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It may sound unlikely that you could be made bankrupt without you knowing anything about it. However, not only is it possible, but we also actually get a significant number of enquiries from people asking what they can do about it. The frequency of these calls for help prompted us to write this article. We think it’s important that people understand how, why and what to do to avoid unexpected bankruptcy shocks.
Let’s start with a quick definition.
Bankruptcy is a legal process. It’s solely about individuals who are unable to repay their debts. The two important words to remember there are, legal and individuals. Legally, a business cannot be bankrupt, but an individual person can. Also, an individual can be insolvent (meaning unable to pay their debts) which could result in personal bankruptcy. So, it is a legal position of bankruptcy, and it is only applicable to individuals. That’s the short way to identify what makes bankruptcy different from a business insolvency.
Once declared bankrupt, your assets are placed under the control of the Official Receiver or a trustee. The role of that trustee, probably an Insolvency Practitioner, is to manage your estate and repay creditors where possible. By your ‘assets’, we are talking about things you own and some of your finances, including property, savings, and disposable income. All these are placed under the control of a trustee.
In England and Wales, bankruptcy is governed by the Insolvency Act 1986. It is a remarkably simple concept behind all the legal jargon. In essence, you, as an individual, can declare yourself bankrupt (known as a debtor’s petition) or someone you owe at least £5,000 to can ask the court for you to be made bankrupt (known as a creditor’s petition).
There are several other restrictions as well. However, in practical terms one of the biggest difficulties faced by someone declared bankrupt is the effect on their financial situation. It is unlikely that you will be able to get any from of credit for quite some time (the record stays in your file for 6 years) including mortgages and loans as well as some leases.
Despite all the restrictions placed on you, Bankruptcy is actually intended to give you the opportunity to start again financially. So, you will still be able to earn a living, have a bank account and so on.
No, not everything, because some items are considered ‘protected assets’ as they are considered basic items for living and earning a wage. The list below will give you an idea of what can and can’t be sold or disposed of to pay creditors. It isn’t an exhaustive list and there are some judgment calls to be made by the Trustee. For example, furniture is usually exempt, but high-cost designer furniture may well not be considered basic household items.
So, as you can see, you are not going to be left in a position where you have nothing at all. The basics required for a decent standard of living and important things like medical equipment will be protected.
You can also keep a ‘modest vehicle’ if it is needed for work or family use. Modest usually means worth under £1,500–£2,000 unless there is a good reason for a higher value.
You will also be allowed to retain a reasonable amount for essential living costs, and most state benefits are protected.
Your house will not necessarily be sold either. That will all depend on whether you have equity in the property, dependents who rely on the home, medical conditions, and other factors. The purpose of the bankruptcy is to reclaim the money owed, not to leave you homeless.
In short, the Trustee will only order the sale of items non-essential to you living a reasonable life. Earning a living and getting back on your feet financially.
Surprisingly, yes, they can, and it happens more often than many people realise. At Smart Business Recovery, we’ve spoken to people who only found out they were bankrupt after the event. Sometimes people don’t know until they are turned down for a mortgage, receive a letter from the Official Receiver, or see their details appear on the public register.
Let’s answer the hard question now. Sometimes people ask how often people become bankrupt without ‘knowing about it’, shall we just kindly say, because they were maybe trying to be evasive. Does that happen? Yes. Is it common? Honestly, I would say, ‘No’. The main reasons people are made bankrupt without them knowing are not due to any attempt to deceive. The following are far more likely reasons.
If you’ve moved house, changed email address or stopped engaging with creditors, legal documents may have been sent to your last known address. Provided the creditor can demonstrate they made reasonable attempts to serve those documents, the process can continue without direct contact.
In some cases, people mistakenly assume that ignoring debt collection efforts will lead to the issue eventually "going away". It won’t, it will grow, and it will continue to escalate. Ignoring a significant debt is likely to result in bankruptcy and at least Court Orders being issued. If you ignore those communications, you could find yourself in very deep water financially.
There are some rather sad and difficult circumstances that can also be a factor. When someone is facing severe financial difficulties, they can also find themselves struggling with mental health or stress-related issues. In other cases, some neurodivergent conditions can affect an individual’s ability to manage finances or deal with official documents effectively. Sometimes the result of this is the missed deadlines and unopened letters that can lead to bankruptcy. Unless these things come to the attention of the court and those looking for payment, the process will continue.
So, as you can see, if you fail to respond within the specified timeframe, even unknowingly, the court can issue a bankruptcy order in your absence. That means bankruptcy can, and usually will, be granted by the court, regardless of whether the debtor was fully aware.
While most people assume bankruptcy involves months of court notices and very clear red flags and warning signs, the reality can be very different. For some, the first time they hear the word "bankruptcy" is after the order has already been made.