When should you consider going bankrupt? What to think about before you declare yourself bankrupt

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If you’ve got to the stage where bankruptcy seems to be the only way out of the financial mess you’re in, don’t despair. It is a drastic step to take but it can help some people But when should you consider going bankrupt?

What does going bankrupt mean?

There’s no point in trying to soften the blow and make out that going bankrupt isn’t a serious step. What you do by declaring yourself bankrupt (or being forced into bankruptcy by one of your creditors) is give someone else – in this case an official receiver or trustee appointed by the court – control over your money.

1. You have to hand over all your assets and he or she will decide what you can keep and what has to be sold to pay off your debts.

2. You’ll be able to keep some possessions, such as your car (if you need it for work and if it’s below a certain value), clothing, household equipment, furniture and bedding.

3. You can carry on working and can continue trading if you’re self employed, although you can’t be a company director while you’re bankrupt.

SAVVY TIP: You can be declared bankrupt if you fail to keep to the terms of an individual voluntary arrangement (IVA), if you apply for bankruptcy yourself or if you owe more than £5,000 (in which case a creditor could apply to court to make you bankrupt).

Debts that aren’t covered by bankruptcy

Having said it’s a chance for you to draw a line under your debts, there are some that you’ll still have to pay throughout your bankruptcy – and beyond. These include:

  • Maintenance payments.
  • Court fines.
  • Student loans.

The bankruptcy process

In England or Wales you can only apply for bankruptcy online. You have to apply to go bankrupt via the Gov.uk website (or you can ask Citizens Advice or a debt advice charity to help you).  It costs £680 to go bankrupt in England or Wales. In Scotland the process of going bankrupt (sometimes called sequestration) is different and it costs £200. You can find out more about bankruptcy in Scotland on the Accountants in Business website (it’s the official site for going bankrupt in Scotland). In Northern Ireland you have to pay a deposit of £525, a court fee of £137 and a solicitor’s fee of £7. You can find out more about about going bankrupt in Northern Ireland on the NI Direct website.

SAVVY TIP: You have to create an account online if you want to use the Gov.uk website to apply for bankruptcy online in England or Wales. Don’t be overwhelmed by the form as lots of the questions are aimed at people who run their own business.

Don’t worry that you’ll have to face your creditors in court; you won’t. If a court appearance is involved, your court appointment will also be made before or after the court deals with the cases of the day. You won’t be treated as a criminal; bankruptcy is a way to deal with a problem, not a punishment.

After bankruptcy

After you’ve been declared bankrupt, you’ll be telephoned by the official receiver (who works for the Insolvency Service in England and Wales) to talk through the figures you’ve provided in your budget and your list of assets and their value.

1. You will have to close down your bank account. You’re allowed to open an account afterwards as long as you’ve told the bank in question. You will only be allowed to have a basic bank account.

2. You’re allowed to keep personal effects and items that you need for your job (including your car).

SAVVY TIP: Debt advisers used to find that if your car was worth less than around £4,000 you’d probably be allowed to keep it, but these days cars worth less than that have been sold off by the official receiver to repay debts.

3. Your property will fall within the bankruptcy if you have equity in it and/or a mortgage. That means your property will be repossessed and sold, but it won’t happen immediately as the process can take up to a year.

SAVVY TIP: If you’re in negative equity, where you owe more than your property is worth and you’re not in arrears on your mortgage account, your property may not be included in the bankruptcy.

Useful links:

The debt advice charity StepChange, has an online debt counselling service (although you can contact them by phone if you prefer).

National Debtline is another free debt advice charity. Its website has lots of useful information and factsheets.

There’s also a guide to the basics of bankruptcy on the Gov.UK website.

For background information, contact the government-run Insolvency Service– via the Gov.uk website. You can find information about how to find an insolvency practitioner or contacting the official receiver.

Related articles:

Tips from someone who’s been through bankruptcy

Debt management plans and individual voluntary arrangements; options if you can’t pay off your debts

Your rights if the bailiffs or debt collectors call

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