No one likes to be in debt and any type of debt will affect your credit rating. Declaring bankruptcy is often considered the last resort for insolvent individuals but while it has its advantages; it also comes with disadvantages. One of the main issues is bankruptcy and credit ratings as it has a much longer, greater impact on your credit profile than other forms of debt management plans.
Any serious debt situation can be frightening and you may feel you don’t know how to deal with it. The first step is to seek debt management advice, but it also helps to fully understand what bankruptcy involves and the difference it will make to your daily life.
What is bankruptcy and credit rating?
Before we look at how bankruptcy can impact your credit rating, let’s explain the two terms.
If you have debts in excess of £5,000 and are not in a position to pay them back using a Debt Relief Order (DRO), Individual Voluntary Agreement (IVA) or other insolvency plan, a final option is to declare bankruptcy. Whilst this stops both your creditors from taking court action against you and your debts rising even further, you still have to pay back as much of your debt as you can over the bankruptcy period, usually one year.
There are two ways to declare bankruptcy:
● A creditor can apply to the court to make you bankrupt and get their money back, or
● You can declare yourself bankrupt. This can be done online in England and Wales but in Northern Ireland and Scotland, it must be done through the courts.
When you declare bankruptcy, your insolvency practitioner or bankruptcy professional will assess any assets you may have that can be sold to raise money to pay back your creditors. These assets can include your car, any jewellery of value, any leisure equipment and tools, and can also include your house. However, you may be able to argue that any tools you need for work are not sold, so you can continue to earn an income, and you may not lose your house.
Whilst your creditors are no longer allowed to continue any legal action against you, and you will be debt-free after one year once the bankruptcy agreement has been discharged, declaring bankruptcy has a serious impact on your credit rating.
Your credit rating is ‘a measurement of a person’s or business’s ability to repay a financial obligation based on income and past repayment histories.’ In the UK, there are four main credit reference agencies – Experian, Equifax, Crediva and TransUnion.
How does bankruptcy impact your credit profile?
One advantage of declaring bankruptcy is that your debts are discharged once the bankruptcy agreement has ended, usually after one year. However, it will affect you and your family in several ways including your credit profile.
Although your bankruptcy agreement comes to an end after one year, it will appear on your credit profile for at least six years; in some cases, it will be seven years. This will affect your ability to apply for credit, such as a bank loan, mortgage and even when applying for a mobile phone contract. In addition, when you do apply for credit you are legally required to advise the lender of your bankruptcy status if the amount you wish to borrow is in excess of £500. It is a criminal offence if you do not admit to your bankruptcy and this includes any Bankruptcy Restrictions Order (BRO) against you that is actively in force.
You may even find that employers will assess your credit rating before thinking of employing you, and landlords are also entitled to check your credit reference before they will rent a property to you. If a lender is prepared to allow you to borrow money, you will be paying a higher interest rate as your risk level is higher. You may also be asked if you have been declared bankrupt by a lender, even if your bankruptcy has been discharged, such as when applying for a mortgage, and does not appear on your credit profile.
If it is your business that has been declared bankrupt, this could have a long-term impact on your ability to get credit or supplier accounts. You will probably find that most suppliers will require payment upfront and you could also have problems renting premises.
Some debts are not covered under bankruptcy including any court fines, student loans, maintenance or child support payments, personal injury debts, loans from social funds as well as secured debts, such as a mortgage, IPAs or IPOs.
Advantages of bankruptcy
There are some advantages to bankruptcy, including:
● Creditors are no longer allowed to continue with any legal action.
● Your insolvency practitioner or authorised bankruptcy professional will liaise with your creditors on your behalf.
● Some assets are exempt from bankruptcy, such as household goods, work tools or your car if it is required to do your job – if its value is not in excess of £1,250. In some cases, you may be able to keep your house, too.
● A portion of your income, if you have one, will be put aside to pay your creditors any remaining debt after the sale of assets.
● The debts covered by the bankruptcy will no longer have to be paid back on discharge of the bankruptcy agreement.
Disadvantages of bankruptcy
However, there are more disadvantages to declaring bankruptcy, including:
● Your credit profile is impacted for up to seven years and you will find it difficult to apply for any form of credit.
● You will have to pay a bankruptcy fee of £680.
● If you earn sufficient income, you are legally required to continue making payments to your creditors for three years.
● If you apply for a loan in excess of £500, you are legally required to declare your bankruptcy status.
● If you own your home, you may have to sell it. If you rent your home, your landlord is within their rights to end your tenancy.
● Any assets that are not exempt may have to be sold to pay back your creditors.
● You may find that many employers do not allow people to be bankrupt, such as financial institutions, and you may lose your job.
● You may have to close your business and its assets sold to repay creditors.
● It may affect any immigration status.
● Bankruptcy is a public matter and your bankruptcy status will be published in The Gazette including personal details (you may apply to court to have your address details withheld if there is the possibility of violence towards you or your family).
Company or individual insolvency is not something that anyone wants to deal with; however, the sooner a financial problem is recognised, the sooner it can be dealt with and the more potential the company has in recovering. If you are struggling with debt or are considering winding up a solvent company, contact Simple Liquidation for assistance. For more information on how our professional insolvency practitioners may be able to help your business, contact us today.