What is bankruptcy and how can it help?

Bankruptcy is a formal, legally-binding solution for people with completely unaffordable unsecured debts. To apply for bankruptcy, you must attend a County Court to have your case assessed.

If your bankruptcy is agreed, all payments towards your unsecured debts will be frozen and you will hand over rights to your assets to a Trustee. They will then be responsible for selling those assets and ensuring each of your lenders receives a fair share of the money available.

Bankruptcy ends when you are 'discharged' - normally after a year. At that point, any remaining unsecured debt is written off. However, in some cases you may be expected to make payments to your unsecured lenders for up to three more years, if you can afford it.

Do I have to be a homeowner to apply for bankruptcy?

No. You can apply regardless of whether you're a homeowner, but you will only be eligible if you genuinely can't afford to repay what you owe. Because bankruptcy could write off a significant proportion of your unsecured debts, you must be able to prove that those debts have become unaffordable.

How much does bankruptcy cost?

At the time of writing (August 2011), applying for your own bankruptcy can cost up to £700. This is made up of the debtor's petition fee (£525) plus the court fee (£175). However, the court fee can sometimes be waived if you're claiming certain welfare benefits.

If you have no way of affording these fees, you may qualify for a Debt Relief Order (DRO). Find out more about Debt Relief Orders here.

Shouldn't I avoid bankruptcy if I can?

Some people think that bankruptcy should only be considered as a last resort for tackling debt. There are other options available, such as an IVA, that you may consider a preferable alternative to bankruptcy.

However, it's important to remember that bankruptcy can be the best option for some people. It's normally over more quickly than many other debt solutions, and doesn't necessarily require regular payments (unless you can afford it).

Will I lose my home if I go bankrupt?

It depends. If you're a homeowner, it's quite likely that your home will be sold ('repossessed') to help repay your lenders. However, this might not be the case if you have very little equity in your home.

If you don't own your home (e.g. if you're a tenant), you won't face the risk of repossession.

What are the disadvantages?

Apart from the risk of losing your home (as discussed earlier), bankruptcy will have a significant impact on your credit rating. Records will remain on your credit history for six years, and obtaining further credit is likely to be difficult in this time. In serious cases, you may be subject to additional restrictions on obtaining credit after the six years.

But there could be even more serious consequences if you don't get help, as your situation may have time to deteriorate further. Don't hesitate to get in touch if you're really struggling.