method is rare
- In England or Wales, enforcement agents have visited your home after a County Court judgment (CCJ) but found you don’t have enough goods to sell to pay off the debt. Bankruptcy by this method is also rare
- In Northern Ireland, it’s possible for a creditor to petition for your bankruptcy after the Enforcement of Judgments Office (EJO) has granted a certificate of unenforceability for the debt. But again, this is rare
Creditor bankruptcy if you live in Scotland
A creditor can make you bankrupt in Scotland if you owe them more than £3,000.
Two or more creditors can club together if the amounts you owe are under these limits, but this is rare. For example, if you have two debts of £2,000, the creditors could apply for your bankruptcy together so the total debt passes the £3,000 minimum.
If you live in Scotland, a creditor can only petition for your bankruptcy if they can prove your ‘apparent insolvency’. To do this they will send you one of the following documents:
- A charge for payment giving you 14 days to pay the debt, or
- A statutory demand giving you 21 days to pay the debt
You can also be made bankrupt if you set up a protected trust deed to repay your debts, but it failed because you didn’t make the payments.
If you don’t pay the debt in this time you’ll receive a ‘warrant to cite’ which gives you a date for a court hearing.
Received a date for a bankruptcy hearing?
At the hearing you can explain why you don’t think you should be made bankrupt.
Even if you don’t plan to oppose the bankruptcy, you should still go to the hearing.
The court can take into account the history of the debt, what you’re able to pay and whether the creditor has acted fairly when considering any offers of payment you’ve made.
If you get a date for a bankruptcy hearing, contact us straight away for advice.
After the bankruptcy hearing
When you’re made bankrupt your case will be passed to a ‘trustee’. In England, Wales or Northern Ireland, this will be an official receiver, and in Scotland it will be the Accountant in Bankruptcy.
The trustee’s staff will contact you and ask for details of your income, living costs, assets and debts. You’ll be asked to fill in some forms giving this information.
The trustee will also explain what will happen for the rest of your bankruptcy. You must cooperate with the trustee, and you might face further court action if you don’t.
At the hearing you can explain why you don’t think you should be made bankrupt.
What is a statutory demand?
A statutory demand is a document which a creditor may send you if they’re planning to make you bankrupt. The format of the demand and how the creditor needs to serve it is set out in insolvency legislation. However the statutory demand is not a court document – it’s issued by the creditor.
The reason for sending a statutory demand is to confirm whether or not you can afford to pay a debt. If you can’t show that you can pay the debt, the creditor will use the statutory demand and your response as evidence that you can’t pay your debts if they apply to make you bankrupt.
If you don’t want to go bankrupt, you must act straight away. Never ignore a statutory demand.
Contact us for advice if you’ve had a statutory demand delivered, or if you’ve had a letter from a creditor telling you they’ve tried to deliver one.
How long is a statutory demand valid for?
If you don’t comply with a statutory demand or set it aside, the creditor has four months to petition for your bankruptcy. If a creditor wants to use a statutory demand that’s more than four months old, they’ll need the court’s permission.
Does a statutory demand affect your credit rating?
Statutory demands aren’t recorded on your credit file. When your bankruptcy terms have been confirmed by the official receiver, it’ll be recorded on your credit file.
How can I identify a statutory demand?
A statutory demand is a form which includes details of the debt you owe. See an example of a blank statutory demand here.
The forms will normally be delivered to, or ‘served’ on you in person. This means your creditor or an agent working on their behalf will visit you to hand you the form.
They can send the statutory demand by post, but only if they’ve tried to serve it in person and been unsuccessful.
For debts which are regulated by the Consumer Credit Act, the creditor must have defaulted the account before they can issue a statutory demand.
Want to get professional debt advice to find out if Bankruptcy is right for you?
How do I reply to a statutory demand?
There are three responses to a statutory demand:
Comply with the statutory demand
This means either paying it off, or making an arrangement to pay it. There are three ways you could comply with the statutory demand:
- Pay off the debt in full
- Make an agreement with the creditor to pay the debt off in instalments.
- Agree with the creditor to secure the debt against your home or another asset – we strongly recommend you get legal advice before considering this
Although if you plan to comply with the statutory demand, you’ve got 21 days to do this before your creditor could start action to bankrupt you.
Apply to set aside the statutory demand
If you think the statutory demand is wrong you can apply to the court to have it cancelled or ‘set aside’.
If you live in England or Wales, you need to fill in two forms explaining the reasons why you think the demand is wrong:
- Application to set aside a statutory demand
- Witness statement in support of application to set aside statutory demand
If you live in Northern Ireland you need to fill in these two forms:
- Application to set aside statutory demand
- Affidavit in support of application to set aside statutory demand
The forms will need to be submitted to the High Court, along with a copy of the statutory demand if you still have it.
The reasons for applying to set aside a statutory demand could include:
- The debt is actually below the bankruptcy limit of £5,000
- You’re in the middle of disputing the debt, for example you currently have a case being investigated by an ombudsman
- The debt is statute barred
You can’t get a statutory demand set aside because of minor errors in the forms, because you’re in financial difficulties, or because you think the demand is unfair.
If you want to apply to set aside the statutory demand, you need to complete the forms and send copies to the court and to the creditor who sent you the demand. You have 18 days to do this. Contact us for debt help if you plan to do this as it can be complicated.
If you do nothing, your creditor may go on to make you bankrupt. They’ve got four months after the statutory demand to apply to the court for a bankruptcy petition.
If you don’t want to go bankrupt, then doing nothing is a bad idea. It’s not guaranteed that your creditor will start to make you bankrupt after the statutory demand, but it’s a significant risk. The effects of bankruptcy can be very serious, so don’t take any chances.
However, if you do want to go bankrupt, then doing nothing after a statutory demand might be a good idea – if your creditor goes on to make you bankrupt they’ll have to pay the costs of this instead of you paying.
Bankruptcy is a specialised area of UK debt advice. If you haven’t already received advice from us, make sure it’s the best solution for you by contacting us. We’ll provide you with a tailored budget and the best solution to help you deal with your debts.