Bankruptcy

Bankruptcy: What It Means and How It Works

Bankruptcy is a formal insolvency process for individuals who cannot pay their debts. It does not apply to limited companies, although a person may become bankrupt because of debts connected with a business, personal guarantees, sole trading or partnership liabilities.

Bankruptcy can give a person a fresh start from many debts, but it is a serious step. It can affect assets, bank accounts, employment, business interests, credit rating and the family home.

How Can Someone Become Bankrupt?

There are two main ways a person can become bankrupt. They can apply for their own bankruptcy, or a creditor can apply to make them bankrupt if the legal requirements are met.

Before choosing bankruptcy, it is important to consider alternatives such as debt advice, breathing space, a debt management plan, an Individual Voluntary Arrangement or a Debt Relief Order.

Applying for Your Own Bankruptcy

In England and Wales, an individual usually applies for their own bankruptcy online through GOV.UK. The old process of applying through the court using debtor petition forms has been replaced.

An adjudicator considers the application and decides whether to make a bankruptcy order. The applicant must provide details of debts, income, assets, bank accounts, property, employment, household circumstances and spending.

Creditor Bankruptcy Petitions

A creditor can apply to have someone declared bankrupt if they owe enough money and the statutory requirements are met. The current creditor threshold is usually £5,000 or more.

Before presenting a bankruptcy petition, a creditor will often serve a statutory demand or rely on an unpaid court judgment. A statutory demand should not be ignored. If there is a genuine dispute about the debt or another reason the demand should be cancelled, urgent advice is needed.

Statutory Demands

A statutory demand is a formal demand for payment. If it is not paid, secured or challenged within the relevant time limits, the creditor may use it as a basis for a bankruptcy petition.

There are strict deadlines for challenging a statutory demand. Citizens Advice states that an application to set aside a statutory demand should normally be made within 18 days of service. :contentReference[oaicite:1]{index=1}

What Happens When Bankruptcy Is Made?

When a bankruptcy order is made, control of the bankrupt person's assets usually passes to the official receiver or trustee. Assets may be sold to repay creditors, subject to the rules and exemptions that apply.

The bankrupt person's details are entered on the Individual Insolvency Register. This is a public register showing details of insolvency arrangements, including bankruptcy.

Bankruptcy Restrictions

Bankruptcy restrictions normally last until discharge, usually 12 months. During bankruptcy, a person must follow legal restrictions and cooperate with the official receiver or trustee.

Restrictions include not borrowing more than £500 without telling the lender about the bankruptcy, not acting as a company director without court permission, and not carrying on business under a different name without telling people about the bankruptcy.

Failure to Co-operate

A bankrupt person must provide information, attend interviews if required, disclose assets and debts, and co-operate with the official receiver or trustee.

If they do not co-operate, discharge may be suspended, restrictions may be extended, and further action may be taken. In serious cases, bankruptcy offences may be committed.

Bankruptcy Restrictions Orders

If the bankrupt person has acted dishonestly, recklessly or irresponsibly, the restrictions can be extended through a Bankruptcy Restrictions Order or Bankruptcy Restrictions Undertaking.

This can extend bankruptcy-type restrictions for several years after discharge. Examples may include hiding assets, taking on debts with no reasonable prospect of repayment, gambling losses, fraud or giving away assets to avoid creditors.

What Happens to Assets?

Assets can be claimed and sold by the trustee to repay creditors. This may include savings, investments, vehicles, valuable possessions, business assets and the bankrupt person's share of property.

Basic household items and tools or equipment needed personally for work may be protected, provided they are not excessively valuable. Expensive items may still be sold and replaced with a more modest alternative where appropriate.

The Family Home

The family home is often the most significant asset. If the bankrupt person owns a home or has a share in one, the trustee may seek to realise that interest for the benefit of creditors.

This can lead to a sale, a buyout by a spouse or family member, or other arrangements. The position can be more complex when children, a co-owner, a mortgage lender, matrimonial rights, or beneficial interests are involved.

Bank Accounts

Bank accounts may be frozen when bankruptcy is filed. The official receiver can explain what money may be released for essential living costs.

Some people may need to open a basic bank account after bankruptcy. Not all banks will offer the same facilities to someone who is bankrupt.

Renting and Tenancies

Bankruptcy can affect a tenancy depending on the terms of the tenancy agreement and the landlord's position. Rent arrears may be treated differently from ongoing rent due after bankruptcy.

Tenants should continue paying the current rent if they want to remain in the property and should seek advice if they receive a notice from their landlord.

Employment and Business

Some jobs, professions and regulated roles may be affected by bankruptcy. This can include work involving finance, legal services, insolvency, accountancy, regulated advice, public office or company management.

A bankrupt person cannot act as a company director without court permission. Sole traders may be able to continue trading, but they must comply with disclosure rules and co-operate with the trustee.

Income Payments

If the bankrupt person has surplus income after reasonable household expenses, they may be asked to make monthly payments under an Income Payments Agreement. If agreement is not reached, the court may make an Income Payments Order.

These payments can last for up to 3 years, even though discharge from bankruptcy normally happens after 12 months.

When Bankruptcy Ends

Bankruptcy normally ends automatically after 12 months. This is called discharge. Discharge releases the person from most bankruptcy debts, but some debts are not written off.

GOV.UK states that discharge can take longer if the bankrupt person does not co-operate with the trustee. The Individual Insolvency Register can be used to check the discharge date.

Debts Not Usually Written Off

Some debts may survive bankruptcy. These can include certain court fines, student loans, child maintenance, debts arising from fraud, some personal injury liabilities and other debts that the law excludes.

Anyone considering bankruptcy should check whether their main debts would actually be written off before applying.

Credit Rating

Bankruptcy will seriously affect a person's credit rating. It usually remains on a credit file for 6 years from the date of the bankruptcy order.

Even after discharge, it may be harder to obtain credit, a mortgage, some tenancies, insurance or financial products.

Alternatives to Bankruptcy

Bankruptcy is not the only debt solution. Alternatives may include a Debt Management Plan, an Individual Voluntary Arrangement, a Debt Relief Order, breathing space, informal negotiation with creditors, full and final settlements, or time-to-pay arrangements.

A Debt Relief Order may be suitable for some people with low income, limited assets and qualifying debts. National Debtline states that a DRO can stop most creditor action and may write off most debts after one year if the person's financial position has not improved.

Getting Free Debt Advice

Before applying for bankruptcy, it is usually sensible to speak to a free, independent debt advice organisation. Advisers can help compare options and explain the consequences.

National Debtline provides free debt advice on 0808 808 4000. Citizens Advice and StepChange also provide free debt help. Contact details should be checked on each organisation's official website before calling.

When Legal Advice May Be Needed

Legal advice may be needed where a creditor has served a statutory demand, a bankruptcy petition has been issued, the debt is disputed, the person owns a home, there are business assets, there has been a transfer of property, or bankruptcy may affect employment or professional status.

A solicitor or insolvency adviser can advise on statutory demands, bankruptcy petitions, alternatives to bankruptcy, home ownership, business debts, personal guarantees, insolvency offences, trustee claims and court applications.

Current Position

Bankruptcy is a formal insolvency process for individuals who cannot pay their debts. A person can apply for their own bankruptcy online, or a creditor can apply if the legal requirements are met and the debt is usually at least £5,000.

Bankruptcy normally lasts 12 months, but assets may still be dealt with after discharge and income payment arrangements can last for up to 3 years. It should only be considered after proper debt advice.

Disclaimer

Solicitors.com is not a firm of solicitors and does not provide legal advice or debt advice. The information on this page is for general guidance only. It should not be relied upon as a substitute for advice from a regulated solicitor, insolvency practitioner or authorised debt adviser. Insolvency law, debt rules and court procedure can change, and how the law applies will depend on the facts of each case.

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