Credit Score Basics > How does bankruptcy work?

How does bankruptcy work?

Wollit Team3 minute read · Updated 15th September 2024

Bankruptcy is a legal process that helps you if you cannot pay your debts.

It allows you to clear most of your debts and start fresh. However, there are rules and serious consequences involved, especially regarding your credit score and ability to borrow again in the near future. Here is how it works.

Why do people become bankrupt?

There are three main reasons why someone can be made bankrupt in the UK:

When they cannot pay what they owe and want to declare themselves bankrupt. This is by far the most common situation.
When their creditors apply to make them bankrupt because they owe £5,000 or more.
Or when an insolvency practitioner makes the individual bankrupt because they have broken the terms of an individual voluntary arrangement (IVA).

What does the bankruptcy process look like?

First of all, it's important to note that the bankruptcy process is different in Scotland and Northern Ireland compared to England and Wales.

To apply for bankruptcy in England and Wales, you can only do so online and must pay a fee of £680. If you live outside the UK but have lived in England or Wales or had a business there in the last three years, you can still declare yourself bankrupt in England and Wales.

Once the application is submitted, an adjudicator employed by the Insolvency Service will assess it and decide whether to approve the bankruptcy within 28 days.

If the bankruptcy application is approved, you will be made bankrupt on that day. An official receiver, who works for the Insolvency Service, will be appointed as the first trustee and will manage the bankruptcy.

The official receiver will write to you within two weeks of the bankruptcy order being made, explaining what you need to know and what you must do. This includes:

Providing information on your finances to the official receiver;
Giving the official receiver a full list of your assets;
Telling the official receiver about any rise in income during your bankruptcy;
Telling anyone who offers to loan you over £500 that you are bankrupt;
Going to court to explain why you owe money if asked to do so.

The official receiver will also notify your creditors that you are bankrupt, removing the stress of dealing with them directly.

The trustee (either the official receiver or an insolvency practitioner) will take control of your valuable assets, which can be sold to pay your creditors. However, some items, such as reasonable domestic items and items needed for their job, are exempt.

The trustee will use your assets to pay your creditors (whoever you owe money to). If you agree or are required to make payments into the bankruptcy, these payments may continue for up to three years after discharge.

How long does bankruptcy last?

Bankruptcy usually lasts for one year, after which you will be discharged from your bankruptcy regardless of how much you still owe. Rather good if you’re dealing with large debts.

In some cases, such as if you have behaved dishonestly or not cooperated fully, bankruptcy can last for more than one year.

After being discharged, your bankruptcy restrictions will be lifted, and your trustee cannot claim any new assets that come into your possession (unless you owned them before discharge). You will be free from most of your debts.

However, the details of your bankruptcy will stay on your credit record for up to six years, and will be visible to anyone running a credit check on you.

Having a bankruptcy on your credit record can make it difficult to obtain credit in the future, as lenders may be reluctant to lend to someone who has previously been bankrupt.

Are there any alternatives to bankruptcy?

Before applying for bankruptcy, you might want to look into the other options for dealing with debt. Here are some alternatives:

Debt management plans: negotiating with creditors to pay back debts at a reduced rate or over a longer period;
Individual voluntary arrangements (IVAs): this is a formal agreement with creditors to pay back a portion of the debt over a set period;
Debt relief orders (DROs): this is a cheaper alternative to bankruptcy for people with low incomes and few assets.

However, all of these still come with a negative impact on your credit score, and will still be visible on your credit file for the next six years. This is because lenders need to know if you’ve failed to repay money in your recent past.

What should I do to soften the impact of a bankruptcy on my credit file?

A bankruptcy can be the right solution if you’re dealing with completely unmanageable debt. However, it does have a significant impact on your credit score and ability to borrow money in the near future.

You shouldn’t despair, though. Here are some things that you can do to minimise this impact:

Add a Notice of Correction to your credit reports. While this doesn’t affect your credit score, it can give lenders a bit of context. They might understand your situation and feel some empathy if your bankruptcy happened because, for example, you lost your job or fell sick.
Wait. The impact of your bankruptcy will not be as serious over time, as lenders tend to focus on your most recent history. And after six years, it will be completely gone from your file.
Continue building your credit history. One of the ways to do this safely and without breaking the terms of your bankruptcy agreement is by signing up to a credit-building subscription like Wollit.

Wollit works by reporting a fixed-fee monthly subscription as a loan repayment to all credit reference agencies. This helps you build a history of timely debt repayments, which is the main factor that matters for your credit score.

On top of this, Wollit can also report your monthly rent payment to Experian. This can add another line in your credit report that shows lenders you pay your bills on time, helping you reduce the impact of the bankruptcy in your overall credit file.