Bankruptcy: What really happens?

Heard of bankruptcy but not sure what it means to you? Read on. 

What is bankruptcy? 

Bankruptcy is a formal declaration that you are insolvent. This means you cannot stay on top of your monthly debt payments. 

When you declare bankruptcy your debts are cleared, but all of your assets – mainly your home, car, land, business – will be sold to help pay back those debts. 

Bankruptcy is called “sequestration” in Scotland, and the forms, rules and process are different than the rest of the UK.

Will going bankrupt clear my debts? At what cost?

Although bankruptcy will clear your debts this comes at a deep cost to your personal circumstances. Here are the personal bankruptcy pros and cons: 


No more calls from creditors. Any firm that you owe money to will stop chasing you and stop asking you to pay those debts. For some people, this is a huge relief.

Bankruptcy lasts for one year. After that time you can start fresh. Although some debts may still need to be paid, like student debts. 


It costs money to declare bankruptcy. Like adding salt to the wound, it costs £680 to apply for bankruptcy online. So you have to have some money saved to apply for the relief. 

You will lose your property. When you file for bankruptcy all of your assets may be sold to pay off your debts. You can live in your home until it is sold. There are some exceptions to the sell-off, such as your personal computer and some things necessary to do your job.

Poor credibility. Your bankruptcy will impact your credit score for the next six years, making it very difficult to take out a loan. You may also be at risk of losing your job, depending on the industry you work in, such as finance or legal. If you are in Scotland, it also means you cannot act as a company director. Your bankruptcy will also be on the public record for 12 months. 

Any extra cash you make will be taken. Your income and necessary expenses will be assessed when you declare bankruptcy. For the next twelve months if you have disposable income of more than £20 per month you may be asked to make monthly payments towards the debts for three years.

How do UK bankruptcies applications work 

In the UK you qualify for bankruptcy and have £680 for the fee, you can go online to fill out an application. According to, to apply for bankruptcy you need to provide information about your income, outgoings and debts, including:

  • wage slips
  • benefits or pension statements
  • bills - for example, electricity, credit card and council tax
  • letters from a bailiff or enforcement agent

Before applying, it is recommended you take out any money from your accounts immediately as they may be frozen while a decision is made. This way you have money to get by for a few weeks. 

For more information about how the bankruptcy process works, what happens during bankruptcy, and how bankruptcy can affect your job and home, visit Citizens Advice

Tips for when considering bankruptcy 

Bankruptcy is for those with little to lose, or ideally nothing to lose. There are alternatives that can be more suitable, such as consolidating your debts or getting a debt relief order. 

Before applying for bankruptcy, be sure you have exhausted your other options. Here are the main steps you can take to understand your situation and the options available to you:

Get free advice. If you are considering bankruptcy you should get free professional advice from StepChange Debt Charity or the Citizens Advice Bureau about your best next steps.

Figure out how much you owe, and if you spend more than you earn. Do you know how much you owe in total each month? How does this compare with what you earn? If your earnings outweigh your debt, even slightly, there may still be ways to tighten your belt by spending less and getting back on track

An open banking app like Money Dashboard is free and will show you where your money is coming from and exactly where it is going. This can give you a reality check about your spending and help you spot areas for improvement. You can then plan a tighter budget for the weeks and months ahead. 

Prioritise debts and interest rates. If your debts are costing you more than your income, and if this is largely due to the interest payments, you may want to consider a zero interest credit card. This can give you a bit of relief and an opportunity to get on top of your payments.

You can also contact your lenders and let them know you are struggling. They may be able to help by reducing monthly payments. And some may write off the debt, but this will show on your credit score and impact your rating. 

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