What debts does bankruptcy cover?

Bankruptcy helps you deal with debts you can’t pay.

It involves your assets being sold and the money shared between your creditors.

You’ll then be released from most of your debts, usually after a year.

Although applying for bankruptcy can offer you a fresh start, it can also have long-term consequences.

So get debt advice before applying for bankruptcy to make sure it’s the right option for you.

Bankruptcy writes off most unsecured debts, including:

• credit cards
• store cards
• overdrafts
• unsecured loans
• payday loans
• utility bill arrears
• rent arrears
• council tax debts
• benefit overpayments (non-fraud related)
• tax debts, including income tax and VAT
• catalogue debts

But some debts won’t be written off, so you’ll still have to pay these even after being declared bankrupt.

These include:

• mortgages or secured loans
• criminal fines
• child maintenance arrears
• student loans
• TV licence arrears
• payments ordered by a court in family cases

Yes, money you owe to HM Revenue & Customs (HMRC) can be included in bankruptcy, such as:

• income tax
• VAT
• national insurance

Even if HMRC hasn’t finished working out what you owe, it can usually be included if the debt relates to a period before the bankruptcy started.

Yes, you can include a joint debt in your bankruptcy.

So if you and another person borrowed money together, perhaps for a joint loan, your legal responsibility for the debt will be written off when your bankruptcy ends.

But the other person will still be responsible for the full amount.

If you have any joint debts, it’s a good idea to speak to the other person before applying for bankruptcy so they understand how it could impact them.

Otherwise, they might not realise they’ve been left with the full amount to pay.

Debts secured against your home, such as a mortgage, aren’t included in your bankruptcy. This means you’ll need to keep paying these debts.

If you fall behind with your mortgage payments, bankruptcy won’t stop your provider from repossessing your home.

If your home is repossessed and sold, and the money raised isn’t enough to cover your outstanding mortgage and any other debts secured on the property, this is known as a mortgage shortfall.

Once your home has been sold, these debts will no longer be secured. That means you’ll be released from them at the end of your bankruptcy.

Even if your home is sold after your bankruptcy ends, you’ll still be released from any mortgage shortfall.

Rent arrears will be included in your bankruptcy and, once you’re discharged, they’ll be written off.

This means your landlord can’t take you to court for these debts, but they don’t have to keep renting to you. 

If you’ve fallen behind on payments to a private landlord, they might ask you to leave by serving you a section 8 notice. You’re extremely unlikely to be evicted by a social landlord.

While you can’t pay any arrears directly after they’ve been included in your bankruptcy, someone else – e.g. a friend or relative – can if it stops you from being evicted.

Hire purchase (HP) and conditional sale agreements are often used to pay for expensive items like cars, furniture or appliances.

These are secured debts, which means the finance company still owns the item until you’ve made all the payments.

Many HP contracts have a ‘bankruptcy clause’, which lets the company end the agreement if you go bankrupt.

If this happens, you’ll usually need to return the item, and any remaining debt will be written off as part of your bankruptcy.

In exceptional circumstances, you may be allowed to keep the item if you carry on making your payments. For this to happen, the official managing your bankruptcy and the finance company must agree to it.

The official managing your bankruptcy is only likely to permit this if the item is deemed essential e.g. a car that you need for work (if you can get to work on public transport instead, it’s unlikely to be deemed essential). 

If you’ve been overpaid benefits, the debt might be included in your bankruptcy.

But it depends on how the overpayment happened.

If it wasn’t your fault and a genuine mistake, the overpayment will usually be included in your bankruptcy and written off when you're discharged.

But if the overpayment is judged to have been made as the result of fraud on your part, you won’t be able to include it in your bankruptcy and you’ll be expected to repay the money in full.

If you have a guarantor loan, it will be included in your bankruptcy so the creditor won’t be able to chase you for payment.

But the guarantor will still be responsible for the full amount. This means your creditor can continue to chase them for the debt after you’ve been made bankrupt.

If you’re considering bankruptcy and you have a guarantor loan, it’s a good idea to let the other party know what you’re planning. Otherwise, they might get a nasty shock when the creditor asks them to repay the debt.

Bankruptcy only covers debts you owed before the date of your bankruptcy order.

If you forget to list a debt, you must tell the official receiver.

Even if a debt wasn’t listed, it can - in many cases - still be included if it existed before you applied for bankruptcy.

New debts taken out after your bankruptcy won’t be covered and you’ll still be responsible for paying those off.

You should also be aware that if you borrow more than £500 from any lender while bankrupt and you don’t let them know about your bankruptcy, you’re breaking the law and could be hit with a hefty fine.

If you’re considering bankruptcy, get debt advice beforehand so you know all the possible consequences and alternative options available.