Bank­ruptcy in the UK: Com­pre­hens­ive Guide

A note on the door stating the business is closed
business.jpg
Catrin, UK Solicitor
26/07/2024 ● 3 minutes
Share
Ex­plore how bank­ruptcy can offer a fresh start for those over­whelmed by debt. This guide ex­plains the dif­fer­ent types of bank­ruptcy in the UK, out­lines the pro­cess, and dis­cusses the im­pacts on your fin­an­cial future.

When fin­an­cial troubles become too much to handle, de­clar­ing bank­ruptcy might be a ne­ces­sary step. It's a legal pro­ced­ure that helps people or busi­nesses clear their debts and start anew.

By un­der­stand­ing what bank­ruptcy in­volves, from the dif­fer­ent op­tions avail­able to the steps for filing, to what to expect after, you’ll be best placed to nav­ig­ate this daunt­ing pro­cess with con­fid­ence.

What is Bank­ruptcy?

Bank­ruptcy is a legal pro­cess de­signed to help in­di­vidu­als and busi­nesses manage over­whelming debt. It provides a struc­tured way to ad­dress fin­an­cial ob­lig­a­tions that can't be paid under cur­rent cir­cum­stances.

Through this pro­cess, those in debt can obtain relief from their cred­it­ors and, de­pend­ing on the type of bank­ruptcy, either sell their ex­isting assets to pay debts or create a plan to repay them over time. There are ac­tu­ally plenty of pros and cons of bank­ruptcies in the UK.

Types of Bank­ruptcy in the UK

There are three dif­fer­ent forms of bank­ruptcy in the UK: Bank­ruptcy, In­di­vidual Vol­un­tary Ar­range­ment and Dept-Relief Order.

Bank­ruptcy

Bank­ruptcy is suit­able for people who can’t repay their debts and have no viable al­tern­at­ive solu­tions. Bank­ruptcies last for 12 months in the UK.

When a person de­clares bank­ruptcy in the UK, a trustee is ap­poin­ted to manage the sale of their non-exempt assets to pay their cred­it­ors. The pro­cess aims to fairly dis­tribute the pro­ceeds ob­tained from selling the debtor's assets. After 12 months, the bank­rupt person is usu­ally dis­charged from most of their debts, of­fer­ing a chance to start afresh fin­an­cially.

However, the impact on the in­di­vidual's credit rating is sig­ni­fic­ant and lasts for six years, af­fect­ing their abil­ity to borrow in the future.

In­di­vidual Vol­un­tary Ar­range­ment (IVA)

An IVA is an option for people seek­ing to avoid full bank­ruptcy by ar­ran­ging a re­pay­ment plan with their cred­it­ors. It’s most suit­able for those with a reg­u­lar income and some amount of dis­pos­able income, and it allows debt­ors to pay back a por­tion of their debts over an agreed period, usu­ally five years.

During the IVA, cred­it­ors are for­bid­den from taking fur­ther action against the debtor. The ar­range­ment must be ap­proved by the cred­it­ors hold­ing at least 75% of the debtor’s debt.

Suc­cess­ful com­ple­tion of an IVA can lead to the re­main­ing debt being writ­ten off, of­fer­ing a less dam­aging al­tern­at­ive to bank­ruptcy on a credit report.

Debt Relief Order (DRO)

A DRO is de­signed for in­di­vidu­als with total debts of less than £20,000, few assets (less than £1,000), and less than £50 sur­plus income each month after house­hold ex­penses. It is most suit­able for those who do not own their home and have low income.

A DRO provides a morator­i­um, or “freeze” period of 12 months, during which the cred­it­ors can’t pursue any debt re­pay­ment. If the debtor’s fin­an­cial situ­ation does not im­prove by the end of the morator­i­um, the debts in­cluded in the DRO are writ­ten off, al­low­ing a fresh start without the burden of these debts.

This option is par­tic­u­larly be­ne­fi­cial for those who might oth­er­wise have no real­ist­ic pro­spect of paying off their debts.

Read more about con­tract ter­min­a­tion.

Filing for Bank­ruptcy: Step-by-Step Guide

Filing for bank­ruptcy in the UK is a ser­i­ous step, and it’s im­port­ant to un­der­stand the pro­cess fully. Here’s a straight­for­ward guide to help you nav­ig­ate through it:

  1. Assess Your Fin­an­cial Situ­ation: Before de­cid­ing on bank­ruptcy, eval­u­ate your debts, assets, and income. Con­sider al­tern­at­ives like an IVA or a DRO if they might be more suit­able.
  2. Seek Pro­fes­sion­al Advice: Con­sult­ing with a fin­an­cial ad­visor or a so­li­citor spe­cial­ising in in­solv­ency is cru­cial. They can provide tail­ored advice based on your spe­cif­ic cir­cum­stances and help you un­der­stand the con­sequences of bank­ruptcy.
  3. Com­plete the Ap­plic­a­tion: Bank­ruptcy ap­plic­a­tions in the UK must be com­pleted online. You’ll need to provide de­tailed in­form­a­tion about your fin­ances, in­clud­ing your debts, assets, income, and ex­pendit­ure.
  4. Pay the Fee: There is a fee to apply for bank­ruptcy which you need to pay online when sub­mit­ting your ap­plic­a­tion. It cur­rently costs £680 to apply to become bank­rupt.
  5. Attend the In­ter­view with the Of­fi­cial Re­ceiver: After your ap­plic­a­tion is sub­mit­ted and ac­cepted, you’ll have an in­ter­view with an Of­fi­cial Re­ceiver. The re­ceiver will ask you ques­tions about your fin­an­cial situ­ation to un­der­stand your cir­cum­stances better.
  6. Co­oper­ate with the Trustee: Once bank­rupt, a trustee will be ap­poin­ted to manage your bank­ruptcy. Your assets might be sold to pay off your debts. You must co­oper­ate fully with the trustee, provid­ing all the in­form­a­tion they re­quest.
  7. Follow Bank­ruptcy Re­stric­tions: During bank­ruptcy, you’ll face cer­tain re­stric­tions, such as not being able to take out credit over £500 without dis­clos­ing that you’re bank­rupt, and not being able to act as a com­pany dir­ector.
  8. Dis­charge from Bank­ruptcy: Usu­ally, you will be auto­mat­ic­ally dis­charged from bank­ruptcy after 12 months. However, some of the re­stric­tions can remain longer, and your fin­an­cial situ­ation will be re­viewed.
  9. Re­build­ing Your Credit: After dis­charge, focus on re­build­ing your fin­an­cial sta­bil­ity and credit score. Starting with a budget, using pre­paid cards, and gradu­ally ap­ply­ing for small amoun­ts of credit can help you manage your fin­ances more ef­fect­ively in the future.

Nav­ig­at­ing bank­ruptcy is a sig­ni­fic­ant fin­an­cial de­cision, and un­der­stand­ing each step is cru­cial for making in­formed choices. Always con­sider every avail­able option and seek pro­fes­sion­al advice to ensure that you choose the path that's best suited to your fin­an­cial situ­ation.

Personal legal assistance at your fingertips
aatos.
Coming soon
Divorce
Lasting power of attorney
Living will
Probate
Contact us
Lemuntie 3-5 A 00510 Helsinki 2901500-3
Aatos Legal Technology ltd Company Number 15368786 1 Chapel Street, Warwick, United Kingdom, CV34 4HL
© Aatos Legal Technology 2024