If you are declared bankrupt – irrespective of whether you applied for bankruptcy voluntarily or a creditor filed a petition to have you declared bankrupt – you may likely face a wide range of consequences. One of these, which can have a long term effect on your life, is the effect bankruptcy will have on your credit score.
Before considering how bankruptcy affects your credit score, in a lot of cases, including here at NOW FINANCE, you will find that being bankrupt prevents you from applying for credit at all. In other cases, being bankrupt might not prevent you from applying for particular types of credit, but the impact on your credit score means you could find it difficult for your application to be accepted.
Perhaps the most important way you can move on from bankruptcy is to learn the lessons of how you ended up being declared bankrupt in the first place.
While it goes without saying that you are unlikely to be accepted for any significant borrowing, you could also find it difficult to access so-called “non finance” credit, such as a contract for a mobile phone. Such are the consequences of bankruptcy that even a relatively small commitment of, for example, $40 per month may be out of reach.
Although mobile phone plans seem trivial, a person who has been declared bankrupt is likely going to find it difficult to get approved for the credit because the person is often deemed a high risk.
In order to understand the impact bankruptcy has had on your credit score, and how your overall credit history and status appears to lenders, you should check your credit file here or any other credit reporting agency.
If you are declared bankrupt, you will remain so for at least three years and one day. In circumstances where you repay all of your creditors in full, including interest, you may be eligible to have your bankruptcy annulled by your trustee. ‘Annulled’ means it is effectively cancelled. Credit reports will show that your bankruptcy was annulled for 2 years from the date of annulment, or 5 years from the date you became bankrupt (whichever is later). However, your name will still appear on the National Personal Insolvency Index forever.
While having the bankruptcy recorded on your credit file will be a detriment to your credit score, you will be able to ‘start again’ with your credit history and start building your credit file to demonstrate you are a responsible and reliable borrower in the future.
What steps can you take to ensure you begin to build your credit score post-bankruptcy?
Although bankruptcy is likely to affect your credit score and can have long lasting implications for your finances, it does not need to represent the end of your use of credit.
Perhaps the most important way you can move on from bankruptcy is to learn the lessons of how you ended up being declared bankrupt in the first place. While bankruptcy is never a pleasant experience, you can learn from and avoid any mistakes you made previously, whether these were over exposing yourself to credit, getting caught in the debt cycle, or failing to budget effectively.
Ensure you are set up for a brighter financial future, and when it comes to accessing and using credit again you will be in a better position to manage and deal with it.
Whether your first exposure to credit post-bankruptcy is via a mobile phone contract or a small personal loan, it is crucial that you only take out something that is manageable, so that you can be able to repay the loan on time and thus slowly build up your credit score once again.
Avoid accessing credit for the sake of it; it can be tempting to apply for new credit cards, personal loans, and a variety of other credit products once you know your credit score has improved, but doing so could easily place yourself in financial difficulties once again. If you think you will struggle to manage your credit repayments, then you should consider avoiding credit products completely.
Although bankruptcy is likely to affect your credit score and can have long lasting implications for your finances, it does not need to represent the end of your use of credit. While dealing with the consequences of bankruptcy may prove difficult, providing you learn from the lessons of the past and do not over expose yourself to credit in the future, it is possible to move on and enjoy a relatively positive financial outlook in years to come.
Please seek independent legal advice for specific cases. This article is for general information only.
Disclaimer: This article contains general comments and recommendations only. It is not intended to be and should not be construed as legal advice. This article has been prepared without taking account of your objectives, financial situation or needs. Before taking any action, you should consider the appropriateness of the comments made in the article, having regard to your objectives, financial situation and needs. If this article relates to the acquisition, or possible acquisition, of a particular credit product you should obtain and consider the relevant disclosure documents before applying for the product.
NOW FINANCE Blog subscription form