This guide explains some simple facts about bankruptcy – and a few useful tips to help you get back on track if you’ve been declared bankrupt.
It’s important to remember that there is free and independent advice available to you - this guide will help you find the best ways to obtain it.
What is bankruptcy?
Bankruptcy is a legal status for people who have simply found it too difficult to repay the money they owe.
It is usually a last resort when someone finds it impossible to meet repayments and when their assets – like their house, car and possessions – aren’t worth enough to sell off to clear their debts. You can apply to make yourself bankrupt or your creditors can apply for a bankruptcy order to be issued against you.
- If you are declared bankrupt, any debts that are included in your bankruptcy are written off but you may have to continue to make payments towards them for up to three years from any surplus income.
- For debts secured against some form of asset the lender may take ownership of that asset. All but essential assets can be sold off and shared out among those you owe money to. Your bank accounts may be closed and your bankruptcy will be advertised.
- Mortgages are included in your bankruptcy if you return the keys to your house or it is repossessed. However, you may be allowed to continue to live in your house if you can continue to meet your mortgage repayments as normal. If you don’t, the lender can repossess your home.
How do you declare yourself bankrupt?
You will need to complete a bankruptcy application form called a petition and a statement of affairs, and submit copies to your local county court. There’ll also be a total fee of £705.
Depending on the court’s processes, you may need to make an appointment. But once granted, your bankruptcy will take effect immediately. From April 2016, the rules are due to change so that you can apply online to the Insolvency Service.
You can find your local county court at the government’s court website: courttribunalfinder.service.gov.uk.
What happens in a bankruptcy?
Once you have petitioned for bankruptcy, the following happens:
- An official receiver looks into your finances, generally over the last five years.
- Your basic outgoings (like bills and food) are taken into account, and any surplus income may be required as a monthly repayment contribution for up to three years.
- A record of the bankruptcy is added to your credit report with each credit reference agency, meaning that lenders and anyone else entitled to access your report will be able to see this. A bankruptcy is likely to make it very difficult for you to access credit for six years.
- Everything apart from your most essential assets may be sold off, split up and put towards your debts – although you will be able to keep anything needed for day-to-day living.
What happens in a bankruptcy? (cont)
Bankruptcy has further wide-reaching effects:
- While bankrupt, if you want to apply for more than £500 of credit you’ll need to tell the lender you are bankrupt.
- It will be listed at the court, advertised in the Gazette and added to an online register as a public record. Landlords and employers who ask permission to see the public records on your credit report will also be able to see it and may decide not to offer you a tenancy or job.
- All your bank accounts may be closed.
- If you are financially connected to a spouse or partner because you’ve applied for credit together, a bankruptcy on your credit report could negatively impact how a lender views the person you are connected to, as your credit reports will be linked through financial association. See our guide on Money & Relationships on how to protect your partner from this.
How long will it last?
In England and Wales a bankruptcy will usually last for a year – after which you are ‘discharged’ (this means that you are no longer liable for the debts covered in your bankruptcy). However, if you do not co-operate with the administration of your bankruptcy, your discharge could be suspended. If you have been reckless or dishonest before going bankrupt, certain restrictions may be extended beyond discharge.
If discharged, a bankruptcy will stay on your credit report for six years from the date it was started. However, if not discharged within six years, it will remain on your credit report until the date it is discharged. Once a bankruptcy record has dropped off your credit report, lenders will no longer be able to see it. But be aware that future lenders can ask if you’ve ever been declared bankrupt – so the impact can last longer than six years.
Is bankruptcy the right option for me?
Before making a decision, speak to a free, independent debt adviser (such as your local citizens advice bureau, National Debtline, Payplan or StepChange Debt Charity), a solicitor, a qualified accountant, an authorised insolvency practitioner, or a reputable financial adviser.
The road to recovery
The good news is that bankruptcy is not the end of the road financially. With some patience, the right guidance and using credit responsibly, it is possible to rebuild your credit rating over time.
Bankruptcy and credit
During bankruptcy, it is very unlikely that you will be able to get credit - and it might prove difficult afterwards as well.
If you do manage to find someone who will lend to you, it is possible they will charge you a higher interest rate as they will probably see you as a high-risk customer.
If you were declared bankrupt because you defaulted on a number of debts, your credit report will include details of the individual debts as well as the bankruptcy. These will all have a strong negative effect on how a lender views you for up to six years, although their impact is likely to lessen over time. By the time your bankruptcy drops off your credit report the defaults should have gone too.
Taking the first step back after your bankruptcy has ended
Your first step should be to ask for a copy of your statutory credit report from Experian and the two other main credit reference agencies. We collect public and credit data on the behalf of lenders – it is your legal right to see a copy of the information. We charge you a small admin fee of £2 to send you your report. There are also subscription products available for those who want to understand, manage and improve their credit rating.
- Contact the credit reference agencies to query any information that hasn’t been updated – they will contact the relevant lender or lenders on your behalf.
- If applicable, add a short statement to your report explaining why you got into difficulties in the first place – if due to illness, for example.
- Make sure everything else on your report is accurate and up to date – positive records could be few and far between so ensuring you’re on the electoral roll and that your addresses are shown correctly is doubly important.
Building a positive credit history
During the six years that the bankruptcy is on your credit report, it will be important to try rebuild a positive credit history to help give lenders confidence you will meet repayments in the future. However, before you seek out new credit, you need to be 100% sure you can afford to borrow money, and – vitally – that you can meet your monthly repayments.
- Consider credit products aimed at people with low credit ratings: Products with low limits and high interest rates are usually the most accessible option for people with poor credit ratings. Using credit of this kind wisely for small purchases such as groceries, for instance, could be one way to try to improve your credit rating, as long as you pay what you owe in full and on time every month. Remember to think very carefully about any application for credit, and make sure you are not taking on more than you can afford.
- Don’t run before you can walk: Space out your applications. Too many, whether you take out the credit or not, can appear to lenders like you’re in financial trouble. Try to make no more than one application for credit every three months if you can. Take time to ensure you are in control of the credit you are using, and are meeting repayments.
- Look before you leap: Use eligibility tools that show the likelihood of any application being successful and only leave a ‘soft search’ footprint on your credit report. Unlike a full application, ‘soft searches’ can’t be seen by lenders so don’t affect your credit rating.
Remember, as long as you’re managing credit responsibly, your credit rating should improve over time – so be patient and take it step by step.
Managing your debt – other options explained
Bankruptcy may not always be the best option for you. If you’re in financial difficulty, there could be other options available to you, such as a Debt Management Plan, Individual Voluntary Arrangement (or Protected Trust Deed in Scotland) or a Debt Relief Order (not available in Scotland). Options vary between UK nations, so make sure to contact a local organisation to get appropriate advice applicable to where you live.
10 things you need to know about Debt Management Plans (DMPs)
- A debt management plan (DMP) is an informal arrangement between a borrower and creditors to repay outstanding debts.
- DMPs can help you regain control of your finances by making repayments more manageable – you can often alter your repayments or pause them depending on your circumstances.
- They’re often administered by a third party, typically a not-for-profit provider or a commercial company who will charge you an administration fee.
- They can involve repaying all or part of your debt. There’s no minimum amount – but there’s no guarantee your lenders will accept a DMP.
- In some cases interest can be frozen – but this isn’t guaranteed.
- As they involve agreeing to reduce (or missing) repayments compared to the original terms, they are likely to have a negative effect on your credit rating.
- DMPs aren’t added to credit reports because they are informal, so there’s no central source of information on them.
- However, any accounts included in your DMP should have a DMP ‘flag’ added to them on your credit report, to make it clear reduced payments are by agreed arrangement.
- Once your DMP ends, the accounts should be marked as closed or returned to good order if you keep them open.
- A note (called a notice of correction) could be added with each credit reference agency explaining why you got into difficulties and that you took positive action to sort out your debts.
10 things you need to know about Individual Voluntary Agreements (IVAs)
- Unlike a DMP, an IVA is a formal agreement, administered by a licensed Insolvency Practitioner.
- Only unsecured debts can be included in an IVA.
- In general, an IVA will be considered for those who owe upwards of £10,000.
- 75% (in terms of value of money owed) of creditors who vote on your IVA must agree to your proposal for it to go ahead. Once an IVA goes ahead, letters demanding payment should stop, interest will be frozen and a percentage of your debt will be written off.
- An IVA has a formal end date, usually five years from its start.
- As a public record, an IVA will stay on your credit report for at least six years and will also be entered onto the Individual Insolvency Register.
- An IVA will make it very difficult for you to access credit while it remains on your credit report, usually for six years.
- Once completed, make sure your credit report is updated to include this – the Insolvency Practitioner should tell us about the completion but you can send us confirmation yourself (such as a letter from your supervisor).
- Check to make sure that any debts included in the IVA are dated on or before the IVA start date and no longer show as outstanding - contact us for any that need updating.
- If applicable, file a note of explanation detailing why you got into difficulties – due to illness, for instance.
10 things you need to know about Debt Relief Orders (DROs)
- To be eligible you will need to have:
- No more than £20,000 debt and not own your own home
- No more than £50 surplus income per month
- Total assets worth no more than £1,000
- A car worth less than £1,000
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