What is bankruptcy?

This guide explains what it is, how someone is declared bankrupt, when it might be right for you, things to consider before applying, the debts that can be included and what happens during bankruptcy. 

Bankruptcy is available in England, Wales and Northern Ireland.

Bankruptcy involves selling your possessions and using the money to pay off some of your debt. When bankruptcy ends, usually after 12 months, your remaining unsecured debt is written off.

There are two ways to become bankrupt: voluntarily or involuntarily.

Voluntary bankruptcy

You apply to declare yourself bankrupt.

Involuntary bankruptcy

If you’re not keeping up with your payments, one or more of your creditors can apply for a bankruptcy petition. You’ll need to owe someone at least £5,000 before they can do this and they must have tried certain other legal methods to get you to pay your debt first.

Bankruptcy could be suitable for you if:

• your debts are greater than your assets
• it would take you a very long time to pay off your debts
• you can’t see your circumstances improving

Bankruptcy is a big step, so you should always get impartial debt advice before applying.

• When it ends, most of your debts will be written off.
• It offers a fresh financial start to people who can’t afford to repay their debts.
• You’ll only have to make monthly payments into your bankruptcy if you can really afford to.

• It costs £680 (this figure may vary slightly in Northern Ireland).
• It will seriously affect your credit rating.
• You may have to sell things you own, including your home, to help cover what you owe.
• Your details will be published in a public insolvency register.
• You may have to reveal you’ve been made bankrupt when applying for future jobs or credit.

Most debts can be written off in bankruptcy, including:

• council tax, including any unpaid bills for the current tax year and any arrears (although, if you get a joint council tax bill, the other person will be responsible for the full outstanding amount)
• unsecured debts such as credit cards, personal loans, overdrafts and buy now, pay later
• attachment of earnings (a court order telling an employer to deduct money from an employee’s wages to pay off a debt)

There are some debts that can’t be included in bankruptcy, including:

• student loans
• personal injury compensation
• child support arrears
• magistrate fines
• social fund loans

The process usually lasts 12 months, during which you’ll face some financial restrictions. 

After this time, you’ll be ‘discharged’, meaning your bankruptcy is officially over and the outstanding debts are written off. 

Your bankruptcy will be recorded on your credit file for six years. This will make it hard for you to access credit during this time.