Bankruptcy: What happens when you go bankrupt?

It's affected 50 Cent, Fazer from N-Dubz, Kerry Katona and pretty much all of the band Blue - among a lot of other celebrities.

But when we talk about bankruptcy, how many of us actually understand what it means?

Katie Price is the latest celeb to be declared bankrupt after failing to stick to a plan to repay her debts.

And after reading this, you'll know exactly what that means.

Bankruptcy might be seen as a dirty word but it's a pretty simple concept - it's when nearly all of your debts are written off because you can't afford to pay them at the time that they're owed.

It's an order from the court that in the UK usually lasts a year - after which you're "discharged" from your bankruptcy, meaning you get a fresh start.

People usually choose to make themselves bankrupt when they don't have anything to lose. If you've got a lot of debt, bankruptcy is a way of sorting that out.

But, you'll only be accepted if you're insolvent - the value of things you own has to be less than the debt that you owe.

As soon as you're declared bankrupt, everything you own stops being your property and is used to pay off your debts. That can include your car and house, but you'll still be able to live there until it's sold.

There are exceptions though - "exempt goods" - which include everyday household items (things like your TV and computer are included in this) as well as things you need to do your job and, if you need it to get to work, your car.

In the UK you need to apply to become bankrupt - although it's called something different and works differently in Scotland - which involves filling in a form on the government website.

It actually costs money to do though, £680, which means bankruptcy isn't an option for some people struggling with debt. Something like a debt relief order (which costs a lot less money) could be a better option.

Creditors - the people or organisations you owe money to - can also ask a court to make you bankrupt, even if you don't want them to. That's only if you owe them at least £5,000 though.

Bankruptcy is a very serious step, given almost everything you own will be taken from you, so it's not something to do lightly.

"It may free you of debt, but bankruptcy isn't the right option for everyone," says Lorraine Charlton, a debt expert at Citizens Advice. "You need to fully understand how it works and what will happen, so take advice before making a decision."

For some people, filing for bankruptcy can be a relief. That's because as soon as you're declared bankrupt, people you owe money to have to stop contacting you. No texts or phone calls, no bailiffs at the door.

Bankruptcy was introduced as legislation in the 1980s in large part for this reason - to take the pressure and stress away from people who owe lots of money.

People who file for bankruptcy who are earning money are also allowed to keep some of their income to cover living costs.

But your incomings and outgoings will be assessed and if you have more than £20 a month to spare, that will be taken and put towards your debt for three years.

People on benefits don't have to pay anything.

Aside from what's we've already mentioned, like your possessions being taken from you, being bankrupt puts a number of restrictions on you - like not being able to borrow more than £500 without telling the lender about your bankruptcy.

The fact that you've been declared bankrupt will also stay on your credit reference file - affecting your credit rating - for six years.

If you work in certain professions like the legal or financial industry, it's also possible you'll lose your job. And if you own a business, it might be sold off to cover your debts.

Your bankruptcy will also be published publicly on an insolvency register for 12 months, although there can be exemptions for people who are at risk of violence.

When you're discharged from bankruptcy - usually after a year - you're freed from any debts that were included in your bankruptcy. The worst is over.

Although you're now debt-free there are some, like student loans, which you still have to pay.

If your home has been taken from you but hasn't been sold or an alternative agreement worked out after three years, it might be given back to you.

There are debt charities out there that can offer advice if you're struggling with money.

Citizens Advice has a few steps they recommend following to sort out your debts.

Work out how much you owe

Who do you owe money to? Add up how much do you need to give them each month.

Prioritise your debts

Things like rent, mortgage, council tax and energy bills are considered priority debts because there are "serious consequences" if you don't pay them. So pay them first.

In urgent situations like if you're about to be evicted, contact them and tell them you're seeking debt advice. Try and pay them something if you can afford to.

With non-urgent debts, think about getting a debt-management plan. You make one payment to a provider, who handles paying your creditors.

Work out how much you can actually pay

Add up all your essential living costs - food, housing, etc - and take those away from your income. Anything left over can be put towards your debts.

If you can't pay your debts

Seek advice immediately from the likes of StepChange or Citizens Advice.

If you have been affected by any of the issues raised in this article help and advice is available here.

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