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How is your credit rating affected by bankruptcy

Published: 08 May 2024

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Find out exactly how your credit rating will be affected if you go bankrupt. Surprisingly, it may not be as bad as you think.

Use this guide to discover everything you need to know including how to repair your credit file after bankruptcy and how long you have to wait until you can borrow again.

Contents

What happens to your credit rating when you go bankrupt?

After you go bankrupt, a record of your bankruptcy will be automatically added to your credit file by the credit reference agencies. Your credit score will become much worse as a result.

Until your credit rating begins to repair, you are very unlikely to be able to get new forms of credit because you will fail most (if not all) lenders’ credit checks.

The record will remain on your file for 6 years from the start date. After this time, the reference agencies automatically remove it.

During the year you are bankrupt, you can’t borrow money in the form of a bank loan or credit card and it is unlikely you will get store credit. In addition, suppliers may refuse you for credit related applications such as a new mobile phone contract or pay monthly insurance.

How can you improve your credit rating after bankruptcy?

Your credit rating will not be 100% clear until the credit reference agencies remove the record of your bankruptcy from your file. This will happen 6 years from the start date.

However, you don’t have to wait this long to start getting credit.

Realistically, there is nothing you can do to repair your credit rating while your remain bankrupt. However, you will normally be discharged after 1 year. There are then actions you can take to improve your credit rating straight away.

Doing these will mean you will be able to start borrowing again sooner.

The Insolvency Service will delete your record from the Individual Insolvency Register after the date you are discharged. It will then take 3 months for the change to be visible on the register. Once your record is no longer visible on the register, start doing the things below.

There is no way you can remove the record of your bankruptcy from your credit file any earlier than 6 years from the start date.

improve credit rating after bankruptcy

Confirm the status of your old accounts

Get a copy of your credit file. Check the status of all of your old accounts that were written off by your bankruptcy.

These should now be updated to say “partially satisfied” thus confirming that the balance is no longer owed.

Where this is not the case, you can escalate to the lender’s data controller and request the change.

Review and CCJs and defaults recorded on your credit file

Check your credit file for all CCJs and default notices.

If any lenders have issued these after the date of your bankruptcy, contact their data controller. They are legally obliged to change the issue date to no later than the date of your bankruptcy.

Doing this will ensure that no negative records remain on your file after the record of bankruptcy is finally removed.

Start using a credit repair credit card

After your record has been removed from the insolvency register, you should be successful in applying for a so called credit repair credit card.

Your chosen card provider will give you a small credit limit to begin with. Start using this for everyday expenses. But remember to pay it off in full at the end of each month. This way you will avoid expensive interest charges.

Taking this action will mean that you start to build up a history of responsible credit usage on your credit file. In time, this will make it more likely that more lenders will start to offer you more forms of credit such as bank loans.

Typical credit repair cards include:

  • Capital One
  • Aqua
  • Vanquis

Only start taking the actions described above after the Insolvency Service has removed the record of your bankruptcy from the Individual Insolvency Register.

credit repair credit card

Is going bankrupt worse for your credit rating than other debt solutions?

You might think that there could be nothing worse for your credit rating than going bankrupt. In fact this is not the case.

Affect on credit rating – IVA compared to bankruptcy

Starting an IVA has the same effect on your credit rating as going bankrupt. This is because just like bankruptcy, the credit reference agencies add a record to your IVA to your credit file which remains there for 6 years.

The record of the IVA on your credit file will mean you will fail potential lenders checks and not be able to get new forms of credit in exactly the same way as if you were bankrupt.

In terms of the time it takes to repair your credit rating, arguably you are better off going bankrupt. The reason for this is you can then start the repair process immediately after you are discharged.

Within 2-3 years of the start date of your bankruptcy, you are likely to be able to have bank loans and credit cards if you wish because of the improvements which have already been able to make to your credit file.

This is not the case with an IVA. If you use this type of debt solution, you have to wait until the Arrangement is completed (which normally take 5-6 years) before you can start repairing your credit rating.

Affect on credit rating – Debt Management Plan compared to bankruptcy

Unlike bankruptcy, if you start a debt management plan, a record of the Plan is not recorded on your credit file. However, your credit rating will still be negatively affected.

Your creditors are likely to issued default notices against you (following their standard process). These will be recorded on your credit file and as a result your credit rating will become poor.

The record of a default notice stays on your credit file for 6 years – the same length of time as bankruptcy. As a result, you will struggle to borrow from main stream lenders for at least this length of time.

How long after going bankrupt can you get a mortgage?

The first thing to understand is that it is possible to get a mortgage after going bankrupt. You are not somehow blacklisted from buying a property forever.

That said, you need to be prepared to be patient. This is because as a rule of thumb, You will only be able to start thinking about getting a mortgage 2-3 years after the start date of your bankruptcy. And then only with a sub-prime lender.

Sub-prime lenders do charge relatively high rates of interest. As a result, if you do take a mortgage with one of these providers, your repayments will be relatively expensive.

You will need to wait longer to get a mortgage from a high street lender (such as a high street bank or building society). This is because, generally speaking, these lenders will not consider you until the record of your bankruptcy has come off your credit file (6 years after the start date).

Getting a mortgage in the future will be no easier if you use an IVA. Even if you settle the Arrangement early, you will not be able to get mortgage with a main stream lender until the record has come off your credit file – 6 years from the start date.

If you want a mortgage within 6 years of going bankrupt, you can initially agree a deal with a sub-prime lender. You can then switch to a cheaper product after the 6th year when your credit file is clear.

mortgage after bankruptcy

Can you still pay your mobile phone and utility bills if you are bankrupt?

Despite the affect on your credit rating, going bankrupt will not affect your current mobile phone contracts or utility accounts. These will remain running.

Utilities when bankrupt

You can continue to use the same utility supplier(s) after you go bankrupt. This is because they should not be affected by your poor credit rating. As long as you maintain the ongoing payments they will probably never find out.

If you have any utility arrears in your name, your bankruptcy will write these off because they are unsecured debts. The supplier will change the balance of your account to zero. You then start paying your normal monthly payment.

Mobile phone when bankrupt

After you are bankrupt, you can continue to pay your mobile phone contract. The fact that your credit rating is poor does not affect this even if you are paying for your phone itself on a monthly basis.

The only time you may face an issue is if you want to switch to a different provider. Because your credit rating is poor, it is likely to mean that you will fail their credit check. The answer to this is to pay as you go until your credit rating starts to improve.

Car insurance when bankrupt

Your car insurance should not be affected by your bankruptcy. You simply maintain your monthly car insurance payments.

If you need to renew your car insurance during the year you are bankrupt, you need to tell the insurer you are bankrupt. This is particularly the case if your premium is more than £500 and you want a facility to pay monthly. The pay monthly facility is a form of credit. You can use it as long as the insurer is aware of your situation.

   Written by James Falla

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