What is bankruptcy and is it right for you?

Bankruptcy is a formal insolvency procedure that writes off unsecured debt and provides a genuine fresh start — typically after 12 months. It sounds serious, and it is a legal process with real restrictions. But for many people, it is also the clearest and most decisive route out of a debt position that has become unmanageable.

Bankruptcy is a formal insolvency procedure. You can apply to go bankrupt if you can demonstrate that either your debts exceed your assets, or that you are unable to pay your debts when they fall due.

You can apply for bankruptcy yourself online through the government’s insolvency service. However, there are a number of aspects you need to be aware of, so it is essential to get advice first. The application is assessed by an adjudicator — you no longer need to attend court. The application fee is £680, which can be paid in instalments.

When you are declared bankrupt, a Trustee in Bankruptcy is appointed to investigate the reasons for the bankruptcy, gather your assets and distribute them among your creditors fairly. All unsecured debts are written off — including credit cards, personal loans, overdrafts, and most other unsecured liabilities. Some debts are exempt: student loans, criminal fines, and certain benefit overpayments do not form part of the bankruptcy estate and remain payable after discharge.

Secured debts — mortgages, secured loans — are not written off in bankruptcy. It is essential to maintain contractual repayments on those throughout. If you are in arrears on a mortgage, the lender retains the right to repossess regardless of the bankruptcy. The arrears are not written off in bankruptcy.

During the period between the bankruptcy order and discharge — typically 12 months — you are subject to a number of restrictions. You cannot borrow £500 or more without disclosing that you are an undischarged bankrupt. You cannot act as a director of a limited company. You cannot hold certain positions in the community or act as a trustee of a charity. Your assets pass to the Trustee, who may require you to trade down your car or, where there is equity in a property, to realise it. If your income after essential expenditure leaves a surplus, you may be required to make monthly contributions to the bankruptcy estate for up to 36 months — this is called an Income Payments Agreement or Income Payments Order. Windfalls, bonuses and inheritances received during the bankruptcy must also be paid in.

Once discharged, the restrictions are lifted. The debts are gone and you can resume your life normally. The bankruptcy will remain on your credit file for six years from the date of the order — visible to landlords, employers and lenders — and is listed on the Individual Insolvency Register, a public register maintained by the Insolvency Service and accessible online.

Bankruptcy can extend beyond 12 months in certain circumstances. If you are found to have acted irresponsibly, recklessly or dishonestly, a Bankruptcy Restrictions Order can be made, extending the restrictions for between two and 15 years. Full cooperation with the Trustee and the Official Receiver throughout the process is therefore important.

Bankruptcy is not right for everyone. Where income is sufficient to sustain repayments, or where a lump sum is available, other solutions — a creditor arrangement, partial settlement, IVA, or Full and Final IVA — may be more appropriate. Where debt is simply too large to address any other way, or where the need for a definitive end point outweighs the restrictions, bankruptcy provides what no informal arrangement can: certainty.

If you want to understand whether bankruptcy is the right option for your specific circumstances, our Bankruptcy page explains how we can help.

Advantages

All unsecured debts are written off (some debts are exempt)
Lenders must stop chasing the debt and cannot take legal action against you
You can keep household items, your job, your car (dependent upon value and if required for work) and even the home you own (dependent upon circumstances)
There are some restrictions upon you, but typically discharged from restrictions after 12 months
Provides an opportunity for a fresh start after just 12 months
You can do it yourself online, and the decision is made by an adjudicator. You no longer apply to a court
The bankruptcy fee can be paid in instalments
It is important to have advice based upon your specific circumstances

Disadvantages

There is a government collected bankruptcy fee of £680 payable
There are restrictions imposed upon you during your un-discharged period, which is typically 12 months. Most people are impacted by:
You cannot borrow £500 or more, without telling the lender (person/company) you are an un-discharged bankrupt
You cannot be a director of a limited company
You cannot hold certain positions in the community or be a trustee of a charity
Your assets are in the hands of the Trustee in Bankruptcy; you may have to trade down your car, or sell your home (dependent upon circumstances)
You may need to make monthly payments for 36 months dependent upon surplus income, after essential expenditure
Windfall, bonuses and or inheritance would need to be paid into your bankruptcy fund
A bankruptcy restriction order can be made, extending the restrictions in force, if you acted irresponsibly, recklessly or dishonestly
It is registered on your credit file and remains there for 6 years, can be viewed by landlords, employers and lenders
Information of your Bankruptcy Order is available on a public register, accessed via the internet

Important This article provides general information only. During a consultation, Lightside Financial focuses on your specific circumstances, clarifies how a solution would apply to you, and the probability of actions and outcomes are identified specifically to your situation.

Frequently asked questions

What is bankruptcy?

Bankruptcy is a formal legal process that brings all your debts together under court administration. A Trustee is appointed to gather your assets (if any) and distribute them among your creditors fairly. The debts that remain are written off at discharge — typically after 12 months.

At that point, you get a genuinely fresh start. Bankruptcy sounds serious, and it is a formal process with restrictions, but it is also a route to a genuine end to debt — not a continuation of payments or a managed arrangement that will take years.

What happens to my home if I go bankrupt?

That depends on whether your home has equity — value beyond what you owe on the mortgage. If the mortgage is greater than the property’s value, the Official Receiver will usually leave the property with you unless you actively choose otherwise. If your home has significant equity, the Trustee will want to realise that value by selling it. It can be bought by a family member or friend on your behalf, but if it is not, the Trustee may require you to sell it.

You should not simply assume your home is untouchable. The earlier you seek advice, the more options you may have to protect it or to plan for the outcome.

What are bankruptcy restrictions and how long do they last?

When you are declared bankrupt, you are subject to certain restrictions. These last while you are still in bankruptcy — typically until discharge, which is usually 12 months from the date of the bankruptcy order. They include restrictions on borrowing, running a business, or acting as a director without permission.

These restrictions are not permanent. Once discharged, you are free of them and can resume your life normally. The debt is gone, the restrictions are gone, and you have a genuine fresh start.

How long does the bankruptcy process take?

The bankruptcy process typically runs for 12 months from the date of the bankruptcy order. The application is made online and is followed by an interview with the Official Receiver. After 12 months, providing you have cooperated fully and there are no complications, you are discharged.

Discharge is the moment when all your unsecured debts are formally written off and you are free to resume your life normally. However, the bankruptcy will remain on your credit file for six years from the date of the order, even though you no longer owe the money.

What is the difference between bankruptcy and an IVA?

Bankruptcy writes off all unsecured debts but carries restrictions for the duration of the un-discharged period — typically 12 months — including the prohibition on acting as a company director. Assets pass to a Trustee who can realise equity in property.

An IVA offers more control and does not carry the directorship restrictions, but requires creditor approval and commits you to monthly contributions over several years. A Full and Final IVA — where a lump sum is available — is often the more efficient route, avoiding ongoing contributions and resolving the matter quickly.

The right answer depends on what assets are involved, whether income or capital is available, and what restrictions are acceptable.

Does bankruptcy affect my ability to work?

Bankruptcy does not automatically mean you lose your job, and most employed people continue working without disruption. However, certain roles are restricted during the un-discharged period: you cannot act as a company director, and some professional licences and regulated roles may be affected. Some employment contracts contain clauses that are triggered by formal insolvency proceedings, so it is worth checking before proceeding. Once discharged after 12 months, the restrictions lift and most professional constraints disappear — though the bankruptcy remains on your credit file and the public register for six years.

What is bankruptcy and is it right for you?

Advantages

Disadvantages

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Frequently asked questions