Bankruptcy

Bankruptcy writes off most debts, including council tax arrears, usually after 12 months. It is a last resort with real consequences, but for some people it is the right one.

In short

  • You apply online and it costs £680. There is no court hearing when you apply yourself.
  • Most debts, including council tax arrears from before the order, are written off when you are discharged, usually after 12 months.
  • Anything of value can be sold, including your share of a home, and you may have to pay from your income for up to 3 years.
  • Council tax for the time after the order is not included. You must keep paying it.
  • If you owe £50,000 or less and do not own a home, a free Debt Relief Order usually does the same job.

Bankruptcy is a formal insolvency procedure that writes off most debts you cannot pay. In England and Wales you apply online to an adjudicator, and you no longer have to go to court to make yourself bankrupt. The Scottish equivalent is sequestration.

Once you are made bankrupt, the Official Receiver takes control of your finances and anything of value you own. You are normally discharged after 12 months, which is when most of your debts are written off.

  • £680 to apply
  • 12 months until most debts are written off
  • Up to 3 years of payments from spare income
  • 6 years on your credit file

How bankruptcy works

  1. Before you apply

    Get free advice and save the fee

    The £680 can be paid in instalments through the online service before you apply.

    £680 in total

  2. Usually within 28 days

    An adjudicator decides your online application

    There is no court hearing when you apply yourself.

  3. On the order

    Enforcement of your debts stops

    The Official Receiver takes control of your finances and anything of value you own.

  4. After 12 months

    You are discharged

    Most debts, including council tax arrears from before the order, are written off.

  5. Up to 3 years

    Payments from spare income

    If you can afford it, you may have to pay a monthly amount for up to 3 years.

  6. Within 3 years

    Your share of any home is dealt with

    If the trustee does nothing with it in that time, it normally comes back to you.

What it costs

The total is £680, made up of:

  • £130 for the adjudicator
  • £550 as a deposit towards the Official Receiver’s costs

This is a genuine barrier, and the most common reason people who would benefit from bankruptcy do not apply. The full amount must be paid before the application is considered.

You can pay it in instalments beforehand. The online service lets you build up the payment before you submit, so you can save towards it over several months. Some charities can help with the cost. A free debt adviser will know which.

Check whether a Debt Relief Order would do the same job for nothing. DROs are free, cover debts of up to £50,000, and write them off after 12 months. If you do not own a home and have very little spare money or savings, a DRO is almost always the better route. See Debt Relief Orders.

Council tax and bankruptcy

Council tax arrears for the time before the bankruptcy order are included, and are written off when you are discharged. That includes court costs already added. Once the order is made, your council and any bailiff firm must stop enforcing them, and any deductions from your wages or benefits for those arrears should stop.

Council tax for the time after the order is a new debt. It is not included, and you must pay it as normal. If you do not, the council can take action for it in the usual way.

Tell your council and any enforcement firm about the bankruptcy in writing, straight away, and quote the case details. Do not assume they will find out.

When your council threatens bankruptcy

A council can itself ask the court to make you bankrupt, if you owe it at least £5,000. This is uncommon, but it does happen with council tax.

It is a very expensive way to recover a debt. The costs of the petition, which can run to thousands of pounds, are added to what you owe, and anything you own, including your share of a home, can be sold to pay them. The Local Government and Social Care Ombudsman has criticised councils that went straight to bankruptcy without first considering alternatives, such as an arrangement or an attachment of earnings.

If your council has threatened to make you bankrupt, get advice immediately. There is usually a better route, and councils can often be persuaded to take it, particularly once an affordable offer is in front of them in writing.

What happens to your home

If you own your home, or a share of it, your share becomes part of the bankruptcy and passes to a trustee, usually the Official Receiver.

  • If there is equity, the trustee will try to raise money from it. Often a partner or relative buys the trustee’s share. If not, the trustee can ask the court to order a sale.
  • If there is little or no equity, the trustee may wait. The court will not order a sale where your share is worth less than £1,000.
  • After 3 years, if the trustee has done nothing with your share, it normally comes back to you.

A partner’s own share of the home is not part of your bankruptcy, but a sale of the whole property can still be ordered. For the first year, the court has to weigh up the needs of your partner and any children who live there. After that, it will usually order a sale unless the circumstances are exceptional.

If you rent, the tenancy usually carries on. Keep paying the rent.

If protecting your home matters most, an IVA is usually the better route, because it deals with the debts without your home passing to a trustee.

Your possessions

You can keep:

  • Household things you need, such as furniture, bedding, clothing, and kitchen equipment
  • Tools, equipment and a vehicle you need for your work, as long as they are not unusually valuable

Things of real value can be sold. If something you need is worth much more than a basic replacement, such as an expensive car, it can be sold and replaced with a cheaper one. For most people with ordinary household goods, very little is taken.

Most pensions are protected, although income from a pension you are already drawing can count towards your spare income.

Your income

If you have money left over each month after reasonable living costs, you may have to pay some of it towards your debts for up to 3 years. This is called an income payments agreement. It can carry on after you are discharged.

The Official Receiver works out what is reasonable for your household. If you have very little left over, you will not be asked to pay anything.

Restrictions while you are bankrupt

Until you are discharged, you:

  • Must not borrow £500 or more without telling the lender you are bankrupt
  • Cannot be a company director, or set up or run a company, without the court’s permission
  • Cannot run a business under a different name without telling people you are bankrupt
  • May find your bank account is frozen at first. Most people can open a basic bank account

Some jobs and professions are affected, particularly in law, finance and accountancy. Check your contract and any professional body rules.

Your bankruptcy is listed on the public Individual Insolvency Register, and comes off 3 months after you are discharged. It stays on your credit file for 6 years.

If you have been dishonest or reckless, the restrictions can be extended for between 2 and 15 years by a bankruptcy restrictions order or undertaking.

What bankruptcy does not write off

Some debts survive bankruptcy and must still be paid after you are discharged:

  • Court fines
  • Child maintenance, and some other payments ordered in family proceedings
  • Student loans
  • Debts that came about through fraud
  • Compensation you owe someone for injuring them

Is bankruptcy right for you?

It tends to be right where the debts are large, there is no realistic prospect of clearing them, and there is no home or other valuable asset to protect. It ends the matter in about 12 months, which no informal arrangement does.

It tends to be wrong where:

  • A Debt Relief Order would do the same for free
  • You own a home with equity you want to keep
  • A special payment arrangement would clear the council tax within a reasonable time
  • Your job would be put at risk

Take advice first

Bankruptcy cannot be undone, and the £680 is not refunded if it turns out to have been the wrong choice. Free, independent advice is available from organisations with no financial interest in which route you take.

We do not charge for our help. If a DRO or an arrangement with your council would serve you better, we will say so.

Related guides

  • Debt Relief Orders

    Writing off debts of up to £50,000 after 12 months, free, for people with little spare money and no home.

  • Individual voluntary arrangements (IVAs)

    A binding agreement to pay what you can for about five years, and when it is the wrong answer.

  • Liability orders

    What the order permits, the deduction rates, what it does not do, and when it can be challenged.

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