If you're in financial trouble and struggling to repay your debts, you might be considering bankruptcy. We look at exactly what declaring yourself bankrupt involves, what the alternatives are and how to work out your best option.
Bankruptcy is a way of protecting yourself from those you owe money to by making a legal declaration that you are unable to pay your debts. It's a last resort, once you have exhausted every other option.
You should always take advice before going down this road, as the impact it can have on your life is significant.
You will eventually become free of debts that you are struggling to repay, but the process can be arduous. Going bankrupt means losing much of the control over how your finances are run. While you're bankrupt, a trustee or receiver will make decisions for you and your money will be used to repay your creditors.
Read our guide to find out exactly what happens while your bankruptcy is in force: What Actually Happens If You Go Bankrupt?
Filing for bankruptcy isn't cheap, as you'll need to pay fees of £705: £525 is paid to the Official Receiver and £180 is paid to the court. The court fees can sometimes be waived if you're on benefits or have a low income.
Assets you owned before your bankruptcy will still be controlled by the Trustee or Official Receiver even after the bankruptcy is over.
The Official Receiver or your trustee can also apply to prolong your bankruptcy to between 2 and 15 years, especially if you've been dishonest with them.
Before making a decision on this, you should get some advice from someone like the StepChange Debt Charity or the Citizens Advice Bureau, as you can get free advice on the best course of action to deal with your debts.
Since you are formalising an agreement with your creditors when you become bankrupt, you will have the comfort of knowing that you will no longer be chased for payment by them.
To work out if you're spending more than you earn each month, you'll need to work out your exact income, work out how much you spend on average and compare the two.
Read our guide to help you calculate what you earn and what you spend: How to Write a Budget.
Make a list of all of your outstanding debts, how much you owe on each, the rate of interest you're being charged and the name of the creditor.
Total up your monthly repayments, and get an overall figure you need to pay out each month. Now compare this to the figure you have calculated for your overall income each month.
If your debts are costing you more than you have coming in, you need to get help quickly.
To help you decide if you should pay off debts with savings, read our guide: Should I Use My Savings To Pay Off My Debts?
Often bankruptcy isn't your only option. Before you make up your mind, consider the following alternatives:
If you tell your lender that you're struggling to meet their repayments, they may be able to reduce your payments to make the debt more manageable or give you a repayment holiday.
Spreading repayments over a longer period will reduce the amount you pay monthly, but it will mean you end up paying more in the long term.
Some firms will write off some of the debt if you're in financial difficulty, but this could impact on your credit rating.
If your debts are spread over several credit cards, you may be able to reduce your debt more quickly by shuffling balances from one card to another.
Read our guide to find out how you can do this with your existing cards: What is a balance transfer?.
Alternatively, you could transfer your debts onto a balance transfer credit card or a lifetime balance transfer card. Read our guide, What is a balance transfer?, to work out which suits you best.
Consolidating your debts effectively means that you're taking out one big loan to pay off all of your smaller loans.
You'll usually end up extending the loan term, and ideally should end up with a better interest rate.
However, you do run the risk that you'll end up paying out far more in interest than you would have done otherwise, thereby making your debts significantly more expensive overall.
Debt relief orders offer people who are eligible a way of having their debt discharged after a year.
To find out if you'll qualify, read out guide: How to apply for a debt relief order.
With a debt management plan you let an organisation like the StepChange Debt Charity assign you a counsellor to work out how much you could afford to pay off for each of your debts each month.
You would then send a single payment to your debt plan manager each month, and the payments would be made on your behalf to each of the creditors. Read our guide to find out more: What is Debt Management?
An Individual Voluntary Arrangement (IVA) is a way that you can pay a reduced amount to your creditors in settlement of your debt. It is, however, an option that is only available to those who are struggling with considerable debts.
If you can't decide which option is best, read our guide, for details of who can help you.
You can petition for bankruptcy online if you want to, and this will speed the process up a little. You have to register with Insolvency Direct before you can fill in the forms.
Check the Courts Service website to find out if your local court can deal with it, or whether you need to go further afield.
Once an Insolvency Order has been issued, you'll have an interview by phone or face-to-face with the Official Receiver or Trustee.
Read our guide, Declaring Yourself Bankrupt: Disclosing All Your Assets, to find out what you'll need to do at this point.
Once you are a bankrupt, all of your payments to those you owe money to have to go through your Official Receiver or Trustee.
However, you'll still need to pay the following yourself: maintenance payments to your children or a divorced spouse, your student loan payments, court fines and some benefit repayments.
If you are in a position where you may be able to more into your bankruptcy fund, then you have an obligation to do so.
If you don't do this, you may have the period of your bankruptcy extended or even face a second bankruptcy order.
If you're not able to open a normal bank account while you're bankrupt, you could open a basic bank account instead, which comes without facilities like an overdraft.
Alternatively, you could get a prepaid card. These work like credit cards, but you can only spend money you've already loaded onto the card, meaning they're generally available to bankrupt customers.
Read our guide, How to Rescue Your Finances if You've Been Refused a Bank Account, to learn more about options like basic bank accounts and prepaid cards.
If you were made bankrupt after April 1, 2004, your bankruptcy should be automatically discharged after 12 months. It can be even sooner if your Trustee or Official Receiver has concluded all inquiries into your case.
As soon as the notice is filed to the court, you will be discharged from your bankruptcy, and a notice to this effect would be sent to you.
The court can annul a bankruptcy if one should never have been granted, or you have paid all debts, expenses and fees relating to the bankruptcy in full, or you undertake an IVA instead.
When your bankruptcy has been discharged, your pre-existing debts will no longer apply.
Read our guide for a detailed look at what happens following your bankruptcy: What Happens After You're Discharged From Bankruptcy?