As a bankruptcy trustee I am often asked by individuals facing personal financial hardship what will happen to my credit rating if I formally declare myself bankrupt More importantly individuals are often concerned about their ability in future to borrow money for important things such as a house or a car.
The legal position is that the bankrupt is unable to borrow money over the prescribed limit (presently $5,409) without disclosing the fact that the individual is bankrupt. Clearly a lender will be cautious about making an advance in such circumstances. The position changes however once the individual is discharged from bankruptcy or even better if the bankruptcy is annulled. Once this takes place there is no longer any legal impediment to an individual borrowing money. In addition he or she is not under any legal obligation to disclose the bankruptcy. Of course lenders frequently request a disclosure of the past history of the individual which is a separate matter.
In addition the foregoing lenders will do a check with a Credit Reporting Body (CRB) on an individual’s history and of course the bankruptcy will appear. At present formal bankruptcy proceedings remain on individual’s credit record for seven years after the bankruptcy has been completed (notwithstanding the fact that most Bankruptcies are discharged after 3 years). This kind of credit referencing information simply augments other information obtained by lenders and has no legal bearing whatsoever on the credit arrangements. The information is merely to enable the lender to assess the likely risks in relation to the borrower.
It is important to note that a great deal of additional information is maintained by CRB’s on individuals. This information includes details of past credit applications, defaults, judgements and writs. It also now includes details of repayment history regarding consumer credit. Having regard to the other information recorded bankruptcy is often not the worst thing that can be reported about an individual in relation to the credit referencing.
Indeed credit referencing bodies report on “serious credit infringements” which generally speaking relate to individuals that have avoided being contacted by the creditors or commit fraud. In the worst case a “skip out” is recorded reflecting the fact that an individual has put themselves in a position where they can no longer be contacted by the creditors.
Where there has not been any “serious credit infringement” it is possible for individual to take action to repair his or her credit worthiness.
A “Certificate of Discharge of Bankruptcy” is an important document signed by a Bankruptcy Trustee indicating that an individual is now formally discharged from bankruptcy. An individual seeking to borrow money after discharge from bankruptcy will find this document extremely helpful in obtaining finance
In most cases the major banks will consider a Discharged Bankrupt for relatively straightforward loans such as housing loans providing the individual complies in all other respects (that is in relation to deposits and affordability). In some cases however an individual may have to go to second-tier lenders at least initially and be required to pay a higher interest rate until the credit referencing score has improved.
Individuals with an impaired credit report can take positive steps to improve the situation.The first step is to obtain a copy of the credit report and ensure that there are no errors or mistakes. Mistakes can and must be rectified. The second step is to ensure all future debts are paid on time. A handy hint here is to set up payment authorities for such things as utility bills and to ensure that other accounts are paid strictly on time. Over time expensive short-term finance such as credit cards and overdrafts can be refinanced into long-term loans with periodic payments. This improves the score and enables these loans to be refinanced again at competitive rates and conditions.
In summary just because an individual has had a chequered history so far as finances are concerned, even involving Personal Bankruptcy, a Debt Agreement or a Personal Insolvency Agreement it does not mean that things cannot be repaired over time.
Individuals who find themselves in too much debt should consider the benefits of filing for Bankruptcy. Myself or others at Jones Partners can advise and assist in this regard.