How Bankruptcy Affects Your Credit Score
There are a variety of organisations that can help you cope with debt, offering practical solutions, legal advice and counselling. However, sometimes you may find yourself in a position where advice is no longer enough and you need to take more serious action to deal with your debt. In this case you may need to declare personal bankruptcy. Going bankrupt can give you relief from debts, but it can also carry long-term ramifications for your finances, including your credit history.
What Does It Mean to Go Bankrupt?
Bankruptcy is a legal procedure that begins by making an application on the government website – it is not free, it costs £655 to apply, although you may be able to pay in instalments or apply for a grant if you cannot pay the fee up front. You will have to submit information on your finances, including things like wage slips, bills and bank statements, this information will be reviewed by an adjudicator who will determine whether your situation warrants bankruptcy.
If you are declared bankrupt, you will have a meeting in-person or via telephone with an official receiver who will value your assets and attempt to sell them to raise funds to pay off your debts. You will be allowed to keep anything that is necessary for your employment, such as a car or a set of tools, as well as items that fulfil basic domestic needs e.g. bedding and cooking equipment.
Your name will also be added to the Individual Insolvency Register - a public record of people who have been made bankrupt that can be searched online. Bankruptcy usually lasts a year, at which point you will be removed from the register, assuming you have acted in a fit and proper way, i.e. have complied with the receiver’s demands and have not infringed any of the restrictions applied while you are bankrupt.
These restrictions include not being allowed to borrow more than £500 without declaring your bankruptcy status, not being the director of a company, and not working as an insolvency practitioner.
How Does Bankruptcy Status Affect Your Credit History?
Your credit history is used by lenders to judge how viable a candidate you are for particular types of credit. It includes information like your history of credit account payments, your current credit and debt status, and public records like the electoral roll.
When you are made bankrupt a note is added to your credit file, (the information that is used to determine your credit score), which will stay on there for six years after you were made bankrupt. A bankruptcy can show that you are at a higher risk of defaulting on your repayments and can make it very difficult to obtain credit or to even open a new bank account.
The extent to which your bankruptcy will affect your creditworthiness and how long it will take to improve it, will depend on your particular circumstances. It will take 12 months before you are discharged from bankruptcy, during that time you may struggle to do things like renting accommodation, getting insurance or taking out direct debits (due to not having a bank account). Even after you are discharged, it may still be difficult obtain these things – if necessary you would need to use bank accounts designed for those that have been declared bankrupt and use specialist lenders to borrow money.
Alternatives to Bankruptcy
As outlined above, bankruptcy is a serious matter that will affect your financial life and life in general for years afterwards. It is therefore essential to get as much advice as possible before making such a decision. There are also alternatives to bankruptcy – not everyone who has trouble paying their debts will need to declare themselves bankrupt.
IVAs (Individual Voluntary Arrangements) are formal arrangements where an insolvency practitioner will help organise a proposal that goes to your creditors. If they accept the proposal you will be able to pay back part of your debts, meaning the creditors get at least some of their money. A DRO (Debt Relief Order) is an alternative to bankruptcy that prevents creditors taking legal action for a period of around a year. However, it does not apply to all your debts and carries very specific requirements for qualification.
Both IVAs and DROs may also affect your credit score, as the existence of either will be added to your credit file. They carry fewer restrictions than official bankruptcy and are alternatives that should be at least considered.
Where to Get Further Advice and Information
If you are looking for further advice on bankruptcy and how it may affect your credit score, make sure to read the Government’s official bankruptcy section. There are also organisations called StepChange and The National Debtline that have useful online resources as well as Freephone numbers and online chat functions to get advice directly.