What is bankruptcy?

How bankruptcy starts

There are two ways to become bankrupt. You can apply yourself, or someone you owe money to can apply.

If you apply yourself

You can only apply online. It costs £680. An Insolvency Service worker called an adjudicator checks your application. If you have other money that could pay your debts, for example a pension or savings, they might refuse to make you bankrupt. They usually tell you their decision within 28 days, but it can take longer.

If someone else applies

A creditor can ask a court to make you bankrupt if you have not paid and you owe £5,000 or more. They must usually try other legal routes first, such as a statutory demand or a court judgment. The court sets a hearing at least 14 days after you are given the application. You can go to the hearing and oppose it.

Free advice is available if this is happening to you.

What happens next

You get a bankruptcy order. Your name and address are published in the Gazette and on the Individual Insolvency Register. Your name is added to the Land Charges register. Lenders can search that when you apply for a mortgage.

The official receiver will usually contact you within 2 weeks. You must give them the information they ask for. That can include details of your finances and a list of everything valuable you own. You must tell them straight away about any change in your income or belongings, for example an inheritance.

Your home

The trustee might sell your family home. It depends on how much equity you have. Equity is the value of your home after any loans secured on it, such as a mortgage, are paid.

• If your equity is more than £1,000, the trustee can sell the property. Or they can apply for a “charging order”, which fixes the amount they will get if you sell later.
• If you are the only owner, the legal ownership passes to the trustee, and you cannot sell the home yourself.
• If you own it with someone else, your share of the equity passes to the trustee. You still own the home with the other owners.
• If the trustee has not started to deal with your family home within 3 years, it will usually be transferred back to you.
• A sale can sometimes be delayed for up to 1 year if you need to arrange somewhere for children or a partner to live.
• If you rent, your landlord might be told. GOV.UK says it is unlikely you will be asked to leave if you are up to date with rent.

If your home is at risk, see our home help section as well.

Your belongings and vehicle

The trustee decides whether your things could be sold. You can usually keep things you need for your job, such as tools or a vehicle, and essential household items. You may have to give up items worth much more than a reasonable replacement. If you own a vehicle and other transport is not practical, you can usually keep it. That is if you need it for your household’s basic needs, to care for someone, or to do your job. Vehicles on hire purchase, conditional sale or leasing have different rules.

If you are self-employed, your business is very likely to be closed, unless the trustee decides to keep it open.

Your money and income

• The trustee decides how much you need to live on. If you have spare income, they may ask you to pay some of it. That is an “income payments agreement”. It can last up to 3 years, even after bankruptcy has ended.
• If you do not agree, the trustee can ask a court to order you to pay.
• If your income is mainly state benefits, the trustee will not normally ask for an agreement.
• Your bank will usually freeze your accounts. The bank decides whether you can keep using them.
• After you are made bankrupt, you can usually keep money you have already put into a UK pension.

Rules while you are bankrupt

You cannot:

• borrow more than £500 without telling the lender you are bankrupt,
• act as a director of a company without the court’s permission,
• create, manage or promote a limited company without the court’s permission, or
• run a business without giving the name you were made bankrupt under to the people you do business with.

You might be prosecuted if you break these rules. They last until your bankruptcy ends.

Debts that stay

You must keep paying:

• debts from fraud you have carried out,
• debts that were not part of the bankruptcy, such as to the Student Loans Company,
• secured debts, like a mortgage, if you carry on living in the mortgaged home, and
• money owed to the DWP for budgeting or crisis loans.

You might still have to pay child maintenance debts and damages for personal injuries, unless the court decides you do not have to.

How it ends

After 12 months, you are usually released automatically. This is called discharge. It can take longer if you do not cooperate with the trustee. If you have an income payments agreement, you must keep paying it until it finishes. The trustee also carries on selling things after you are discharged.

You can also apply to a court to cancel (“annul”) a bankruptcy in some cases, for example if your debts are paid or secured.

Records and your credit file

• Your bankruptcy can stay on your credit file for 6 years from the date of the bankruptcy.
• The Individual Insolvency Register is updated within 3 months of your discharge.
• The Gazette notice is a permanent record. Your details are left out of search engine results after 1 year and 3 months.
• Your name is usually removed from the Land Charges register after 5 years.

Want to see how it compares? IVA or bankruptcy?