Bankruptcy can be scary – you may be worried about how it'll affect your day-to-day life, loved ones and financial future. But if you're struggling with debt, bankruptcy can be a turning point. It gives you a chance to get the help you need, and to work towards a debt-free life.
Bankruptcy is a legal status for people who're unable to repay the money they owe. You can only be made bankrupt if you have debts over £5,000, and it's generally seen as a last resort – for example, you might consider a Debt Relief Order (DRO) or an Individual Voluntary Agreement (IVA) first.
When you're declared bankrupt, the value of your possessions is usually shared out among those you owe money to. This can include your house, car, leisure equipment and jewellery – everything except the essentials. Depending on your income, you'll also be asked to make payments towards your debt for up to three years.
Sounds gloomy, but there's a silver lining. Once you're declared bankrupt, you won't have the pressure of dealing with creditors anymore. Lenders will also have to stop most types of court action against you. And, most relieving of all, you will usually be 'discharged' – in other words, freed from your debts – after one year.
You can be made bankrupt in two ways:
A lender can apply to make you bankrupt, even if you don't want them to. They may do this to recover money you owe them.
You can declare bankruptcy yourself. In England and Wales, you can apply online through the Government’s website. Bankruptcies are made through the courts in Northern Ireland and the AIB (Accountant in Bankruptcy) in Scotland.
If you're thinking of applying for bankruptcy, you should first speak to a free, independent debt adviser (such as your local Citizens Advice or National Debtline) or a reputable solicitor, accountant, insolvency practitioner or financial adviser.
Bankruptcy is an extreme measure and can affect your life in several ways:
It can be a stressful experience. From doing the paperwork to telling friends, bankruptcy can be a difficult process emotionally. That said, some people find a weight has been lifted from their shoulders, as bankruptcy lets them turn over a new leaf.
If you’re financially connected to someone, declaring bankruptcy could negatively impact how a lender views them. Examples of a financial connection include joint bank accounts or a shared mortgage. If you’re not connected to someone financially, their credit information shouldn’t be affected – even if you live with them.
If your partner or spouse jointly owns property or possessions with you, this could be sold to help repay your debts. They'll usually be given the chance to buy out your share or agree a value for the item. If the item is sold, the money will be split between your partner and creditors.
Your bankruptcy will appear on your credit report for six years, or until you're discharged if this takes longer. Lenders look at your credit profile when you apply for credit, so you'll probably struggle to borrow money while bankrupt. What’s more, you must tell lenders about your bankruptcy when applying to borrow over £500. Employers and landlords may ask to look at your credit information before employing you or letting you rent property.
If you do find someone who'll lend money to you, they may charge you a higher interest rate as they'll see you as a high-risk customer. Even after your bankruptcy has been cleared from your profile, lenders can ask if you’ve ever been bankrupt (this is common when applying for a mortgage).
You can see what's on your credit profile by getting your Experian Credit Report.
A number of organisations and third parties can be told about your bankruptcy, including:
The good news is that bankruptcy isn't the end of the road financially. Here are some steps you can take in the short term:
In the long term, it's important to show lenders that you can borrow money responsibly. You can do this by using and repaying credit. But before you do so, you need to be 100% sure you can afford and meet the repayments.