A guide to personal insolvency

Managing the bankruptcy process

This guide shows you what needs to be done and in what order, from deciding whether bankruptcy is an option for you to petitioning for bankruptcy and understanding what happens after that.

1. Understanding whether bankruptcy is an option for you

Sort out your debts

If you have a problem with debt, the first thing you need to do is create a plan as to how best to manage your debts. This begins by working out how much money you owe.

Make a list of how much money you owe and to whom (ie your creditors).

Collect the following information for each specific debt:

the name and address of the creditor
the account or reference number
a copy of the original loan agreement (if applicable)
recent letter or statement of debt, including total amount owed

Organise your list of debts and all the relevant information in a way that is easy to navigate, so you can easily find each document or piece of information as you need it.

Review which debts are most urgent

The consequences of not paying some debts can be more serious than other debts. For this reason, some debts are more urgent than others. These are known as priority debts.

Priority debts can vary depending on your circumstances. You should therefore consider which debts have most priority for you.

In some situations, you may have to convince a court or other creditors why you have chosen certain debts as priority debts, so make sure that you have very good reasons for prioritising your debts.

Priority debts can include:

mortgage or rent arrears
council tax arrears
gas and electricity arrears
arrears of maintenance payable to an ex-partner or children
Income Tax or VAT arrears
Court offences, such as magistrates' court fines for traffic offences

If you have money to begin paying off your debts, you should ensure that your priority debts are dealt with first.

Work out a budget and determine whether you have enough money to pay off your debts

If you do have enough money to start paying back your priority debts, contact each creditor and try to make an arrangement to pay back what you owe.

Arrangements you make with a creditor can vary. In some cases, the creditor will agree for you to make monthly instalments on top of standard service charges, adding an extra amount of money on each bill until you have completely paid off any outstanding debts. In some cases, they will freeze interest accruing so the debt doesn't worsen.

You can either make arrangements with a creditor yourself or get the help of an experienced debt adviser. Your local Citizens Advice Bureau offers a free advice service.

If you can't afford to pay any of your debts, you should get advice straight away

If you can't afford to pay any of your debts, this may mean that you are insolvent and need to file for bankruptcy. You should seek advice immediately.

If you are unsure of who to contact, a number of organisations offer a free confidential consultancy service, including:

An adviser will be able to help you work out what is the best thing to do in your situation. Licensed insolvency practitioners will also usually give half an hour or an hour of free advice to enable you to determine the best route for you.

If you seek advice from an advisor be sure to notify all of the creditors as soon as you can. Ask them to stop further action for a few weeks, while you get advice and decide how to move forward.

2. Alternatives to bankruptcy

Assessing your options

Before petitioning for bankruptcy, be sure to assess all of your options. Bankruptcy might not be your only or best choice, but it may be.

Insolvent individuals can sometimes avoid bankruptcy by means of an individual voluntary arrangement (IVA), a debt relief order (DRO) or, if you have already been made bankrupt, a fast-track voluntary arrangement (FTVA). It may also be possible for you to reach an informal arrangement with your creditors, for example, to allow you more time to pay your debts. Debt management plans are often also advocated but they do not offer any debt relief as such - they are a way of managing your creditors as a whole and paying one instalment through an intermediary, who will charge for the service. However, many banks support such plans.

For more information, you should seek advice from a consultancy service or review guidance notes at Gov.uk.

Individual voluntary arrangement (IVA)

In England and Wales, whether you are already bankrupt or not, you can put forward a plan to your creditors to pay off all or part of your debts. This is called an IVA.

An IVA is an insolvency procedure, which results in the renegotiation by an individual of the payments due to all of their creditors, or some other form of financial restructuring.

In order for an IVA to succeed, 75 per cent of creditors (by value of debt attending and voting) must meet and vote its approval.

All IVAs must be supervised by an insolvency practitioner. Pending the approval of the arrangement, the insolvency practitioner will act as the nominee and will usually become the supervisor once the arrangement comes into effect.

If your IVA is approved, you will make scheduled payments to the insolvency practitioner who will then divide the money between all of your creditors (and pay his or her fees).

IVAs are not available in Scotland, where the only alternative to sequestration is for the debtor to sign a trust deed in favour of an insolvency practitioner.

See the insolvency practitioner directory or call R3, the insolvency trade body.

Debt relief order (DRO)

DROs became available in England and Wales on 6 April 2009. They are designed to be a potential individual insolvency solution aimed at people with debts lower than £15,000 and with assets not exceeding £300 (based on gross, not net value).

DROs are also aimed at individuals with little to no disposable income (not exceeding £50 per month) with which to make contributions to creditors.

DROs are not available to those who have an interest in property.

There are exemptions, for example, for cars with a value less than £1000.

For more information, please see the following guidance notes at Gov.uk.

A different set of rules apply in Scotland. Further details can be obtained from the Accountant in Bankruptcy.

3. The bankruptcy process

If you are unable to pay your debts, because the amount you owe dramatically outweighs your total earnings, this may mean that you are insolvent and need to petition for your own bankruptcy.

What is bankruptcy?

Bankruptcy is a legal procedure to give debt relief for people whose circumstances are unlikely to change and who have no hope of paying off their debts within a reasonable time.

A court has to issue a bankruptcy order against you in order for you to be made bankrupt. A bankruptcy order can happen for two reasons:

you can apply to the court if you are unable to pay your debts
if you owe £5000 or more, one of your creditors (the people you owe money to) can apply to make you bankrupt (following a formal demand, unsatisfied judgment execution or if you have broken the terms of an IVA)

Bankruptcy only applies to individuals. Limited companies that are struggling with debt and cannot pay their creditors are 'insolvent' and may be subject to compulsory liquidation (please see the corporate insolvency guide).

Bankruptcy will have a serious effect on your life. You should be absolutely certain that it is the right course before pursuing a bankruptcy order.

The bankruptcy process is different in Scotland and Northern Ireland, but typically the following results when you are made bankrupt:

your assets belong to your trustee ('vest in') and can be used to pay your debts
you must follow certain rules called 'bankruptcy restrictions'
your name and details will be published on a bankruptcy register called the 'Individual Insolvency Register'
after 12 months you are usually discharged (freed) from your bankruptcy, provided you cooperate with your trustee

Petitioning the court for a bankruptcy order

If you want to be declared bankrupt, you will have to ask ('petition') the court. The court will ultimately decide whether or not to allow you to declare yourself bankrupt.

Not all courts deal with bankruptcy and you must use the bankruptcy court nearest to where you live or trade (whichever is for the longest period in the last 6 months). You must be domiciled in England and Wales (or Scotland if petitioning there).

You will need to complete two forms, both of which can be found on Gov.uk. You must submit two copies of each form, along with the relevant fees:

a deposit of £550 (refunded if the application is rejected)
£130 for adjudicator’s fees (if you're on income support, you may be exempt)

The court will not accept your petition unless the fees are paid.

You can pay the appropriate fees using cash, postal orders or a building society, bank or solicitor's cheque made payable to Her Majesty's Courts & Tribunal Service. If you are unable to pay, Citizens Advice can inform you about any charities in your area that might help you pay the fees.

Review resulting bankruptcy restrictions

After you're made bankrupt by a court, you will need to follow a series of bankruptcy restrictions. These restrictions usually last 12 months from the date the court made you bankrupt.

Typically, when you are bankrupt you will not be able to:

act as a director of a company
borrow more than £500 without telling the lender you're bankrupt
create, manage or promote a company without the court's permission
manage a business under a different name without telling the people you do business with that you're bankrupt
work as an insolvency practitioner (an authorised debt specialist)

It's a criminal offence to break the restrictions of your bankruptcy order.

Your assets

When you're made bankrupt, your assets may be sold to pay your bankruptcy debts.

If declared bankrupt, you will have to hand over your assets to the person appointed to manage your bankruptcy. They will then be sold to pay your bankruptcy debts subject to some exceptions such as the tools of your trade.

The person who manages your bankruptcy is called your 'trustee'. The trustee can either be an Official Receiver (an officer of the bankruptcy court) or an insolvency practitioner (a licensed and regulated private specialist who also operates as an 'officer of the court').

It is common that within two weeks of the court making you bankrupt, an Official Receiver will contact you to arrange an interview.

The purpose of the interview is to check the information they have about your debts and assets. They will ask for details, for example about your pension or savings. They might also ask for more details about how and why you became bankrupt. The trustee will also answer any questions you might have about the bankruptcy process. You will have to complete a detailed questionnaire.

It is very important that you provide the trustee with any information requested. Failure to do so can result in a delay to the date you're discharged (freed) from your bankruptcy. For more information, please see Gov.uk.

How long the bankruptcy period usually lasts

Your bankruptcy and the restrictions that follow usually end 12 months after the court made you bankrupt. However, your bankruptcy could last longer if, for example, you don't co-operate with your trustee or break the bankruptcy restrictions.

The assets which became vested in your trustee remain his or hers to realise (if that includes the family home this must be done within three years of the bankruptcy) and you may have to pay surplus income to the trustee for three years following bankruptcy. If there is little or no equity in the family home, it may be best for a partner to purchase the trustee's interest for a small sum to conclude the matter and give certainty for the family.

The individual insolvency register will be updated within 3 months from the time when you're 'discharged' from bankruptcy.

After your bankruptcy, you should send any credit reference agencies you may deal with a copy of any official document about your discharge. It's your responsibility to update your credit file.

Once published, your notice will remain on The Gazette website. However, after four years and 11 months it will be restricted from being found by search engines. A notice can be placed in The Gazette announcing the discharge of your bankruptcy - providing a permanent record of the discharge, you must arrange this notice with the Official Receiver that has managed your case within 28 days of your bankruptcy being discharged.

Fast-track Voluntary Arrangement (FTVA)

You can only get an FTVA if you have already been made bankrupt by the court.

An FTVA is a way to deal with your debts if you have already been made bankrupt by the court.

In an FTVA, the Official Receiver (an officer of the bankruptcy court) acts as a nominee. The Official Receiver will help you put together a proposal that is presented to your creditors. If the creditors accept the proposal, the Official Receiver will act as a supervisor, ensuring that payments are made according to the agreement.

The FTVA is cheaper than an ordinary individual voluntary order.

More information about FTVAs or how to apply, can be found at Gov.uk.

Cancel a bankruptcy

There are times when your bankruptcy can be cancelled. The cancellation of your bankruptcy is called annulment.

An order of annulment can only be made by the court.

You can apply for an annulment at any time, if you meet the follow criteria:

the bankruptcy order should not have been made, for example, because the proper steps were not taken when obtaining the order; or
all your bankruptcy debts and the fees and expenses of the bankruptcy proceedings have been either paid in full or secured (guaranteed) to the satisfaction of the court; or
you have reached an agreement called an 'IVA' with your creditors to repay all or part of your debts.

See also

A guide to corporate insolvency

Find out more

Citizens Advice Bureau

Options for paying off your debts (Gov.uk)

The insolvency practitioner directory (The Insolvency Service)

Debt Relief Orders (Gov.uk)

Accountant in Bankruptcy

Applying to become bankrupt (Gov.uk)