What is bankruptcy?

If you're up to your eyeballs in debt, declaring bankruptcy may seem like an easy way out. Unfortunately, it's not. Find out what declaring yourself bankrupt means for your future.

Woman showing empty purse

Bankruptcy is more complicated than just not having any money

What is bankruptcy?

Bankruptcy is a legal process, declaring that you’re financially unable to pay off the debt you’re in. It usually lasts about a year, after which all your debts will be written off.

Sounds amazing, right? It ain’t…

The BIG downside is you have to sell your ‘assets’ to pay the people you owe money to first. That includes your house (if you’re lucky enough to own one), possibly your car, and any luxury items, such as watches, electrical goods etc. Though they won’t leave you naked on the street – you can keep your clothes, furniture, and anything you need for work.

If you’re thinking about declaring bankruptcy, we strongly recommend getting expert advice first.

What are the other downsides to bankruptcy?

No doubt all you’re thinking about now is getting rid of these debts that are stressing you out so much. But the aftermath of bankruptcy isn’t a fairy tale either. Other downsides include:

  • While you’re bankrupt you can’t borrow any money.
  • It stays on your credit history for six years, so borrowing in the future is harder.
  • If you’ve been made bankrupt it can be harder to get a job or promotion, and it might also affect your current job if you have one; check your contract to find out if there are rules about bankruptcy.
  • Your name will go on the Insolvency Register, so people can find out
  • Some loans, like student loans, don’t get written off through bankruptcy
  • You’ll probably be asked to leave your bank, and then you’ll have to tell a new one that you’re bankrupt before you open an account – awkward.

How do people become bankrupt?

You can become bankrupt in two ways:

  • You can apply to the court to become bankrupt yourself. This costs about £700 – although you can get help with this if you’re on a low income. The Insolvency Service website explains what forms you need to fill in and how to apply.
  • If you owe someone £750 or more, they can apply to make you bankrupt.

Again, please DON’T apply to become bankrupt without getting debt advice first.

What happens after I’ve applied to be bankrupt?

There will be a court hearing, where the judge will decide if you should be declared bankrupt or not. If they decide you should be, you’ll have an appointment with your ‘official receiver’, either in person or over the phone.

Your official receiver will manage your bankruptcy and be in charge of selling your assets. So you must be honest about your debts and assets and tell them if you have any changes in circumstances whilst you’re bankrupt.

I owe loads of money! What if the people I owe decide to make me bankrupt?

Your credit card company, loan company, or whoever else you owe, can’t make you bankrupt without warning. They must send you a ‘statutory demand’ first, which is an official letter that asks you to pay up. But don’t panic, it won’t be a ‘hand over the cash in three days or we’ll send the heavies round’ kind of letter, there will be different options for paying it back.

Also, receiving a statutory demand doesn’t automatically mean they’ll try to make you bankrupt, it could just be a warning tactic. As it will cost them about £700 to make you bankrupt they’ll prefer to settle the debt another way. They also have to prove that you can’t afford to pay the money back.

If you’re worried about how much money you owe, read our paying off your debt article.

What other options are there?

Having debt can be really stressful, but there is loads of help available and you don’t have to go bankrupt to sort it out. Get advice from a trustworthy organisation, such as Step Change or National Debtline. There are other ways to manage your debt.

Photo of woman with empty purse by Shutterstock

Next Steps

  • The Money Advice Service offers free, unbiased and independent advice about all financial matters. 0800 138 7777
  • StepChange offers free advice on your debt problems, basing it round what's right for you. 0800 138 1111
  • Moving out for the first time? Get the real Home Truths.
  • Chat about this subject on our Discussion Boards.
  • Need help but confused where to go locally? Download our StepFinder iPhone app to find local support services quickly.


Updated on 29-Sep-2015