Types of Bankruptcies in the United Kingdom

Bankruptcy and insolvency can be daunting concepts, but understanding the different forms they take in the United Kingdom is essential for anyone facing financial challenges—whether as an individual or a business owner. UK insolvency law is designed to help manage unpayable debts and protect the interests of both debtors and creditors. While the term “bankruptcy” is often used colloquially to refer to any financial collapse, it specifically applies to individuals, while companies face liquidation, administration, or voluntary arrangements.

This blog provides a comprehensive look at the main types of bankruptcies and insolvency procedures in the UK, including who they apply to, how they work, and what their consequences are. We’ll also highlight why expert guidance from professionals like Simple Liquidation is invaluable during these critical moments.

Personal Bankruptcy

Bankruptcy in the UK is a legal process available to individuals who are unable to repay their debts. It is typically seen as a last resort after other debt management options have been exhausted. A person can file for bankruptcy voluntarily, or it can be forced upon them by a creditor if the debt exceeds £5,000.

Once a bankruptcy order is made, the individual’s assets—including property, vehicles, and savings—may be sold to repay creditors. Control of the individual’s finances passes to an official receiver or a licensed insolvency practitioner. Bankruptcy typically lasts for one year, after which the individual is discharged and most remaining debts are written off. However, certain restrictions can remain in place for up to 15 years depending on the circumstances.

Bankruptcy offers a fresh start but comes with serious consequences. It can affect one’s credit score for six years, limit access to financial products, and carry personal stigma. It also restricts certain professional roles and responsibilities, such as acting as a company director.

Individual Voluntary Arrangement (IVA)

An Individual Voluntary Arrangement (IVA) is a legally binding agreement between a debtor and their creditors, designed to allow individuals to repay a portion of their debts over time while avoiding the more severe consequences of bankruptcy. IVAs are arranged through a licensed insolvency practitioner, who helps structure an affordable repayment plan, usually over five years.

Once the majority of creditors (75% by debt value) approve the IVA, all are bound by its terms—even those who voted against it. During the term, the debtor makes monthly payments based on what they can afford, and creditors agree not to pursue further action. At the end of the IVA period, any remaining unsecured debt is typically written off.

IVAs offer several advantages over bankruptcy. They allow individuals to retain control over assets like their home and car, carry less social and financial stigma, and are generally more flexible. However, they require discipline and stability, and failure to keep up with payments can result in bankruptcy.

Debt Relief Order (DRO)

A Debt Relief Order is an alternative to bankruptcy designed for individuals with low income, minimal assets, and debts under a certain threshold. As of 2024, the qualifying debt limit is £30,000, and the applicant must have assets of less than £2,000 and a monthly disposable income under £75.

DROs are applied for through approved debt advisers, not through court. Once approved, a DRO places a 12-month moratorium on debt repayments and creditor action. If the individual’s financial situation has not improved after a year, the debts included in the DRO are written off.

DROs are a valuable tool for those in severe financial hardship, offering a low-cost way to become debt-free without entering full bankruptcy. However, like bankruptcy, they impact credit ratings and may limit access to future credit.

Company Liquidation

Liquidation is the process of closing a company and selling its assets to pay creditors. It is typically used when a company becomes insolvent and cannot pay its debts. There are two primary forms of liquidation in the UK:

Creditors’ Voluntary Liquidation (CVL) is initiated by the directors of an insolvent company when they recognize that the business cannot continue. A licensed insolvency practitioner is appointed to manage the liquidation, sell off company assets, and distribute the proceeds to creditors. CVL is a responsible and orderly way to close a business, and it allows directors to fulfil their legal obligations and avoid allegations of wrongful trading.

Compulsory Liquidation is imposed by the court following a winding-up petition, usually from a creditor owed £750 or more. If the court approves the petition, the company is forcibly wound up, and its affairs are taken over by the official receiver. This process can be more damaging to directors and the company’s reputation than voluntary options.

Members’ Voluntary Liquidation (MVL) is used when a solvent company chooses to close down, often for tax-efficient distribution of retained profits to shareholders. It is common in cases where the business is no longer needed—such as after a successful career exit or group restructuring.

Company Administration

Administration is a rescue mechanism designed to help companies in financial trouble reorganize and survive, or if not possible, achieve a better result for creditors than immediate liquidation. An administrator, usually a licensed insolvency practitioner, is appointed to take control of the business.

Once in administration, the company is protected from legal action by creditors, giving the administrator time to assess the situation and propose a plan. This could involve restructuring, selling the business, or entering into a Company Voluntary Arrangement (CVA).

Administration can preserve jobs and business continuity but is often complex and costly. It is most suitable for companies with valuable assets or viable operations that just need breathing space and expert management.

Company Voluntary Arrangement (CVA)

A CVA is an agreement between an insolvent company and its creditors to repay part or all of its debts over time, while continuing to trade. Like IVAs, CVAs must be approved by 75% of creditors by value.

CVAs are beneficial because they allow a business to restructure and survive, avoiding the damage of liquidation. They often involve renegotiating leases, cutting unprofitable divisions, or extending debt repayment schedules. CVAs are particularly popular among retail, hospitality, and service sectors where continued trading is essential.

Why Choose Simple Liquidation?

Facing insolvency or bankruptcy is stressful and overwhelming. Whether you’re an individual, sole trader, or company director, professional advice can make a crucial difference in how effectively you navigate the process. This is where Simple Liquidation comes in.

Simple Liquidation offers bespoke support across all types of insolvency procedures in the UK. From personal bankruptcy and DROs to complex company liquidations and administrations, their experienced team is ready to guide you through each step. They bring deep expertise, regulatory knowledge, and compassion to what is often an emotionally difficult time. With a focus on transparency, they ensure that you understand your options and obligations, and they work to minimize costs, protect your assets, and deliver timely resolutions.

By choosing Simple Liquidation, you gain access to trusted advisors who put your interests first—helping you close one chapter and start a more secure, informed, and financially healthy future.