What is Bankruptcy?
Bankruptcy is a legal process designed to help individuals who are unable to repay their debts. It provides debt relief by writing off most unsecured debts, allowing the individual a fresh financial start. In England and Wales, bankruptcy is governed by the Insolvency Act 1986 and is usually administered by an Official Receiver (OR) or a Trustee in Bankruptcy.

Once declared bankrupt, creditors can no longer take legal action against you to recover debts, and most of your unsecured debts will be included in the process. However, bankruptcy also comes with strict rules and long-term financial consequences.

Benefits of Bankruptcy

1. Debt Write-Off – Most unsecured debts, including credit cards, personal loans, and utility arrears, are written off once bankruptcy is completed (usually after 12 months).
2. Legal Protection – Creditors cannot chase or take legal action against you once a bankruptcy order is in place.
3. Fresh Start – Once discharged, you are no longer liable for the debts included in your bankruptcy.
4. Affordable Repayments – If you have surplus income, you may be required to make payments for up to three years, but these will be based on what you can afford.

Considerations of Bankruptcy

Impact on Credit Rating
Bankruptcy stays on your credit file for six years from the date of the order, severely affecting your ability to obtain credit, mortgages, or even certain rental agreements. Some lenders may refuse services even after discharge.

Loss of Assets
Your valuable assets, including property, vehicles, and savings, may be sold to repay debts. If you own a home, it could be at risk, although factors like negative equity may affect whether it is sold. Vehicles may be kept if deemed essential (e.g., for work), but luxury cars are usually sold.

Strict Rules and Oversight by the Official Receiver
Once bankrupt, you must comply with instructions from the Official Receiver, who will review your finances and determine what assets or income must be used to repay creditors. Non-compliance can result in Bankruptcy Restrictions Orders (BROs), extending restrictions beyond the usual 12 months.

Bank Accounts & Financial Restrictions
Many banks close accounts when a person goes bankrupt, and you may need to open a basic bank account with limited features. Some banks may refuse service, making financial management difficult during the bankruptcy period.

Future Borrowing and Mortgage Difficulties
Securing a mortgage after bankruptcy can be extremely difficult, as most lenders view bankrupt individuals as high risk. Even years after discharge, you may face higher interest rates or require a significant deposit.

The Cost of Bankruptcy
Filing for bankruptcy requires a £680 application fee (England and Wales). If you cannot afford this, you may be able to pay in instalments, but the full amount must be paid before your application is submitted.

Income Payments Orders (IPO/IPAs)
If you have disposable income, the Official Receiver may issue an Income Payments Order (IPO) or an Income Payments Agreement (IPA), requiring you to make monthly payments towards your debts for up to three years. These payments are based on affordability but are mandatory if imposed.

Change in Circumstances
If your financial situation improves significantly during bankruptcy (e.g., inheritance or a salary increase), the Official Receiver may adjust your contributions or seize windfalls to repay creditors.

Business Restrictions
You cannot be a company director while bankrupt and are restricted from setting up, managing, or promoting a business under your name without informing clients of your bankruptcy status.

How to Apply for Bankruptcy

1. Online Application – In England and Wales, bankruptcy applications are made through the Government’s Insolvency Service website.
2. Payment of Fees – The £680 fee must be paid in full before submission.
3. Assessment by the Adjudicator – An Insolvency Service Adjudicator will assess your application and decide whether to approve the bankruptcy order. This typically takes a few days.
4. Bankruptcy Order Issued – If approved, a bankruptcy order is made, and the Official Receiver takes control of your assets and finances.
5. Interview with the Official Receiver – You will be required to provide full details of your financial situation. This may be done via phone or in person.

Alternative Solutions to Bankruptcy
Bankruptcy is a serious decision with long-term consequences. Depending on your financial situation, alternative solutions may be more suitable, such as:

• Individual Voluntary Arrangement (IVA) – A structured repayment plan lasting normally five years, allowing you to write off unaffordable debt while avoiding bankruptcy.
• Debt Management Plan (DMP) – An informal arrangement to pay off debts over time.

Speak to an Experienced Debt Advisor
Deciding whether bankruptcy is the right solution can be overwhelming. Our friendly and experienced debt advisors are here to help. We take the time to understand your situation, explore all available options, and provide expert guidance on the best debt solution for you.

Contact us now for free, impartial advice to help you become debt free.