How to go bankrupt - the whole process explained

Sarah Coles
·5-min read
B8G6YH Young woman worried about debts with head in hands. Image shot 2008. Exact date unknown. woman adult finances financial o
B8G6YH Young woman worried about debts with head in hands. Image shot 2008. Exact date unknown. woman adult finances financial o

Bankruptcy is the bogeyman of personal finances. We know it's a last resort for people with overwhelming debts, credit cards and loans, who have no way of repaying everything they owe. We know going bankrupt is difficult and painful: but most people have no idea what it really involves.

There's no getting away from the fact that going bankrupt is hard. It has a profound impact on your life, and your finances for years to come - and usually means losing your home. This means it so should only be used when all other possible debt solutions have been exhausted.

However, it's officially not the end of the world. It's not even the end of your financial hopes and dreams.

So if you're facing bankruptcy, it's worth getting to know exactly what the bogeyman looks like.


It can hit you in two ways. The first is voluntary bankruptcy. This may be something you decide to opt for if your debts are bigger than the value of everything you own, your income cannot cover repayments, and you have taken advice which has shown there's no other way out.

In that case, you need to apply for a court order. You will have to fill out a bankruptcy petition and a statement of affairs - which will list everything you own and everything you owe - and submit them to the court. Ironically this is a relatively expensive business. In England and Wales you'll pay a court fee of £180 and £525 payable to the Official Receiver. In Scotland the whole thing costs £200.

You will need to go to the court and swear and affidavit to say the forms are correct and true. You may then be required to go to a court hearing. At the hearing they will either make a bankruptcy order or refuse, and suggest a better alternative.

Once you have the bankruptcy order, the Official Receiver will control your money and property, and will negotiate with people you owe money to on your behalf.

Involuntary bankruptcy

Alternatively, you may be declared bankrupt by someone you own money to. There are lots of steps they have to take in order to organise this, so it tends to only happen in dire circumstances. You have to owe them at least £750. They then need to go through the courts to prove the debt is owed to them, and get a county court judgement against you. They will need to have sent the court bailiffs round to seize your goods, but been unable to find things of sufficient value. And finally they will have to issue a 'statutory demand' for payment, and give you 21 days to arrange repayment on a schedule they are happy with.

If you fail, you will be declared bankrupt, and the Official Receiver will take control of everything.

Once the Receiver is in charge

The Official Receiver will send you a letter saying they have taken over all your financial affairs. If you were forced into bankruptcy you may also need to fill in a questionnaire outlining your income and assets. You might have to attend an interview to discuss your situation.

It will close your bank account and and credit cards. It also has the power to sell most of your assets, so there's a very strong likelihood that you will have to sell your home and anything valuable you own. The exceptions here are thing you need in order to continue working - such as a vehicle, and household items like furniture - although if they are very swanky you will be made to sell them and buy cheap alternatives.

If you live in your property with other people, you may be allowed to stay there for another year - and there may be an opportunity for your partner or another relative to buy you out of your portion of the property.

You are also likely to have to make monthly payments from your income for up to three years. The Official Receiver will calculate how much income you need to keep in order to live a very modest lifestyle, and the rest will have to be handed over.

In some instances it will affect your career. If you own your own business it will be closed down and any employees will lose their jobs. If you work in the armed forces, police, post office, legal or accounting professions you will face restrictions on the work you can do during the process. In some employment contracts it will state that if you go bankrupt you will lose your job.

It will damage your ability to borrow too. During the process you are not allowed to borrow more than £500 without making it clear that you are bankrupt. Afterwards it will remain on your credit report for the next six years, and you may not be able to borrow anything during that time.

Is it worth it?

The process is difficult and the effects long-lasting. However, if you are staring down the barrel of a gun, then there are some real positives to bear in mind. The first is that the process takes a year. After that you will live with the effects, but you will no longer owe anything to the businesses you had debts with.

Even as you enter the process, you have the comfort of knowing that you are dealing with the issue. It may well have been hanging over your head for years, and you know that going through this will mean that people you owe money to will stop contacting you, and eventually when it's all over, you will be free from your debts.

It's worth highlighting that student loans and court fines are not included in the process, so if you still owe money on these, you will still be carrying debts when you emerge from bankruptcy.

Read more about bankruptcy on AOL Money

When does everyday borrowing become a problem?

Credit after bankruptcy: what you need to know

The Fixer: Getting over bankruptcy