What is bankruptcy?

Bankruptcy is the last resort when you cannot afford to pay back your debts, and is considered a way of making a new start when all other possibilities have been exhausted.

You can voluntarily declare yourself bankrupt, or can be made bankrupt by a creditor, if you cannot afford to pay back your debts.

A bankruptcy petition is made to the High Court or to a County Court, and the court will then decide what to do. They could either dismiss the proceedings or make a bankruptcy order, and as part of the process you may be required to explain to the court why you are in so much debt.

Once the bankruptcy order has been made, you are appointed an official receiver, whose job it is to investigate your financial affairs for the periods before and during your bankruptcy. They will ask you for information on your debts and creditors as well as any assets that you own.

All of your assets will then be divided out amongst your creditors fairly. Essentially, you will not have any control over any of your assets, which will include your home if you own one. You will also have to declare any funds that you have in any accounts which are more than you will require for living expenses, as these will also be shared out. You will be able to keep your basic items as long as they do not cost more than a reasonable replacement. For example, if you own a very expensive sofa then this will be sold and replaced with a cheaper one.

If you are earning an income during your period of bankruptcy then you may be required to pay a part of it if it is more than you need to live on. On top of that, if you come into any assets such as inheritance during your period of bankruptcy then you will not have control over them.

Once the bankruptcy order has been made, you will remain bankrupt for a certain period. It is possible to be discharged from bankruptcy after one year, but it could last up to three years. If your behaviour is considered irresponsible when you are declared bankrupt, this could lead to longer-lasting restrictions up to 15 years. Going bankrupt is also a public order, meaning you will not be entitled to the privacy that comes with other schemes such as an IVA.

During your period of bankruptcy, there are certain conditions that you have to follow. These include the requirement that you declare your status whenever you want to get more than £250 credit, that you do not use any bank accounts and that you refrain from conducting any business under a different name, amongst others. You must also refrain from making any direct payments to creditors, but all of these restrictions will stop as soon as your period of bankruptcy has ended.

Details of your bankruptcy will also be held by credit reference agencies for a period of time after your bankruptcy has ended. This could be anything up to six years, but after this time you will still be required to declare your financial history. It therefore has long-lasting repercussions, which is why you should always consider it very carefully before making any decisions.