Bankruptcy is a legal process that can be used to help people who can’t afford to pay their creditors.
Typically a last resort, it can be a relief as you will eventually be discharged from your debts and allowed to start afresh. But there are downsides, and the impact on your credit rating is one of them.
The bankruptcy will be on your credit record for at least six years and may prevent you from getting loans or even a mortgage. The good news is, it’s perfectly possible to rebuild your rating over time.
Read on to learn what bankruptcy means, how it happens, when it might be worth exploring and the impact on your credit rating and future finances.
Bankruptcy is a legal process that can be used to help individuals deal with debts they can’t afford to repay.
In a nutshell, it means that all your assets are shared out between your creditors, your debts are written off and you can start anew.
You won’t be asked to make any payments towards the debts that have been cleared and your creditors won’t be able to contact you, take you to court or keep adding interest and fees.
Despite this, there are significant downsides and declaring bankruptcy is not to be taken lightly. Your possessions could be sold to pay off your debts – including the home you live in. You’ll also lose savings and shares (though your pension is usually exempt).
You could be asked to make further payments to the Government Insolvency Service during your bankruptcy.
There will be restrictions placed on you, including on money you’re allowed to borrow, your credit score will be negatively impacted, and it could even affect your job if you work in the legal or financial sectors.
Your bankruptcy is recorded on your credit files for at least six years. This means lenders can see that you’ve been bankrupt when deciding whether or not to loan you money.
It can affect all sorts of things from your ability to get a mortgage, car finance, or even a mobile phone contract.
The six-year countdown starts from the date your bankruptcy begins. Even though the bankruptcy itself will usually only last 12 months, potential lenders will still be able to see that it happened long after that.
Any debts you had will be defaulted, and these will show for six years too. The default dates can’t be later than the date of bankruptcy – if they are, complain and ask for them to be corrected.
Even after the six years, some lenders ask you whether you’ve ever been made bankrupt when you apply for credit. You need to answer honestly, and it could have an impact on their decision to lend.
If you’re found to have acted negligently by the official receiver, they could set up a bankruptcy restriction undertaking (BRU) or bankruptcy restriction order (BRO).
These extend the restrictions you’ll face for up to 15 years. On top of that, the bankruptcy will remain on your credit file till the BRU/O ends.
If you have a bankruptcy on file, your credit scores will typically drop. When lenders check your file, they’ll be able to see the defaults and are less likely to give you a loan as a result.
Credit references allow providers to see how responsible someone is with debt and decide whether they’re likely to make repayments in full and on time. A bankruptcy shows that you’ve had serious problems in the past and so lenders may judge that you’re too risky to lend to.
While the bankruptcy is on file, you could struggle to get a mortgage and it can make it hard to get a rental tenancy. Where you are offered credit or loans, you may find that it’s at much higher interest rates. As you’re deemed to be high risk, lenders need to cover this, so your borrowing tends to cost more overall.
These effects will lessen over time, and your score should improve once the bankruptcy drops off your file in six years. There are also other steps you might consider to improve your score in the meantime.
Time is the greatest healer when it comes to credit scores and bankruptcies. However, there are other steps you can consider that may give your score a boost. Making sure you’re on the electoral roll is a quick win for credit reference agencies.
You might consider getting a credit builder credit card with a low limit and paying it off in full each month. This creates a history of responsible lending, but you must make sure you don’t get back into problem debt and you never miss a repayment.
Follow our ten steps to make sure your credit rating is as high as it can be – despite any bankruptcies.
There are three main Credit Reference Agencies (CRAs) – Equifax, Experian and TransUnion. Each one will give you a different score and it’s important to check all of them regularly. Different lenders use different CRAs so you can only get a full picture by looking at all of them.
A bankruptcy order can be made if:
you can’t afford to pay your debts and want to declare yourself bankrupt
your creditors apply to make you bankrupt because you owe them £5000 or more
an insolvency practitioner makes you bankrupt because you’ve broken the terms of an individual voluntary arrangement (IVA)
It costs £680 to apply to become bankrupt in England and Wales. Charity StepChange explains this fee is made up of a £130 fee to the adjudicator and £550 to the official receiver. In Northern Ireland the total cost is £683.
Bankruptcy is an extreme solution, so you should check all your options before deciding to do it.
If you have problem debt and you’re struggling with repayments, speak to a debt charity who can help you understand all the options and negotiate with lenders. StepChange, NationalDebtline and Citizens Advice can all help you for free.