Money Advice, Debt Advice & Debt Help
Bankruptcy: A Beginner’s Guide

Bankruptcy: A Beginner’s Guide

Bankruptcy: A Beginner’s Guide

If you have personal debts you can’t pay, bankruptcy is one of the options to consider. Not just as a last resort. You may find there are actually little or no downsides and it will mean you are debt free in a year.

Included in this article:


This article relates to going bankrupt in the the UK (England and Wales only).

Want to go bankrupt? We can help. Give us a call (0800 077 6180) or complete the form below. The advice is free and confidential

What is bankruptcy?

Bankruptcy is one of the options available for dealing with personal debts in the UK. Going bankrupt sounds pretty bad, so it’s normal to think that you should avoid it at all costs. However, this view couldn’t be further from the truth.

When you take a closer look, you may find it could be the best way to deal with your debt problem. This is particularly the case if you live in rented property.

Once you are bankrupt, all your unsecured debt is effectively written off. Not just standard bank loans, credit cards and overdrafts. Other things such as council tax and utility bill arrears, benefits arrears and tax owed to HMRC are also included.

You do not have to make any further payments towards your debts unless you can afford to do so. So if you have no surplus income, you will not have to make any more payments. You will then be debt free after just 12 months.

To go bankrupt in England or Wales, you generally have to have lived here for at least the past 6 months. That said, you may be living abroad but still struggling with your debt in the UK. If so, you can still go bankrupt for up to 3 years from the date you left.

Struggling to get your head round all of this? We can help. Call us (0800 077 6180) or complete the form below. The advice is free and confidential.

Will you still have to make payments towards your debts?

Whether or not you will have to make payments towards your debts after you go bankrupt, depends on your surplus income. This is the amount you have left over after all of your reasonable living expenses have been taken into account.

If you have no surplus, you will not have to make further payments. Where you do, 100% of this has to be paid to the Official Receiver (OR) for three years.

This 3 year payment is known as an IPA (Income Payment Agreement).

The OR will decide whether you have any surplus income by reviewing your income and expenses budgets. You provide this information in your application. It is therefore extremely important to get your numbers correct.

Details about the types of expenses and amounts you should include are available in our living expenses guide. Click on this link to download a free copy: Living Expenses Guide

Where your income is only benefits, you will not have to pay anything towards your debts after you go bankrupt. This is regardless of whether you have any surplus or not.

How long does bankruptcy last?

You may have read or hear different things about how long you will be bankrupt for. In fact, it normally lasts for just 1 year.

After 12 months, your bankruptcy will end automatically. This is known as being discharged.

It is possible for this period to be extended. However, it only happens in a very small number of cases. Specifically, if you had a large gambling debt or owed a significant amount to HMRC.

Once you have been discharged, you can start to rebuild your credit rating. In addition, windfalls you subsequently receive are yours to keep (for example an inheritance or compensation payment).

If you are required to pay your surplus income towards your debts, this agreement will last for 3 years. However, your bankruptcy itself will still end after 1 year. It is just your income payments that continue for 3 years from the date they started.

After you have gone bankrupt, your credit rating will be negatively affected for 6 years. This means you will find it more difficult to get new credit during this time.

Using our assistance service will take all the worry out of going bankrupt. Call us (0800 077 6180) or complete the form below for more information.

What happens to benefits payments in bankruptcy?

You are allowed to go bankrupt if you receive benefits. The payments you get will not be affected and your eligibility does not change.

The money will continue to be paid to you in exactly the same way as normal.

The only thing you need to consider is whether or not you will have to open a new bank account. You might need a new account for benefits to be paid in to if you owe money to your current bank.

When you are completing your income budget, remember to include all the benefits you get.

If benefits are your only source of income, you won’t have to make any further payments towards your debts.

You may be employed but also receiving additional top up benefits such as Universal Credit or tax creditors. In these circumstances, you might still be required to make payments towards your debts where you have a surplus income.

Is your house at risk if you go bankrupt?

If you are renting your property, bankruptcy is certainly an option for you. The property you are renting will not be affected in any way.

You may have to provide a copy of your rent agreement to the Official Receiver. However, your landlord is not normally informed unless you have rent arrears.

It is important that you continue to pay your rent on time. As long as you do, there should be no reason you can’t continue living in the property.

Where your landlord is the local council or housing association, you can include rent arrears in your bankruptcy. However, you must make sure you keep your rent up to date in the future. If you don’t you could face eviction.

Bankruptcy may not be an option for you if you are a home owner. It largely depends on the equity in your property. If the amount is significant, your home could be at risk and so this option usually has to be avoided.

If there is little or no equity in your home, going bankrupt could still be an option for you. But you should not proceed without speaking to us for advice.

Homeowner? We will advise you on the implications of bankruptcy for your property and whether it is an option for you. Call 0800 077 6180 or complete the form below.

What happens to your car if you go bankrupt?

After you go bankrupt, you will usually be able to keep your car if it is worth less then £2000. You also need a good reason for keeping it. This is normally because you need it to get to work.

An on-line valuation with We Buy Any Car or the equivalent is normally acceptable.

Where your vehicle is worth more than £2000, the Official Receiver may force you to sell it. You will normally be refunded around £1250 to buy a cheaper alternative. The only time this does not apply is if your vehicle is a tool of your trade such as a work van.

One way of keeping a more valuable car is to buy back the OR’s financial interest in it. To do this you need to pay the OR a cash lump sum equivalent to the difference of its value and £2000.

Different rules apply if your car is on finance. Generally speaking, the OR will not be interest in your vehicle as long as the amount you still owe on it is greater than it’s 2nd hand value.

However, it will still be up to the finance company to decide whether they will allow the agreement to continue. Most main stream finance companies will demand the return of their vehicle. Sub prime lenders may be happy for the agreement to continue.

Cars provided via the mobility scheme are exempt from bankruptcy. You will be allowed to keep your mobility vehicle if you have one.

Can you go bankrupt if you are self employed?

You can work on a self employed basis if you go bankrupt. You are allowed to continue running your business, advertising for new clients and invoicing customers.

Any business debts you owe such as a loan or overdraft are written off with the rest of the money you owe.

You can keep the tools you use personally for your job and a your vehicle (such as a van) as long as it is not of excessive value.

The only significant restriction is that you must trade under your own name. It is possible to continue using a trading name. However, you need to ensure you use your personal name before it. For example ‘John Smith trading as Mr Pipes Plumbing’.

There are some specific rules to consider if you have employees. Normally you will have to terminate their contracts on the date you go bankrupt and then re-employ them. In addition, if you work out of premises that you rent or lease, the agreement you have with the landlord has to be terminated. A new one will then have to be agreed.

It is also possible to start a new self employed business while you are bankrupt. You don’t need any special permission to do this.

Speak to use for more specific advice about bankruptcy if you are self employed. Call 0800 077 6180 or complete the form below. It’s free and confidential.

How do you go bankrupt?

Once you have decided to go bankrupt, there are a number of steps you will need to take:

First you need to register with the Government’s on-line application system. This will give you access to the application form.

The form must be completed correctly.

You then need to pay the required fee. This can be done in instalments. However, you are not allowed to proceed until it is paid in full.

Your application can then be submitted. As long as it has been completed correctly you should be declared bankrupt within 2-3 working days. You are then immediately protected from your creditors.

Within 2-3 working days you will start receiving various e-mails from the Official Receiver. It is also likely that they will want to interview you over the telephone. This will be to clarify your circumstances, any assets and discuss your income and expenses budget.

We will help you with through all these steps if you use our bankruptcy assistance service. Click on this link to find out what some of the people who have used our service say about us: Client feedback

Let us assist you through the bankruptcy process. Call us (0800 077 6180) or complete the form below.

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    8 thoughts on “Bankruptcy: A Beginner’s Guide

    1. SharonZ says:

      I am living with my sister and pay her rent every month. Can I include the amount I pay her as part of my living expenses budget or would the official receiver expect me to live with her rent free?

      1. James Falla says:

        Hi Sharonz

        I confirm that the OR does allow a budget for “lodging” with a family member to be included in your monthly living expenses budget. So including what you pay your sister in rent would not be a problem (as long as the amount is reasonable). In terms of what is reasonable, that is based on the going rate for renting a similar room as a lodger in your area.

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