How Will Declaring Bankruptcy Affect My Credit Rating?

Bankruptcy is an effective way for individuals to clear their outstanding debts and gain a fresh financial start. But there are important implications to consider in regards to personal credit ratings.

Bankruptcy will seriously affect your credit score. Inevitably, it becomes more difficult and complicated to apply for loans or to secure a mortgage. However, it’s far from impossible. Bankruptcy isn’t lifelong, and while it becomes more challenging to secure future credit with a lower credit rating, it is possible to build your score back up.

In this article, we asked our expert financial team at Irwin Insolvency how bankruptcy affects your credit rating.

What Happens When I Declare Bankruptcy?

Bankruptcy occurs when an individual mismanages their finances and can no longer pay their creditors – a business cannot be declared ‘bankrupt’ in the United Kingdom, only individuals. To declare bankruptcy, you must owe at least £5,000 to creditors and you must be prepared for the proceedings to be made public.

Bankruptcy can affect individuals differently. Assets may be sold off to pay creditors, you could lose your house and your car, and you may be forced to close down a business. Bank accounts are also closed down, and you are left with the minimum you need to survive. It’s not an easy way out, but it doesn’t last forever and you have new opportunities at the end of the process.

An individual declared bankrupt is placed on the Individual Insolvency Register for 12 months, but the repercussions in terms of your credit rating can last much longer than this.

How Is My Credit Rating Impacted by Declaring Bankruptcy?

Declaring bankruptcy is an admission that you have been unable to manage your finances properly. A bankrupt individual isn’t able to pay back the money they’ve borrowed from creditors – this can be a bank loan, mortgage, business loans taken in their name, credit cards, and even utility bills.

Mismanagement of money will severely impact your credit rating. Future lenders won’t be happy about risking their money with an individual who has previously shown they’re unable to pay money back or has consistently borrowed too much.

For the first 12 months of a bankruptcy period, it’s unlikely that a bankrupt individual will be able to secure personal loans or even a mortgage. Indeed, their spending will be highly scrutinised and may even be managed by the courts.

Usually, a bankrupt individual loses their existing credit cards, bank accounts and any prearranged overdraft limits. Instead, they’ll have to open a bank account specifically aimed at people with poor credit ratings.

The first 12 months are going to be difficult, but things get easier once you’ve been discharged from your bankruptcy. Unfortunately though, your bankruptcy appears on your credit rating and is public for up to six years.

Can I Secure Bank Loans and Mortgages After Declaring Bankruptcy?

Securing bank loans and mortgages becomes much more difficult, but not impossible if you’re bankrupt. It’s all about risk, and some lenders are more likely to take larger risks than others.

With a low credit rating though, you’ll have an uphill battle. Interest rates are going to be high and repayment terms will be stringent. You’ll also need to provide securities against any loans that are approved.

Bankrupt individuals may find it difficult to apply for business loans too, especially if they’re self-employed. This can be easier, however, if you are applying for a business loan in the name of a company that was not affected by your bankruptcy.

Mortgages can also be very difficult to secure, but there are ways around it. Mortgage lenders are often willing to risk lending to bankrupt individuals if interest rates are high. If you can save up a large deposit and thereby lower the amount you need to borrow from a bank, then a mortgage could be arranged too.

In all cases, you can expect to have to explain in detail your financial situation and why you declared bankruptcy in the first place. Before lending money, the creditor will want to know as much information as possible – this could work for or against you depending on the individual circumstances surrounding your bankruptcy.

What Can I Do to Improve My Credit Rating After Declaring Bankruptcy?

After the first 12 months, you can start to slowly rebuild your credit rating. After all, the ultimate goal of bankruptcy is not just to clear your existing debts, but to give you a fresh financial start for the future.

However, it’s not as simple as wiping the slate clean. With a low credit rating, you’ll have to work hard to secure loans or take out a new mortgage. You have to be careful – slip up, mismanage your funds again, and credit can become impossible to secure.

For lenders, it’s all about mitigating risk, so if you can prove that you’re up to the task, they’ll be willing to lend. You can show that you are financially responsible again by borrowing small amounts of money. There are credit cards and bank accounts aimed at individuals with low credit ratings. Use these to borrow small amounts of money every month to pay off bills or your weekly shop, but make sure you pay it back on time.

If you need larger sums of money, then lenders are often willing to risk it if interest rates are high. This is never ideal, but if you can definitely meet the repayment schedules, then it’s a good way to start rebuilding your credit rating.

It takes time, but over several years, careful planning and proper management of your finances will give you that fresh start you desire.

Contact Irwin Insolvency Today for Your Free Consultation

Declaring bankruptcy is one of the best ways to clear your outstanding debts and start afresh, but there are major implications that need to be considered first, including your credit rating.

With decades of experience advising on personal and business finances, Irwin Insolvency’s expert team are ready to help you. If you’re struggling financially, then don’t hesitate to contact Irwin Insolvency for your free, no-obligation consultation.

Contact Irwin Insolvency today for your free consultation

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0800 254 5122

About the author

Gerald Irwin

Gerald Irwin is founder and director of Sutton Coldfield-based licensed insolvency practitioners and business advisers, Irwin Insolvency. He specialises in corporate recovery, insolvency,
 rescue and turnaround.