How to declare bankruptcy

Woman signing document and hand holding pen putting signature at paper, order to authorize their rights.

This blog seeks to answer some of the most frequently asked questions about bankruptcy and its implications in England and Wales.

 

What is bankruptcy?

Bankruptcy is a type of insolvency that applies to individuals or sole traders who can’t afford to pay their debts within a reasonable time. It’s often the last resort, utilised after alternative ways to handle debt have been exhausted.

The process usually lasts for a year and involves selling your assets to pay off debts. 

Once you’ve declared yourself bankrupt, you will be relieved from any outstanding unsecured debts. This allows you to start afresh. 

Note that your creditors can also apply to make you bankrupt if you can’t pay back your debts.

 

What debts are covered?

A bankruptcy order will cover most of the debts that you owe when the order was made, including business and credit card debts. However, there are exceptions such as:

You can include debts in joint names or guarantor debts in your bankruptcy application, but the debt wouldn’t be written off. Instead, the other party will become liable for the full sum. 

 

Why should I consider bankruptcy?

Apart from giving you a fresh start by writing off your outstanding debts, there are other benefits for declaring bankruptcy. 

You will be relieved from the pressure asserted by creditors as they are barred from taking further actions to recover the debt. 

Moreover, being bankrupt doesn’t mean you’ll lose everything. In fact, you’re allowed to keep ‘exempt goods’. These include:

  • basic household items
  • items and machinery necessary for your business or employment 
  • your car if it’s essential for you to get to work or to satisfy your domestic needs

You’re also allowed to keep a reasonable amount of money for personal use (eg buying food). 

Where you have been asked to make payments to creditors with your income (known as an ‘income payment arrangement’), it can’t last for more than 3 years. 

However, bankruptcy can affect your credit rating and will remain on your credit history for 6 years. As such, it may not be suitable for people that don’t want their financial issues to be public knowledge. 

You will also be subject to certain restrictions during the bankruptcy period. 

 

How do I apply and how much does it cost?

You can make your bankruptcy application online using the Gov.uk service in England and Wales. For information about what you will need to provide, read Bankruptcy process.

The application costs £680 and can be paid in instalments. 

 

What happens after I have obtained a bankruptcy order?

Your job

Generally, your employment wouldn’t be affected. However, certain jobs have specific rules on bankruptcy (eg solicitors can’t practise while bankrupt), so you should check your Employment contract

Bankruptcy may also impact your ability to secure roles in certain industries in the future eg civil service. 

Your business

If you’re a self-employed sole trader, you may continue trading even after you’ve declared bankruptcy. 

Your home

If you own your property, the official receiver may sell it in order to repay your debts. Where your home is worth more than your debts (ie there’s equity in the property), it will likely be sold. This can happen even if your home is jointly owned. You may be able to delay the sale for a year if your family or dependants live in the property with you.

If you’re renting, you should check your Tenancy agreement to see if bankruptcy can affect your tenancy. 

Where your property didn’t count towards your bankruptcy estate, it may still be at risk if you fall behind your mortgage or rent payments. This is because the mortgagee (lender) or landlord can take action to repossess your home.

Your possessions 

Your belongings, unless exempt, will likely be sold in order to generate proceeds to pay creditors.

Your bank account will be frozen immediately upon the bankruptcy order, even if it’s a joint account. You will then be given money the official receiver considers as necessary living expenses. 

The savings you have will be used to pay your creditors. 

Your pension

There are three instances where your pension funds may become part of your bankruptcy estate: 

  1. where the pension scheme hasn’t been approved by the HMRC 
  2. where you’re receiving income from your pension
  3. where you’re making very high contributions into your pension before filing for bankruptcy

Since this is a complex area, it’s advisable for you to Ask a lawyer on the impact of bankruptcy on your pension before declaring bankruptcy. 

 

Chloe Lai

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