Are there different types of bankruptcy in the UK?

Declaring bankruptcy isn’t a decision to be taken lightly, but it can be made infinitely more difficult if you’re unsure how many types of bankruptcy there are, or what your other alternatives might be.

To clear things up and help you secure the fresh financial start you need, the experts at Irwin Insolvency explains how bankruptcies in the UK work.

How many different types of bankruptcy are there in the UK?

A formal legal process, there is technically only one type of bankruptcy in the UK.

UK law stipulates that only individuals – not companies – can declare themselves bankrupt.

Due to the influence of US culture in the UK, there is often confusion surrounding the different types of bankruptcies that exist and who can declare themselves bankrupt.

In the US, things are different, because multiple types of bankruptcy exist.

This includes Chapter 7 and Chapter 13 bankruptcy which are primarily applied to individuals, alongside Chapter 11 bankruptcy which allows corporations to declare bankruptcy in the US.

While declaring bankruptcy in both countries exists as a way for debt to be cleared for a fresh financial start, the main difference is that in the UK only individuals can declare themselves bankrupt.

What are the three types of bankruptcies in the UK?

Although there’s technically only one form of bankruptcy in the UK, there are comparable insolvency processes that vary depending on which part of the UK you live in and whether the financial difficulties affect an individual or a company.

1. Personal bankruptcy – England, Wales, and Northern Ireland

According to government guidance, personal bankruptcies in the UK (more specifically, England, Wales, and Northern Ireland) can be made for one of the three following reasons:

• You cannot pay what you owe
• Your creditors apply to make you bankrupt as you owe them at least £5,000
• An insolvency practitioner makes you bankrupt as you’ve broken the terms of an individual voluntary arrangement (IVA)

Personal bankruptcy applicants must:

• Be a resident of England, Wales or Northern Ireland
• Be able to afford the bankruptcy order application fee (£680)

2. Sequestration – Scotland

The Scottish equivalent of personal bankruptcy in England, Wales, and Northern Ireland is a similar process known as sequestration.

To be eligible for sequestration, applicants must:

• Live or have lived in Scotland for the last 12 months
• Have unsecured debts of over £3000
• Have no history of bankruptcy in Scotland within the last five years
  

3. Liquidation – For UK companies

Although not technically a type of bankruptcy (as only individuals can claim bankruptcy in the UK), liquidation is a last resort for insolvent companies who are also unable to repay their debts.

This process involves winding up the business and selling off a company’s assets to repay creditors.

According to government guidance, a UK company is considered insolvent when:

• It can’t no longer afford to pay bills when they become due
• It has more liabilities than assets on its balance sheet

What debt does bankruptcy cover in the UK?

There’s no minimum level of debt required to declare bankruptcy, and if you’re no longer able to pay your debts, then it’s one of the tools available to help you get your finances back on track.

However, while major debts are written off after 12 months through bankruptcy, there are some debts, such as student loans and child support, that are not written off and will still need to be paid even while you’re bankrupt.

Here are the primary features of UK bankruptcy:

• Bankruptcy lasts for 12 months
• Major debts are written off after 12 months
• Personal debts, such as student loans or child support, are not written off
• You lose control of your finances and your bank accounts will be closed
• If you have an income, then a percentage of this might have to be paid to your creditors for a set period
• You may lose high-value personal assets such as your home or vehicle
• You may lose your business and any employees may lose their jobs
• Bankruptcy is made public knowledge
• If you’re employed as a lawyer, Member of Parliament or on a board of trustees, then you will lose your job
• It’s impossible to secure credit for 12 months, and bankruptcy then remains on your credit score for a further six years

If you’re applying for bankruptcy, applications are processed by the Insolvency Service, which appoints an official receiver to oversee your case and reorganise your debts.

If you owe £5,000 or more, it’s also possible for your creditors to apply for bankruptcy on your behalf. They don’t need your permission to do so, and it’s a way for creditors to pursue their debts once other efforts have been exhausted.

Declaring bankruptcy has positives and negatives attached to it, so always seek impartial insolvency advice if you’re struggling financially.

Are there alternatives to bankruptcy in the UK?

As bankruptcy is commonly viewed as a last resort by insolvency specialists (because you could lose your home and you’ll struggle to secure credit for several years to come), there are other ways to restore your finances without needing to declare bankruptcy.

For individuals, the most common alternatives to bankruptcy include:

Administration Orders

If you owe less than £5,000, one of the best alternatives to bankruptcy is an administration order.

Administration orders are issued by courts to low-level debtors. They allow your finances to be reorganised, interest rates frozen and new repayment schedules made.

If you only have small levels of debt, an administration order is preferable to bankruptcy. You won’t stand to lose your assets and your credit score won’t be as negatively affected.

Debt Consolidation 

Debt consolidation is an effective way to deal with both small and large amounts of debt, and it’s particularly useful if you owe money to multiple creditors.

Debt consolidation plans typically see all your outstanding debts and loans consolidated into one easier-to-manage loan. Taking out a new loan might sound counteractive to escaping debt, but the new, consolidated loan often has more favourable interest rates and lower monthly repayments.

Individual Voluntary Arrangement (IVA)

An individual voluntary arrangement, or IVA, is an agreement made between a debtor and their creditor that aims to reorganise payments while still allowing money owed to be paid back.

An IVA might see repayment terms changed, it might allow interest rates to be lowered or the total amount owed to be reconsidered entirely.

Importantly, an IVA allows you to buy more time to restructure your finances, avoiding the need to declare bankruptcy. If an IVA fails, the only next step left for an individual in debt is likely to be bankruptcy.

Can a company be made bankrupt?

No, companies cannot declare bankruptcy in the UK.

Instead, companies that can no longer pay their debts are considered insolvent and must follow other laws, regulations and procedures compared to personal bankruptcy.

Insolvency alternatives for UK companies

An insolvency practitioner can advise on the best course of action, but common alternatives to insolvency for companies can include the following:

Administration 

If a company enters into administration, then the company directors surrender their decision-making powers to an appointed insolvency practitioner.

As part of the process, the administrators then decide on the best course of action, with the aim being to save the company from liquidation while paying back creditors.

During the administration period, the company may be restructured or streamlined in order to get its finances back on track.

Company Voluntary Arrangement (CVA)

A company voluntary arrangement, or CVA, is an agreement made between the directors of a company and their main creditors. It’s similar to an individual voluntary arrangement, in that the company’s debts and loans might be reorganised, and new payment terms created.

A CVA is designed to help companies pay back their creditors, while also buying time for them to restructure and find a viable route out of insolvency.

Liquidation

Liquidation is a last resort for companies that fail to become solvent again. Unfortunately, the liquidation process sees a complete winding up of the business.

There are several different types of liquidation that companies can be subjected to, and liquidation can be either a voluntary or compulsory process.

The main goal of any liquidation process is to sell off a company’s assets in order to pay back creditors. An insolvency practitioner is appointed to oversee the liquidation process, and to ensure that as many creditors as possible see some of the money owed to them repaid.

Book your free bankruptcy consultation today

Whether you’re going bankrupt with no assets or being pursued by creditors, if you’re considering declaring bankruptcy, it’s important to speak to a professional insolvency advisor first.

While bankruptcy can offer you a fresh financial start, it can also have serious long-term consequences. With decades of experience advising on personal bankruptcy in the UK, the experts at Irwin Insolvency are ready to help you understand your bankruptcy options.

Contact our expert team today to book your free, bankruptcy consultation.

Call: 0800 254 5122

Email: mail@irwinuk.net