Bankruptcy Explained: Process, Costs & Effects

Bankruptcy is a formal way of dealing with debts you cannot pay. It is a legal process that writes off most of what you owe, giving you a clear line under your finances and a fresh start. In return, any assets you own that are worth selling may be used to pay something back to your creditors, and there are restrictions on you while the bankruptcy runs.

In England and Wales you can apply for your own bankruptcy online, and you are usually discharged — meaning the bankruptcy formally ends — after around 12 months. It is a serious step, but for some people it is the most sensible and humane way to escape debts that will never realistically be repaid.

How does bankruptcy work?

You apply through the government's online service and pay an application fee. Your case is then handled by an official receiver, who reviews your finances. Most unsecured debts — credit cards, loans, overdrafts and catalogue debts — are included and, once you are discharged, written off.

If you have spare income each month, you may be asked to make payments towards your debts through an Income Payments Arrangement, typically for up to three years. If you own assets of value, these can be sold to raise money for your creditors, though everyday household items and tools you need for work are usually protected.

What happens to your home?

Your home is one of the biggest concerns for most people considering bankruptcy. If you own a property with equity — the value left after the mortgage — that equity may need to be released for your creditors, and in some cases the property could be sold. This is one of the main reasons people look closely at an IVA instead, as an IVA is specifically designed to help you keep your home. Our guide comparing whether an IVA is better than bankruptcy looks at this in detail.

How much does bankruptcy cost?

There is an application fee to declare yourself bankrupt, payable to the government. The amount is set nationally and can change, so check the current figure before you apply — but you should be aware there is a cost, and it is usually payable in instalments if you cannot pay it all at once. Beyond the fee, bankruptcy itself does not carry the ongoing charges that some other solutions do.

Life during bankruptcy

While you are bankrupt there are certain restrictions. You cannot borrow more than a set amount without telling the lender you are bankrupt, you cannot act as a company director, and some professions have their own rules. These restrictions normally lift when you are discharged after around 12 months, although any Income Payments Arrangement can continue for longer.

• Most unsecured debts are cleared.
• Some debts, such as court fines and student loans, are not included.
• Your credit rating is affected for six years.
• Your bankruptcy appears on the public Individual Insolvency Register.

Is bankruptcy right for you?

Bankruptcy tends to suit people who have little to lose in the way of assets and no realistic way of repaying their debts. If you have a home with equity, a steady income or valuable possessions, another solution may protect more of what matters to you. If you are not sure how close you are to this point, our guide on the signs you might be facing bankruptcy is a helpful check, and our page on clearing your debts yourself covers the earlier steps you can take.

It is also worth remembering that an IVA can achieve a similar outcome — dealing with unaffordable debt — while often letting you keep your home and avoid the public restrictions of bankruptcy. You can learn how to start one in our guide on applying for an IVA.

How IVA Advice Online can help

Bankruptcy is a big decision, and it should never be taken without understanding the alternatives. Our team can explain how bankruptcy would work for your situation and whether an IVA, a DRO or another route might protect more of what you have. To talk through your options, get in touch.