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Bankruptcy can be a scary and life-changing process. On the one hand, it can free people from debts they’re unable to pay and give them a fresh start to rebuild their finances and credit scores. On the other hand, it can have severe consequences that make day-to-day life extremely difficult.
Whether you’ve already declared bankruptcy or you’re thinking about it, you might have concerns about the impact it has on your credit score. You might be wondering how long bankruptcy stays on your credit report and how you’ll buy a house or get a phone contract in future.
Here’s an overview of everything you need to know.
Bankruptcy is a legal status that can be implemented for people who are unable to repay the money they owe. It’s not a decision to be taken lightly and is typically treated as a last resort. If you’ve tried everything you can to repay your debts, this might be an option for you but always seek free independent advice from a qualified professional first.
You’ll no longer have the pressure of dealing with your creditors. After one year, you could be ‘discharged’ from your debts which essentially means you don’t owe them anymore, although you may still be required to pay some of the debts, and also lose any potential assets as collateral.
A civil servant referred to as an ‘official receiver’ will take control of your property and you’ll need to provide them with information about your finances. It’s their job to assess whether you can afford to make payments towards your debts, investigate your conduct and financial affairs, and inform your creditors of your bankruptcy.
Though bankruptcy can free people from the pressure to pay debts they’ll never be able to resolve, it can have severe and long-lasting consequences on a person’s life too.
When you’re declared bankrupt, the value of your possessions is usually divided between those you owe money to. You might lose your house, car, jewellery, furniture and other valuables.
You may be allowed to keep items that are deemed essential, such as a car you rely on to get to work, attend regular hospital appointments, or take your children to school. You might have to sell your car if it’s expensive and buy a cheaper one, before giving the Official Receiver the difference.
Your bank accounts may be closed and this can make day-to-day life difficult. You may be able to open a basic bank account, as these are designed to help people with bad credit. With a basic bank account, you’ll have somewhere to keep your money and ensure your wages are still paid, but you won’t have access to overdraft facilities.
Some people have their passports taken away after declaring bankruptcy, but this is rare. The courts will usually only do this if they think you’ll travel abroad to sell your possessions.
If you’re in England, your status will appear in the London Gazette and if you’re in Northern Ireland, it’ll appear in the Belfast Gazette.
Your bankruptcy will also be seen by:
Creditors, banks and building societies
Utility suppliers
Professional bodies
Your landlord
It will also be visible on the government’s bankruptcy and insolvency register. It’s unlikely that your friends and neighbours will find out about this because very few people know about the register. It’s extremely rare for someone’s bankruptcy status to appear in local or national newspapers.
After six years, bankruptcy will no longer be on your credit report. Normally, bankruptcy will last for 12 months, and it will be on your record from the start of this date.
Lenders will look at your credit profile whenever you request a loan from them, so you may struggle to access credit until the bankruptcy details have been removed from your file. Employers are allowed to ask for credit information before they employ you and landlords can do the same before agreeing to let a property to you, so it may cause some difficulties when looking for work or a new property.
Some lenders are willing to approve loans for people who are bankrupt, but they’ll usually treat these borrowers as high-risk customers and may charge a higher rate of interest.
Once your bankruptcy status has been removed from your credit report, you should find it easier to obtain loans, get new jobs and rent a home.
However, even after your credit report has gotten the all-clear, lenders can still ask if you’ve ever been bankrupt before. This is particularly common when applying for a mortgage. This doesn’t mean you’ll never be able to buy a house, but it can make it much harder.
Bankruptcy doesn’t mean you’ll struggle with your finances forever. There are lots of proactive steps you can take to turn things around and rebuild your credit.
Your first step might be to order a copy of your statutory credit report from one of the three credit referencing agencies, Equifax, Experian and TransUnion.
Once you’ve received it, check your credit details are correct and your personal information is up to date. If you notice that you’re listed as living at a different address, this needs to be corrected. Add a short statement to the report explaining why you got into debt – this is known as a Notice of Correction (NOC). This could include details of illness, redundancy, divorce or other financial pressures.
If you’re confident that you can comfortably manage debt going forward, consider types of credit designed for people with low credit ratings. You might not be able to borrow much and the interest rate is likely to be high, but you can avoid getting charged any interest by paying on time and in full.
Before making an application for credit, check your credit report online. It’s also possible to check your eligibility for personal loans and credit cards too. You can do this by using credit referencing websites if they offer this service. This trick can help you avoid rejections from lenders.
When applying for credit, spread out your applications as much as possible.
If you are doing hard credit checks (and not soft credit checks), your credit request will result in a mark being left on your credit report.
Too many marks over a short period of time can lower your chances of getting credit in future. It can be a vicious cycle and one rejection can lead to another.
Good financial habits can take some practice but by staying within your budget, using credit sensibly, and making sure you never borrow more than you can afford to pay back, you can improve your credit score and avoid having to face the bankruptcy process a second time.
If you are experiencing financial difficulties or thinking about bankruptcy please see professional independent advice. You can find more advice on MoneyHelper.
