Bankruptcy is a legal process that allows you to write off the debts you can’t afford to pay back. It is best suited to individuals with significant debt but no way of paying it back, even in smaller installments.
But while bankruptcy can give you some much-needed relief from the people you owe money to (your creditors) and a fresh financial start at the end of it all, it can have a significant impact on your credit score and your ability to get credit for several years.
What is bankruptcy?
In England, Wales, and Northern Ireland, bankruptcy is a formal debt solution where you’re given a period of relief from your debts before they’re written off (cancelled altogether). In Scotland, the process is known as ‘sequestration.
During your bankruptcy period – which typically lasts 12 months – you won’t have to make any payments towards your debt (unless you earn over a certain amount in which case you’ll be asked to make payments for up to three years) and your creditors can’t chase you for payment or take legal action against you.
However, there are some bankruptcy restrictions you’ll need to stick to for the duration of your arrangement. Failure to stick to these restrictions can result in your bankruptcy being extended.
To qualify for bankruptcy, you must have debts of at least £5,000, be able to prove that your financial situation is unlikely to improve, and show that you’ve tried to deal with your debts in other ways before considering bankruptcy.
How much debt do you have?
How does bankruptcy work?
The bankruptcy process is usually relatively straightforward and usually follows the same set of steps.
We’ve outlined the basic steps involved in bankruptcy below:
Complete an application form
There are two ways to become bankrupt: applying for yourself or a creditor applying on your behalf. If you’re applying to make yourself bankrupt, you can complete a form yourself online. However, if a creditor is applying on your behalf (because you’ve failed an IVA, for example) you’ll receive a copy of the bankruptcy petition in the post.
Before you submit your application, you must pay a non-refundable application fee of £680. This can be paid in instalments for as long as you need but must be paid in full before your bankruptcy order can be made.
Withdraw money for living costs
When you’re bankrupt, an Insolvency Practitioner (IP) acts as your trustee to take control of your money and property, which they can then sell to help them recover the money owed to your creditors.
However, because there can be some time between your bankruptcy order being made and your assets being seized, it’s recommended to withdraw enough money to cover your living costs for a few weeks. By having money for your rent, mortgage, and bills, you can ensure you’re keeping up with your essential payments.
Submit your application
Before you submit your application, you’ll be asked to confirm you are the individual named on the form and the information you provided is accurate. Even if someone else filled in the form on your behalf, it’s still important that you read and agree to this information before putting your name to it.
Making false statements on your form, purposely omitting key information, or hiding property or evidence is classed as a criminal offence for which you could be fined or sent to prison.
Wait for an official decision
Once you’ve submitted your application, the adjudicator will have 28 days to make one of two decisions: make a bankruptcy order or reject your application. In some cases, they will contact you and request more information. When they do this, they will be given an extra 14 days to make a decision.
If the adjudicator rejects your application, you can ask them to review their decision and, if they don’t change their mind, lodge an appeal.
Start your bankruptcy
When the bankruptcy order is made, you will be officially made bankrupt. The money in your bank or build society will be frozen immediately – meaning you’ll need to open a new bank account – and you’ll be expected to stick to certain rules and regulations for the duration of your arrangement.
The official receiver will usually contact you within two weeks of your bankruptcy order being made to discuss how your money and property will be dealt with. They will then oversee the administration of your bankruptcy going forward.
Receive a bankruptcy discharge
Provided you cooperate with the official receiver and stick to the rules and regulations as agreed, you’ll be discharged from bankruptcy after 12 months.
If you don’t cooperate with the official receiver, they can ask the court to delay your discharge and your bankruptcy discharge will be delayed. This is called a ‘suspension of discharge’.
“No fuss, just simple, honest advice. Communication is good and they make the process as easy as they can.”
How long does bankruptcy stay on your credit file?
Although you’ll only usually be in an active bankruptcy for 12 months, it will appear on your credit file for six years from the date the bankruptcy order is made. It’s a common misconception that it will remain visible on your credit file for up to a decade, but this is only true for bankruptcy cases in the U.S.
It will also be visible on a public register called the Individual Insolvency Register (IIR), which is a public database of all insolvency cases in England and Wales.
During this time, you’re unlikely to get approved for most types of credit, including a personal loan, mortgage, bank account, and phone contract. This is because bankruptcy indicates that you’ve experienced serious financial hardship in recent years and might find it difficult to keep up with another repayment schedule.
There is nothing you can do to remove a filed bankruptcy from your credit file – even if you get the bankruptcy cancelled. This is why it’s important to carefully consider both the short-term and long-term effects of bankruptcy before applying.
How does bankruptcy affect your credit score?
Once a bankruptcy order has been made and it has been added to your credit file from each of the main credit reference agencies, it will cause your credit rating to drop significantly.
This is because lenders will see you as high risk regardless of the reasons behind the debt. In fact, if you apply to borrow more than £500 at any point during your bankruptcy period, you must legally inform the lender that you’re bankrupt.
Even if you are offered credit, it will likely be at the highest possible interest rate and with the strictest terms and conditions to counteract the extra risk to the lender.
Having a good credit score is key to accessing the widest range of credit products. Put simply, the better your credit score, the easier it is to borrow money.
Can you remove a bankruptcy from your credit report?
Unfortunately, there is no way to remove bankruptcy details from your credit report before it is automatically removed after six years.
The good news is, there are many things you can do to boost your credit score once the bankruptcy has been removed from your credit report. However, because bankruptcy can cause your credit score to drop dramatically, it’s important to be patient as it can take some time to improve.
It’s also important to check the bankruptcy has been removed at the correct date. If it’s been more than six years since your bankruptcy started and it’s still visible, you must contact the relevant credit reference agency and ask them to update your credit report as necessary.
Debt help tailored to you
From writing off a large portion of your debt, to readjusting your budget, we’ll find a solution that suits you.
How can I improve my credit score after bankruptcy?
Once you’ve been discharged from bankruptcy, it’s important you take steps to improve your credit score in any way possible. Here are some of the ways you can boost your credit score post-bankruptcy:
Check your credit report
The first step to improving your credit score is to check your credit report for any errors or evidence of identity fraud. If you notice anything that doesn’t look right, get in touch with the relevant credit reference agency and provide proof of the mistake to allow them to update their record.
Manage your payments
It’s a well-known fact that your payment history is the biggest contributor to your credit score. Therefore, the longer you make payments on your credit agreements in full and on time, the quicker you should be able to build your credit score.
Join the electoral roll
When you register to vote, your details are added to the electoral roll. Lenders then use this information to confirm your address when you apply for credit, which rules out identity fraud.
Consider a credit builder card
Getting a credit builder card can help show lenders that you’re a responsible borrower. They often come with lower credit limits and higher interest rates than standard credit cards and are best used for small regular purchases.
Conclusion
Bankruptcy can give you a fresh start with your finances, but it can have a lasting impact on your credit score and ability to get a loan or a mortgage.
From the moment you declare bankruptcy, it will be added to your credit report for six years. During this time, lenders will be able to see you’re experiencing financial hardship and will use this information to decide whether to give you credit.
There are many things you can do to improve your credit score after bankruptcy. Boosting your credit score can help your chances of being approved for credit, whether you want a loan, mortgage, phone contract, or bank account.
