5 reasons to consider filing for bankruptcy

5 reasons to consider filing for bankruptcy
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In the UK, a person is declared insolvent or bankrupt every four minutes. Declaring bankruptcy is a big decision, but it can sometimes be the right one. If you’re struggling with debt or wondering why people declare bankruptcy, read on.

Bankruptcy is a form of insolvency where your debts are written off, but any assets you own are shared between your creditors. It’s one option if you can’t handle your debts, but it’s not always the best option. While debt is always the reason for bankruptcy, the reason for that debt varies.

Why do people declare bankruptcy?

1. Job loss

Whether you’re fired, made redundant, or are unable to work due to illness, the loss of income can be devastating. If you can’t find a new job quickly, even a redundancy package and savings may not be enough to stop spiralling debt.

2. Overuse of credit

While credit has its place, it’s easy to live beyond your means and rely on credit cards to make ends meet. Interest repayments build quickly, and you may soon struggle to make even the minimum repayments.

3. Relationship breakdowns

If you rely on two incomes, divorce or separation can quickly lead to debt. Legal fees, division of assets, alimony, child support, and a slow adjustment to living off a single income can make debt seem an attractive option.

4. Student debt

According to Statista, the average student debt in the UK increased from £2,690 in 2000 to £35,950 in 2019. While you don’t have to start paying back student loans in the UK until you earn over a certain amount, many students also graduate with credit card debts and overdrafts.

Low-interest rates for students only last until you finish studying, and the sudden increase in the repayments demanded can push you over the edge into bankruptcy.

5. Unexpected expenses

These are some of the saddest reasons people declare bankruptcy. Fire, flooding, medical expenses, or even a car accident can lead to unmanageable costs. If you’re insured, your insurance will often cover you. Unfortunately, if no insurance was in place, or if you’re not covered, debt might be your only option.

When can you declare bankruptcy?

Bankruptcy laws in the UK depend on where you live. In England, Northern Ireland and Wales, you can declare bankruptcy if you can’t pay what you owe and want to declare yourself bankrupt.

If you owe £5,000 or more, your creditors can apply to have you made bankrupt, or an insolvency practitioner can make you bankrupt because you’ve broken the terms of an individual voluntary arrangement (IVA). An IVA is an agreement with your creditors to pay all or part of your debts.

In Scotland, sequestration is the equivalent to bankruptcy, but the rules are slightly different.

In England and Wales, it costs £680 to declare bankruptcy, while in Northern Ireland it costs £683. Sequestration in Scotland costs £200.

Which debts aren’t included when you declare bankruptcy?

Whether bankruptcy is your best option depends on your assets and the type of debt you have. Bankruptcy covers most unsecured debts in your name, including credit cards, utility arrears and overdrafts, but it doesn’t cover everything.

Some of the debts not included when you declare bankruptcy include:

  • magistrates court fines;
  • any payments a court has ordered you to make under a confiscation order;
  • maintenance payments and child support payments;
  • student loans from the Student Loans Company;
  • secured loans and other secured debts;
  • debts you owe because of personal injury to or death of another person;
  • social fund loans;
  • mortgages;
  • essential bills; and
  • any fraudulent debts.

If you have joint debts, or someone is a guarantor for a loan you’ve taken out, you can include those debts in your bankruptcy. However, the other person will become liable for the full loan.

Rent arrears pose another problem. While you can include the debts in your bankruptcy, it probably won’t stop your landlord from evicting you.

When you declare bankruptcy, the person in charge of administering your estate and sorting things out (known as the trustee) will sell most of your assets and freeze your bank accounts to raise funds. If you own your home but are paying a mortgage, you’ll lose your share of it, known as the beneficial interest. If you own your home outright, the trustee could sell that too.


There are plenty of reasons why people declare bankruptcy. Even if you’re struggling with debt, declaring bankruptcy isn’t the only option. Debt relief charities like StepChange and the Money Advice Service can tell you about other programmes to help you pay off debt, and help you work out whether declaring bankruptcy is right for you.

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