Bankruptcy

Use this fact sheet to:

• understand what bankruptcy is;
• find out how to make yourself bankrupt;
• find out how a creditor can make you bankrupt; and
• understand how bankruptcy can affect you and your business.

Bankruptcy

Bankruptcy is a way of dealing with debts that you cannot pay. While you are bankrupt any assets that you have might be used to pay off your debts. After a period of time (usually one year) most of your outstanding debts are written off and you can make a fresh start. This is known as discharge from bankruptcy. The effects of going bankrupt are the same whether you apply yourself or a creditor makes you bankrupt.

Individual bankruptcy

The information in this fact sheet covers bankruptcy to deal with your personal debts. Contact us for advice if you need information about whether bankruptcy is a suitable solution to deal with your business's debts as well.

How to go bankrupt yourself

If you wish to make yourself bankrupt, you must apply online. There is no minimum amount of debt you have to owe before you can apply for bankruptcy. Go to www.gov.uk and search for 'apply for bankruptcy'. If you do not have access to the internet, contact us for advice.

Do I have to pay a fee?

You have to pay a total fee of £680 to go bankrupt. You can pay the fee online when you apply. If you cannot afford to pay the full fee all at once, you can pay the fee by instalments of at least £5. However, you must pay the full fee before you can complete your application. You can also pay the fee in cash at certain banks. However, if you choose this method, you cannot pay by instalments and you must pay the whole fee at once. If someone has agreed to make the payment for you, they can pay online when you apply.

What happens after I have applied?

Once you have completed your online application, it is sent to the adjudicator at the Insolvency Service. You do not have to go to a court hearing. The adjudicator will check your application to make sure that you cannot pay your debts as they fall due. They will also check that England or Wales is the correct place for you to go bankrupt. The adjudicator will decide whether to make a bankruptcy order within 28 days of receiving your application.

If the order is made, an 'official receiver' is appointed to deal with your bankruptcy. You will be given an appointment to see the official receiver. Sometimes this will take place over the phone. They will want to go through a questionnaire with you to look at some personal and financial details. This includes things such as your National Insurance number, details of any pension policies you have, details of any assets you have, and looking at your income and outgoings.

For more information on the bankruptcy process and the interview with the official receiver, see the Insolvency Service’s Guide to Bankruptcy.

Can my application be refused?

If the adjudicator refuses to make a bankruptcy order, they will send you a notice to tell you this. This is called a ‘notice of refusal’. This notice must tell you why the adjudicator did not make you bankrupt. You can ask them to review their decision, but you must do this within 14 days of the notice of refusal being delivered. When the adjudicator reviews their decision, you cannot provide them with any new information. You must give reasons for asking the adjudicator to review their decision, but they can only consider the information you provided with your original application. If the adjudicator still does not make you bankrupt, they must send you a notice to confirm this. You can appeal to the court against their decision, but you must do this within 28 days of getting the second notice which confirms the adjudicator has refused your application. If you appeal to the court and lose, you may have to pay extra court costs.

If you want to appeal to the court against an adjudicator’s decision, you will need extra help. Contact us for advice about finding the type of help that you need.

A creditor makes you bankrupt

A creditor can make you bankrupt if you owe £5,000 or more to that creditor and you have not been able to agree how to repay the debt. Creditors can ‘club together’ to make you bankrupt but this is rarely done. You can also be made bankrupt if you have an individual voluntary arrangement (IVA) that fails.

Before applying to make you bankrupt, a creditor usually needs to send you a ‘statutory demand’. In certain circumstances, for example you have an IVA that has failed, your creditors do not have to serve you with a statutory demand before making you bankrupt. If you have an IVA that has failed, or have received a statutory demand, contact us for advice.

A statutory demand is a formal demand for a debt of at least £5,000. It requires you to either:

• pay the demanded amount;
• offer to secure the debt against any property you own (create a voluntary charge); or
• offer to pay the debt in a way that the creditor agrees to (for example by instalments).

Statutory demands can be hand delivered or posted.

You can apply to have a statutory demand ‘set aside’ in certain circumstances – for example if your debt is below £5,000 or there is a significant dispute about the money owed. There are strict time limits for doing this. Contact us for advice.

The creditor can apply for a bankruptcy order through the County Court if:

• 21 days have passed since a statutory demand was served; and
• the debt is still at least £5,000.

See our Statutory demands fact sheet for more information.

A hearing will be held if a creditor applies to make you bankrupt. It is important to attend the hearing if you want to try and stop a bankruptcy order being made. Contact us for advice if a bankruptcy hearing has been set and you want to defend against being made bankrupt.

Assets

The official receiver in your bankruptcy may be able to sell some of your assets. In certain circumstances (for example if you own a lot of valuable items) a separate insolvency practitioner may be appointed to deal with your assets. The person who deals with your assets in bankruptcy is known as the ‘trustee’. The only asset treated differently is the house where you live. See the later section Property.

Certain goods are not treated as assets. These are things such as clothing, bedding, furniture and household equipment for basic domestic needs.

Items necessary for you to carry on your employment such as tools, books or vehicles can be excluded. If you have very expensive tools of the trade, the official receiver may say that you have to sell them and get cheaper replacements. If you have valuable household items such as antiques, or expensive electrical equipment, then these could be sold in order to raise money.

Your car may be treated as ‘exempt’ if the trustee agrees that you need it for your employment or if it is essential to meet the basic domestic needs of you and your family.

• If a car is exempt but valuable, it can be sold and replaced with a cheaper alternative.
• If a car is not exempt, it is likely to be sold or scrapped.

If the official receiver decides you have assets then they will usually be sold as soon as possible.

If you are discharged from bankruptcy before any assets are dealt with, they will not belong to you on discharge. Your assets will continue to belong to (or ‘vest’ in) the official receiver until they are dealt with.

Stock

If your business has any stock, this may be treated as an asset. The official receiver may take it and sell it to raise money for your creditors.

Hire purchase agreements

There may be a clause in the hire purchase agreement that allows the hire purchase company to end the agreement if you become bankrupt. In this situation, you may have to return the item.

If your agreement is not ended, the official receiver may decide to sell the item depending upon how much is left to pay on the agreement and the value of the item. There may be some situations where you can keep an item on hire purchase if a third party takes over the agreement for you. In some limited circumstances, you may be allowed to keep making the payments under the agreement yourself. Contact us for advice.

Pensions

If you have one or more pensions, you may not be allowed to go bankrupt if:

• you can take money from your pension(s); and
• you can clear all your debts by taking money from your pension(s).

Usually, you cannot take money from a pension before you are 55 years old.

Can my pension be claimed as an asset in bankruptcy?

If you are not able to use a pension to pay all your debts, it will not be affected by bankruptcy in most cases. A pension may be at risk if:

• it is not approved by HM Revenue and Customs (HMRC); or
• you have made very large payments into your pension.

Most UK pensions are approved by HMRC. If you are not sure whether your pension is approved by HMRC, contact your pension provider to ask if it is registered for tax purposes under section 153 of the Finance Act 2004.

A pension that is not approved by HMRC will vest in the official receiver, but it may be possible to have some or all of the pension excluded from the bankruptcy estate. Contact us for advice if you are considering bankruptcy and you have a pension that is not approved by HMRC.

If you have made large payments to your pension, the trustee may consider whether this is unfair to your creditors because that money could have gone towards your debt. If the trustee feels the large payments were unfair to your creditors, they may ask the court to order your pension company to pay money from your pension to the trustee.

What if I am already receiving an income from my pension?

If you are getting an income from a pension, you may be asked to pay some or all of this towards your debt.

If you are getting a state pension and the only other income you receive is from state benefits, you shouldn’t be asked to pay this towards your debt.

For more information on being asked to pay towards your debt when you are bankrupt, see the later section Payments from income.

Will I be forced to take my pension?

You cannot be forced to start take a pension that you have not drawn on yet. If you do choose to take payment from your pension, you may be asked to pay some or all of the payment towards your debt if:

• you have not been discharged from bankruptcy; or
• you are already making payments into an ‘income payments agreement’ or ‘income payments order’.

For more information on income payments agreements and income payments orders, see the later section Payments from income.

Property

The value (or ‘equity’) in a property can be worked out by taking away from the value of the property the amount you owe under any mortgages and secured loans. We use the term ‘beneficial interest’ to describe your share of the equity after deducting reasonable costs for a sale.

If the property is solely owned by you, your beneficial interest will usually be based all of the equity. If the property is jointly owned with someone else, your beneficial interest will be based on part of the equity.

• If you own property then this might be sold depending on whether it has any equity in it. If you or your spouse and any children live there then there are rules about how quickly this can happen. Contact us for advice. Once you have gone bankrupt, your beneficial interest in your home is transferred to the official receiver or trustee.
• If you are the sole owner then the whole of the value in the property is transferred to the official receiver or trustee.
• With jointly owned property the official receiver or trustee is usually only entitled to the bankrupt person’s share of the equity (that is their ‘beneficial interest’).
• Depending on your circumstances, you may be considered to have a beneficial interest even if you are not named on the mortgage. This is a complex area so contact us for advice.
• It may be possible for the joint owner or family and friends to make an offer to the official receiver or trustee to buy out your share of the equity. This can be particularly helpful if there is little or no equity.

How long does the official receiver or trustee have to deal with my family home?

The official receiver or trustee usually has a maximum of three years from when you went bankrupt to deal with your family home. However, this action may be taken before three years have passed. If you went bankrupt before April 2004 and you are now being asked to sell your family home, contact us for advice.

The term ‘family home’ means:

• the place where you normally live;
• the place where your spouse or ex-spouse normally lives; or
• the place where your civil partner or ex-civil partner normally lives.

Other properties (such as those you rent out) will not be dealt with under the rules described in this section. If you have a beneficial interest in a property that is not classed as your family home, such as a buy-to-let property, contact us for advice.

Within the three years, the official receiver or trustee could:

• come to an agreement with you about the property;
• sell your beneficial interest to a joint owner or other third party;
• apply for an order of possession of your home;
• apply for an order for sale of your home; or
• apply for an order to give them security over your home (known as a charging order).

If they do not deal with your home within the three-year time limit, it will automatically pass back to you.

If your beneficial interest is less than £1,000 when it is finally reviewed, no action will be taken and your beneficial interest will automatically pass back to you.

If your beneficial interest is £1,000 or more when it is finally reviewed, you will be asked if somebody you know will buy your beneficial interest to stop your home being sold. If nobody can buy your share of the home, it is possible that your home may be sold. However, if your beneficial interest is considered to be of low value, the official receiver might apply for a charging order against your home instead of selling it.

Is there a special scheme that can be used to buy back my beneficial interest?

If the official receiver is acting as your trustee and your family home is in joint names, you may be able to use a ‘property conveyancing scheme’ run by the Insolvency Service. This scheme helps to keep the cost of the process low.

However, you will not be able to use this scheme if:

• your property is in your sole name; or
• a separate insolvency practitioner is acting as trustee.

If you are not able to use the Insolvency Service’s property conveyancing scheme, the costs relating to the process of buying your beneficial interest are likely to be a lot higher. In any case, you will need independent legal advice from a solicitor. They will charge you for their services. Any third party who wants to buy back your beneficial interest will also need legal advice. Contact us for advice on how to search for a solicitor.

What if I rent my home?

If you are up to date with your rent payments, you will usually be able to stay in your home. There could be a risk to your home if you have an introductory tenancy, a demoted tenancy or a family intervention tenancy. Contact us for advice if this affects you.

If you have rent arrears from before the date of your bankruptcy order, your landlord can still take court action to evict you from your home. However, they cannot get the arrears back from you because they are a debt that will be included in your bankruptcy.

If you build up any rent arrears after the date of your bankruptcy order, your landlord can take action to evict you and get the arrears back.

When the official receiver works out whether you should pay anything from your income, you may be allowed to continue paying towards your rent arrears to help keep your home. However, the official receiver could ask you to reduce your payments towards rent arrears if they think you are paying too much.

Business property leases

Most business property leases contain a clause which allows the landlord to end the agreement if you become bankrupt. Check your lease agreement.

If the landlord does not end the lease, it will be treated as an asset by the official receiver. The official receiver may try to sell the lease if they think there is value in it. If they do not sell the lease, they will ‘disclaim‘ it. This will end your rights under the lease agreement and the premises will pass back to your landlord.

Any rent you still owe under the agreement will be included in your bankruptcy. This means that you will not have to pay it.

Payments from income

The official receiver will look at your income and expenses to see if you have any spare income (or ‘surplus income’) after paying for essential living expenses. Usually if your surplus income is above £20 per month, the official receiver will expect you to pay it all into your bankruptcy.

Essential expenses such as your mortgage, rent, household bills and food will be taken into account when working out what your surplus income is. The official receiver will have an opinion on what they consider to be reasonable expenses to meet the needs of you and your family. If the official receiver thinks an expense is not reasonable, you could be asked to pay that money into the bankruptcy instead. For example, if the official receiver thinks a monthly mobile phone payment provides you with more allowances than you need, they may ask for the cost of the extra allowances to be paid into the bankruptcy.

If you receive only state benefits

If your only source of income is state benefits, an income payments agreement or order should not be made.

Income payments orders and income payments agreements

Most bankruptcy orders will end after one year. You may be asked to sign a legally binding agreement to pay monthly instalments from your income to the official receiver for three years from the date of the agreement. This is called an ‘income payments agreement’ (IPA). If your circumstances change you need to tell the official receiver, as the agreement can be looked at again. If you do not pay, the official receiver can ask the court to order you to pay the instalments. This is called an ‘income payments order’ (IPO).

If you do not make a voluntary agreement then the official receiver can ask the court to make an ‘income payments order’. This will run for three years from the date of the order. You can ask the court to look at this order again if your circumstances change.

Income tax and payments from income

If your source of income does not change after the bankruptcy order is made, you will not have to pay income tax for the tax year that you are made bankrupt in. The tax year ends on 5 April. Examples of a change in your source of income include starting a different trade or ceasing to trade and becoming an employee.

If HMRC would normally require a tax return from you, you must still send a tax return for the tax year of your bankruptcy. For more information on tax returns, go to www.gov.uk and search for ‘Self Assessment tax returns’.

If you are in receipt of a private pension or you have earnings from employment, you may be paying some tax through HMRC’s Pay As You Earn (PAYE) system. If you are, HMRC will put you on a nil tax (NT) code when you are bankrupt. This will tell your pension provider or employer to stop taking income tax from your pension or wages. An NT code can be applied for different reasons, so it does not tell your pension provider or employer that you are bankrupt.

You may have to pay more under an IPA or IPO while you are not required to pay tax.

If you have been put on an NT code, it should only be in place until:

• the end of the tax year in which you are made bankrupt; or
• you change your job, if this happens before the end of the tax year in which you are made bankrupt.

If an NT code stays in place longer than it should, there is a risk of you building up a debt because of not paying the correct amount of tax. If you notice that an NT tax code is being used when you don’t think it should be, contact HMRC. See Useful contacts.

Effects of bankruptcy

• You will usually have to close your bank or building society account when you are made bankrupt. You may be able to open another one as long as the bank or building society allows you to. You must tell the bank or building society that you are bankrupt. You will usually have to wait to open the account until after you have gone bankrupt.
• Gas, electricity and telephone companies usually want you to pay in such a way that involves you not having credit. If you live with a partner you could transfer the account into their name. Sometimes a deposit is also asked for as security.
• Bankruptcy can affect some insurance policies, for example car insurance or building and contents insurance. Check all insurance policies you have to see whether bankruptcy would affect your cover. If you renew or take out a new insurance policy while you are bankrupt, you must inform the provider about your bankruptcy if you have an agreement to pay in instalments and the agreement is for £500 or more. See the later section Offences.
• If you plan to go into an employed position, be careful. Some employment contracts say that you can't be bankrupt. Check any contract of employment. If you want to know about this beforehand, try contacting any professional body related to the type of job that you want to get.
• Under the rules in the Consumer Credit Act 1974, your creditors will usually have to keep sending you annual statements, as well as arrears and default notices in a set format. This will happen even when you are bankrupt but should stop once you are discharged. Don’t worry; this does not mean that there is a problem with your bankruptcy. If you receive other letters demanding payment, you should take this up with the official receiver and contact us for advice.
• Even after the bankruptcy period you may find it difficult to obtain credit. The bankruptcy order will be registered with credit reference agencies for at least six years. Even after this time you may be asked whether you have ever been bankrupt when applying for some credit, particularly a mortgage. Details of your bankruptcy are also kept on the Individual Insolvency Register for three months after the date of your discharge from bankruptcy.
• Details of your bankruptcy are usually published in an official public record called ‘The Gazette’. Your bankruptcy details will not usually appear in your local paper. However, the official receiver can decide to advertise if, for example, they think you have not told them about all your assets. If you are at risk of violence, you can apply to the court for an order that would stop your address being published in The Gazette and on the Individual Insolvency Register. You would need to get a person at risk of violence order before a bankruptcy order is made. Contact us for advice.

Effects on your business

If you are self-employed with a business that is currently trading, bankruptcy may affect your business in various ways.

Sole trader

• If your business has assets which are not exempt, the official receiver is likely to decide that the assets should be sold to repay your creditors, and close your business. If your business has few or no assets, you may be able to continue trading after going bankrupt.
• A business lease may be considered an asset by the official receiver. There may also be terms and conditions in a business lease which allow the landlord to end the agreement. Contact us for advice.
• You can continue to trade while you are bankrupt if you have the permission of the official receiver or trustee. If you trade while you are bankrupt under a different name to the name that you were made bankrupt under, you must disclose the name in which you were made bankrupt to all of the people you do business with.
• You are not allowed to obtain credit of £500 or more during the bankruptcy without informing the lender that you are bankrupt. You may find it difficult to continue trading if your type of work involves using credit of £500 or more. Credit can include being given time to settle bills, such as 30 day invoices.
• The official receiver will freeze your business bank account. Once this has happened, your bank will usually close your account. You will then be able to open up one of the basic bank accounts available to undischarged bankrupts.

See our Sole traders fact sheet for more information.

Partnership

• Members of a partnership are ‘jointly liable’ for the firm’s debts. This means that creditors can ask any other partners to repay money owed.
• An individual partner can be made personally bankrupt. If this happens, any outstanding business debts will still be owed by any other business partners who have not become bankrupt. The official receiver will usually close a partnership if one of the partners is made bankrupt.
• If a partnership is insolvent an application can be made to make all partners bankrupt. The partnership would then be formally closed. It is likely that the business debts and assets of all partners will be investigated by the official receiver. Contact us for advice.

See our Business partnerships fact sheet for more information.

Limited company

• You cannot be a director of a limited company if you are bankrupt. If you are the only director you may be able to appoint another director to run the company in your place, otherwise your company will be dissolved. If the company has more than one director you should resign before going bankrupt. If you are a company director and want to go bankrupt, contact us for advice.
• A limited company is a separate legal entity. This means that in most situations the director and shareholders are not liable for the limited company's debts.
• If you are made personally bankrupt as a director, your company will still owe any debt in its own name.

See our Limited companies fact sheet for more information.

Offences

Whilst you are bankrupt it is a criminal offence to:

• take out credit of £500 or more without telling the lender you are bankrupt;
• use a new business name without revealing the name you were made bankrupt under;
• act as a director of a limited company without permission; or
• act as an insolvency practitioner.

Bankruptcy restrictions orders

You will usually be discharged from bankruptcy after one year. See the later section, Discharge. The court has the power to make a bankruptcy restrictions order against you if the official receiver feels your behaviour has been dishonest in some way, or if there has been ‘unfit’ conduct.

Unfit conduct can include:

• not keeping records that could explain a loss of money or property;
• gambling;
• trading whilst you knew you couldn’t pay your debts;
• causing your debts to increase by deliberately not managing your business properly;
• taking out credit which you knew you couldn’t repay;
• giving away your assets or selling them at less than their value to avoid them being included in the bankruptcy; and
• paying some creditors rather than others.

This is not a complete list of types of unfit conduct. If you are unsure whether a certain type of behaviour may be considered to be 'unfit', contact us for advice.

A bankruptcy restrictions order means you are not allowed to:

• apply for credit of £500 or more without telling the lender about the order;
• continue to run a business in a different name from the one in which you were made bankrupt, without telling those you want to do business with the name under which you were made bankrupt;
• become an MP or local councillor;
• be a director of a limited company or form a new limited company without permission; or
• be an insolvency practitioner.

Discharge

You will be automatically discharged from your bankruptcy after one year whatever you owe. If you applied for bankruptcy online you should get a letter from your official receiver to confirm that you have been discharged. If a creditor made you bankrupt and you need proof that you have been discharged, you need to apply to court and pay a fee for a certificate of discharge. Contact us for advice.

You can also apply to have your bankruptcy ‘annulled’ (that is, cancelled). This can be done for example, if you have paid all the debts and expenses of the bankruptcy in full, or you can show that a bankruptcy order should never have been made. If you want further information on these points, contact us for advice.

Which debts do I still have to pay after bankruptcy?

Although your liability for most debts will be written off once you are discharged, there are exceptions to this. Even after discharge you will still be personally liable for:

• magistrates’ court fines;
• student loans;
• arrears of maintenance or maintenance payments ordered by a court;
• Child Support Agency and Child Maintenance Service arrears;
• debts you built up through fraud; and
• debts you owe as a result of a personal injury claim against you.

This is not a complete list of the debts that you will still have to pay after your bankruptcy ends. Contact us for advice.

Alternative solutions

Individual voluntary arrangements

An individual voluntary arrangement (IVA) is a formal arrangement to repay your creditors part of what you owe and can be a way of avoiding bankruptcy. You need to be able to raise a lump sum to pay the creditors or be able to make regular payments from your income to your creditors.

To arrange an IVA you need to find an insolvency practitioner prepared to work for you. The insolvency practitioner prepares a proposal to put forward to your creditors. If more than 75% by value of voting creditors accept the proposal, then the IVA is put in place.

Insolvency practitioners’ fees can be expensive and they may want some payment in advance. It is worth asking them for an initial free meeting to discuss whether an IVA is appropriate.

Risk of bankruptcy if an IVA fails

An IVA will usually last for up to five years. If you do not keep to the arrangement, the insolvency practitioner or your creditors can apply to make you bankrupt instead.

Setting up an IVA

If you are interested in setting up an IVA, contact us for advice. We may be able to refer you on to an insolvency practitioner who will not charge any up front fees. We will be able to discuss an IVA with you, as well as advising you on what other solutions there are for dealing with your debts.

See our Individual voluntary arrangements fact sheet for more information.

Debt relief orders

A debt relief order (DRO) is a way of dealing with your debts if you have a low surplus income and few assets. A DRO may be able to help you if meet the following rules.

• You do not own your home.
• Your total assets are worth £2,000 or less.
• You have £75 a month or less spare income to pay your creditors.
• Your total debts are £50,000 or less.

If your DRO application is successful then most of your creditors will be unable to take action to recover your debts for 12 months. The debts are then written off after the 12 months are up.

See our Debt relief orders fact sheet for more information.

Informal arrangements and debt management plans

If bankruptcy or an IVA are not suitable solutions, you may be able to make informal arrangements with your creditors. Contact us for advice on how to negotiate payment arrangements with your creditors.

If you would like an organisation to act on your behalf to negotiate affordable payments, you might want to consider a free debt management plan (DMP). This is a repayment schedule for unsecured debts.

See our Debt management plans fact sheet for more information.

Useful contacts

HM Revenue & Customs (HMRC) Phone: 0300 200 3300 www.gov.uk

The Individual Insolvency Register A register of individuals who are currently in a formal insolvency or are subject to insolvency restrictions. www.insolvencydirect.bis.gov.uk/eiir/

The Insolvency Service The Government agency that deals with bankruptcy. Phone: 0300 678 0015 www.gov.uk/government/organisations/insolvency-service.

Other fact sheets that may help you

Business partnerships fact sheet
Debt management plans fact sheet
Debt relief orders fact sheet
Individual voluntary arrangements fact sheet
Limited companies fact sheet
Sole traders fact sheet
Statutory demands fact sheet