1. What is bankruptcy?

Bankruptcy is a formal procedure to handle the debts that you are unable to repay. Of the various forms of insolvency, bankruptcy is regarded as having the most severe restrictions and consequences for the debtor.

Because of the consequences of bankruptcy, petitioning for your own bankruptcy should only be considered after you have sought expert advice.

You can be made bankrupt by (a) yourself (b) an unsecured creditor to whom you owe at least £750 (c) the official receiver if you have an IVA that fails.

To petition for your own bankruptcy you can get the bankruptcy forms from a county court. On payment of a fee you can present the petition at a county court that handles bankruptcies, or at the High Court.

If a bankruptcy order is made you will become a bankrupt immediately and an official receiver will be appointed to handle your bankruptcy.

If you have assets which can be used to pay your creditors then the official receiver or an insolvency practitioner acting as trustee will distribute your assets among your creditors.

2. What happens when you are declared bankrupt?

When a bankruptcy order is made, the official receiver will publish a legal notice of your bankruptcy in the London Gazette and may also advertise your bankruptcy in other publications like your local paper.

You must cooperate fully with the official receiver and provide the official receiver with all of your financial information including complete details of your assets and liabilities.

You must stop using your existing financial facilities such as bank accounts, credit and debit cards.

You must stop making payments direct to your creditors, except for the debts which are not addressed by the bankruptcy order such as secured debts, CSA payments, court fines and student loans.

You will usually have to close your business and you will become subject to bankruptcy restrictions.

3. What are the possible benefits of bankruptcy?

• It may be possible to avoid selling your home if your interest in the home (which belongs to the trustee) can be bought out and the trustee agrees to the valuation.
• General household items and material you need for your work are usually excluded from the assets to be sold unless they can be replaced by cheaper items.
• If you are self-employed you can start trading again after your business has been shut down.
• Usually, after a maximum of twelve months you will automatically be discharged from bankruptcy. The discharge frees you from the debts that were addressed in your bankruptcy order and you can make a new financial start.
• The discharge will also lift the bankruptcy restrictions unless a bankruptcy restrictions order or undertaking is in force.
• If the bankruptcy proceedings have been concluded quickly and objections to early discharge, if any, from your creditors have been satisfactorily handled you can be discharged from bankruptcy earlier than twelve months.

4. What are the possible disadvantages of bankruptcy?

• Your interest in your home and other assets you have will be part of your estate which will be placed in the hands of the trustee for their possible sale. After meeting the costs and fees of the bankruptcy the proceeds from the sale of your assets will be distributed among your creditors.
• If you have disposed of property before the bankruptcy such that your creditors would not have received the full benefit of the property, then legal action can be taken to have the property restored to the trustee.
• Your employment may be affected. If you are self-employed or running a business it will have to be shut down and, with some exceptions, the assets placed in the hands of the trustee.
• Secured creditors, such as your mortgage lender, can take legal proceedings to recover their debts.
• You have to stop using your credit and debit cards and bank account.
• Any assets that you come into while bankrupt could become subject to the bankruptcy order.
• Notice of your bankruptcy will be published in the London Gazette and may also be advertised in your local paper.
• Bankruptcy restrictions will be in force during the term of the bankruptcy, such as:
• You must tell a prospective creditor about your bankruptcy if you want to get credit of £500 or more.
• You must tell all those you do business with the name in which you were made bankrupt if you want to trade under a different name.
• You cannot be a company director without permission from the court.
• Discharge from bankruptcy may free you from most of your debts but you can, if the official receiver deems it appropriate, be subject to a BRO (a bankruptcy restrictions order which is a court order) or a BRU (a bankruptcy restrictions undertaking which is a legally binding agreement) which will extend the bankruptcy restrictions for two to fifteen years.
• If the assets – which you had when the bankruptcy order was made plus any assets acquired before your discharge – have not yet been processed by the trustee when you are discharged, they remain in the control of the trustee and do not belong to you. But depending on circumstances, your home can be treated differently.
• A record of your bankruptcy order will be held in the Individual Insolvency Register for the duration of your bankruptcy and three months after.
• Credit reference agencies will keep a record of your bankruptcy for at least six years from the date your bankruptcy started and this can affect your credit rating. If you are subject to a BRO then this can affect your credit worthiness for up to fifteen years.
• Information on bankruptcy orders is 'public information' on your credit report which can be seen by landlords and employers.
• Even after you have been discharged from bankruptcy and you may not be subject to a BRO or a BRU, lenders may ask if you have ever been bankrupt and this may continue to affect your credit score.
• You may be subject to an income payments order or an income payments agreement where you have to make monthly payments to the official receiver for up to three years regardless of the date of your discharge from bankruptcy.
• If the bankruptcy processes have not been carried out to the satisfaction of the official receiver or insolvency practitioner (if relevant), your discharge from bankruptcy can be suspended.
• The official receiver can take criminal proceedings against you if there is sufficient cause such as non-cooperation.

The main alternative to bankruptcy is an IVA and if you feel that bankruptcy may be a debt solution for you, your local branch of the Citizens Advice Bureau which you can find at www.citizensadvice.org.uk should be able to advise and help you.