Not all that long ago, going bankrupt was pretty much the end of your financial life. Lenders wouldn’t touch you and it carried a stigma that was hard to shake.
Thankfully, that’s in the past. While nobody would recommend going bankrupt if you didn’t have to, it’s no longer the end of your finances and doesn’t carry any of the stigma it used to.
That doesn’t mean you should enter bankruptcy lightly though.
It’s still a serious situation that needs careful thought and professional guidance before you attempt it.
If you’re facing financial difficulty, let’s discuss bankruptcy a little.
This post will be no substitute for professional advice but it can help you with those initial research steps.
What is bankruptcy?
Bankruptcy is a formal legal process that is usually used as a last resort for people who owe over £5,000.
Basically it’s a legal agreement where all your assets, including your house, car, possessions and everything except life’s essentials are used to pay off your debts.
If you’re working, you may also have to pay a portion of your salary to pay creditors for up to 3 years.
In return, all your debts are settled and nobody will be able to chase you for money you owe.
It’s like a clean slate but with some downsides.
You won’t be able to borrow anything for a year after being declared bankrupt and your credit score will plummet.
How long does bankruptcy stay on your credit report?
Bankruptcy stays on your credit report for 6 years and will impact what lenders will work with you and what interest rates they will charge.
The debts defaulted by bankruptcy will also be visible for those 6 years so any potential lender will see how much you owed and to whom.
Once those 6 years are up, the bankruptcy will be removed or you may request to have it removed.
It’s important to know that even though there may be no trace of bankruptcy on your credit report, many credit applications will ask if you have ever been bankrupt.
You’ll obviously have to answer truthfully as it forms part of your contract with the lender.
There is an important exception to this. Negligence.
If the receiver (the official who monitors bankruptcies) finds you negligent in how you have managed your finances or the bankruptcy process, including the 1 year it takes to complete the process, they can set up a bankruptcy restriction order (BRO).
A bankruptcy restriction order means the bankruptcy will remain on your credit report for up to 15 years.
How does bankruptcy impact your credit score?
Bankruptcy will seriously impact your credit score, causing it to drop. How much depends on the CRA, the amount owed and a range of other factors.
While the bankruptcy is on your credit report, you will find it difficult (but not impossible) to get a mortgage or larger personal loan.
The good news is, there are things you can do to repair your credit score including using a secured credit card and other techniques.
If you’re considering bankruptcy
If you’re considering bankruptcy, get professional advice before you do anything. Talk to a debt charity or hire a professional to give you guidance.
It isn’t right for everyone and there are other options like a Debt Relief Order or Debt Management Plan that may be better.
I’m not qualified to give that kind of advice, only generalist advice. I strongly recommend working with people who really know what they are talking about.
