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Bankruptcy – what does it mean?

Bankruptcy is one way of dealing with debts you can’t pay. Your assets can be used to pay your creditors (people you owe money to). You are subject to certain restrictions and discharged (freed) from your debts after a period of time.

Getting help and advice

There may be other ways to deal with your debts. Get free and independent debt advice to make sure you understand how bankruptcy can affect your home, business and credit rating and if there are other ways you can deal with your debt problem.

• Dealing with debt problems - a guide

• Debt - where to get free help and advice

• Debt repayment options - a guide

How to apply for bankruptcy?

Anyone can apply to the court to make them bankrupt, including individuals, sole traders and members of a partnership. There are different procedures for companies and partnerships.

Only the court can make you bankrupt, and not all courts deal with bankruptcy cases. You can make yourself bankrupt by petitioning (applying to) the court. Your creditors can usually petition the court if you owe them at least £750. You are bankrupt when the court issues a bankruptcy order against you.

There are fees and procedures you have to follow - these are different in Scotland and Northern Ireland.

• Bankruptcy - how to apply

Who manages your bankruptcy?

You have to hand over any assets of value and the financial interest in your home to a person appointed to manage your bankruptcy called a ‘trustee’.

Your trustee will be either an Official Receiver (an officer of the bankruptcy court) or an insolvency practitioner (an authorised debt specialist).

It takes time to appoint a trustee, so the Official Receiver manages your bankruptcy at first. They’ll collect information on your finances and protect your assets for your creditors.

If you have significant assets, it is likely the Official Receiver will ask your creditors to appoint an insolvency practitioner as trustee. If you don’t have significant assets the Official Receiver will act as trustee.

• Bankruptcy - the role of the Official Receiver

Bankruptcy – your responsibilities and restrictions

There are certain restrictions you must agree to when you are made bankrupt. These include:

• co-operating fully with your Official Receiver and trustee
  
• handing over your bank or credit cards to the Official Receiver
  
• not making payments to your creditors, this is known as a non-payment rule

There are limited exceptions to this non-payment rule. You must continue to pay any debts not listed in your bankruptcy order. These usually include things like court fines and student loans.

• Bankruptcy - your responsibilities and restrictions

How bankruptcy affects you

Bankruptcy usually involves the closure of any business you run and the dismissal of your employees. It can affect your working situation if being made bankrupt is not allowed in your contract of employment. For example, you can't have a job as a solicitor, trustee of a charity or a role regulated by the Financial Services Authority.

You will have to give up any assets of value and may lose the financial interest in your home. Any spare income you have can be used to help pay your bankruptcy debts.

It will affect your ability to get credit (for example, a mortgage) as credit reference agencies keep a record of your bankruptcy for six years. Your bank will freeze any accounts you hold and may not let you open new ones.

Public records of your bankruptcy

The Official Receiver will advertise your bankruptcy in official records like the 'London Gazette' and the Individual Insolvency Register. These records are used by credit reference agencies to update your credit file. The 'London Gazette' is a publication of legal notices, and the Individual Insolvency Register an online database of insolvencies in England and Wales.

Organisations like your bank, landlord and mortgage, pension or insurance provider will be told of your bankruptcy.

• Bankruptcy - how it affects you

• Bankruptcy - what happens to your home

• Bankruptcy - what happens to your pension

• Bankruptcy - what happens to your bank accounts and credit rating

How are your debts paid?

Your creditors are told about your bankruptcy and have to make formal claims to your trustee for the money they are owed. You are not allowed to make payments directly to them and they must not ask you for payment.

Your trustee will manage the payments to your creditors through the sale or disposal of your assets. In some cases, your spare income can be used to help pay your debts. This arrangement can last for three years and is known as either an Income Payments Order or Income Payments Agreement.

• Bankruptcy - how your debts are paid

What happens after you have been made bankrupt?

When you are made bankrupt, you have to attend an interview and provide details about your debts, assets and financial situation. This will help the Official Receiver protect your assets for the benefit of your creditors and decide if a trustee is needed to manage your bankruptcy.

The Official Receiver investigates the cause(s) of your bankruptcy. A report will be sent to your creditors and the bankruptcy restrictions can be extended if there is evidence of criminal, dishonest or careless behaviour.

• Bankruptcy - your responsibilities and restrictions

• Bankruptcy - the role of the Official Receiver

How long does bankruptcy last?

Bankruptcy usually lasts 12 months and after this time you are discharged (freed) from your bankruptcy debts. It can be earlier if the Official Receiver completes their work on your bankruptcy and your creditors don’t object.

Your discharge can be delayed if you break the bankruptcy restrictions or don’t co-operate with the Official Receiver.

Even after your discharge:

• assets taken to pay your debts will not be returned to you
  
• your income can be used for three years to help pay your bankruptcy debts, if you can afford it
  
• the bankruptcy restrictions can continue for up to 15 years - for example, if your bankruptcy was the result of careless, criminal or dishonest behaviour (like fraud)

This extension is known as either a Bankruptcy Restrictions Order or Bankruptcy Restrictions Undertaking.

• Bankruptcy - how and when it can end

More useful links

• Debt - where to get free help and advice

• Making someone bankrupt to recover a debt

Useful contacts

• Probate and Inheritance Tax Helpline