Using Bankruptcy to Deal with Debt in England and Wales

Bankruptcy is one possible way to deal with debts you cannot repay. It can release you from many debts, but it has costs, restrictions and consequences for your home, other assets and credit record. This guide explains the rules in England and Wales.

This guide will help you understand bankruptcy better. We’ll cover:

•  What bankruptcy really is
•  How one becomes bankrupt
•  How to work out if bankruptcy is the right choice for you
•  How to apply for bankruptcy and what it might cost
•  The way bankruptcy could affect your life and your credit file

A free debt adviser can help you compare bankruptcy with other options and explain how the consequences would apply to you. MoneyNerd provides general information and introductions, not personal debt advice.

This guide covers bankruptcy in England and Wales. Scotland and Northern Ireland have different processes. Get free debt advice to compare the consequences with other ways of dealing with debt.

Declaring Yourself Bankrupt

You can apply to make yourself bankrupt if you cannot pay your debts and meet the relevant eligibility conditions. There is no £5,000 minimum debt for your own application in England and Wales. The £5,000 threshold generally applies when a creditor petitions to make you bankrupt. An Insolvency Service adjudicator decides your application.

It costs £680 to apply in England and Wales. You can pay in instalments, but you must pay the full fee before submitting the application. If you cannot afford it, ask a debt adviser about charitable help and whether a free DRO could be suitable.

If your application is successful, a Bankruptcy Order will be granted and you will receive written confirmation that this has happened. Within two weeks of getting that confirmation, the Official Receiver will write to you explaining what you need to know and what you need to do.

Your trustee can sell assets that form part of the bankruptcy estate to meet debts and costs. Reasonable household necessities and items needed for your work can be exempt, although a valuable item may need to be replaced with a cheaper one. A home or other valuable property can be at risk; ask how the rules apply to anything you own jointly.

You may need to be able to keep your car or motorcycle if you need it for a specific reason such as commuting to work. However, if your vehicle is particularly valuable you will probably have to sell it and replace it with a cheaper vehicle.

Your bank accounts may be frozen while the trustee checks them, although money for essential living costs may be released. Most approved pension funds are protected, but pension payments or withdrawals can affect the assessment. An affordable Income Payments Agreement or Order can last up to three years from when it starts.

There are a number of rules which apply if you own your home. If you are in this position you should take advice to find out how your home ownership will be affected.

You must co-operate with the people that are managing your bankruptcy.

Discharge, debts that remain and your credit record

In England and Wales, discharge normally happens after 12 months, but it can be delayed if you do not co-operate. It releases you from many bankruptcy debts, not every liability. Student loans, certain court fines, maintenance obligations and some other debts can remain payable. Secured lenders retain rights over their security, and you must deal with new debts and ongoing bills.

Discharge does not necessarily end asset realisations or an Income Payments Agreement or Order. Those payments can run for up to three years from their start. Bankruptcy normally remains on your credit file for six years from the bankruptcy order. Read the government guidance on when bankruptcy ends and ask an adviser to explain the debts and obligations that would remain.

If a Creditor Petitions for Your Bankruptcy

If one of your lenders petitions to make you bankrupt the process is similar although they will be responsible for the fee rather than you.

A creditor normally needs to establish that the debt has not been paid, for example using an unpaid statutory demand or judgment. A statutory demand usually gives you 21 days to pay or reach an agreement. Get urgent advice: the normal deadline to apply to set it aside is shorter.

If a statutory demand was served on you in the UK, you normally have 18 days to apply to set it aside. There must be a valid ground, such as a substantial dispute about the debt. See the government guidance on challenging a statutory demand.

Restrictions

If you are declared bankrupt there are a number of restrictions that will apply to you.

While bankruptcy restrictions apply, you must disclose your bankruptcy when obtaining credit of £500 or more. This can include several transactions with the same lender that together reach £500. Disclosure does not guarantee that a lender will approve the borrowing.

More importantly, unless you have the court’s permission you won’t be able to create, promote or manage a company and you won’t be able to be a company director. If you are a member of certain professions your bankruptcy may also have an impact as certain professions do not allow bankrupt people to practice.

Bankruptcy does not automatically prevent an application for British citizenship. The Home Office considers the circumstances under its good-character rules. If you have a citizenship or immigration application in progress, get advice from a suitably authorised immigration adviser.

These restrictions last until your bankruptcy ends, although they can be extended if you have acted dishonestly or have failed to co-operate with the people managing your bankruptcy. Failure to comply with these restrictions is a criminal offence.

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Will People Find Out?

If you are declared bankrupt, the Insolvency Service will record this fact on the Insolvency Register and anyone can access this.

Bankruptcy is normally recorded publicly, including in The Gazette. If publishing your address would put you at risk of violence, seek advice about a person-at-risk-of-violence order before submitting your bankruptcy application.

Although in the past there was also a requirement to put a notice in your local newspaper, that is no longer the case. There is nothing to stop your local newspaper reporting on your bankruptcy anyway, but unless you are newsworthy because you are a prominent local businessman or a celebrity it is unlikely that this would happen.

Alternative Debt Solutions

Bankruptcy has serious consequences, but it can be appropriate for some people. It is not necessary to try every other solution first. Compare the available options with a free debt adviser before applying, taking account of costs, income, assets, employment and the debts that would remain payable.

Some of the alternatives that you can consider are:

• a Debt Management Plan
• a Debt Relief Order
• an Individual Voluntary Arrangement

Each of these alternatives have their good and bad points so you should explore your options before making a final decision. If you are considering bankruptcy it is worth taking advice to see which route is the best route to take.

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