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  • Rebuilding Your Credit Profile After Bankruptcy

    February 14, 2018 | firstquality
  • There were over 25,000 bankruptcies in the United Kingdom in 2017, over 97% of which were personal bankruptcy cases. The vast majority were voluntary. If you file for voluntary bankruptcy, you be entering into what is known as a ‘debtor’s petition’ rather than someone else making you bankrupt. Either option will leave you with a severely damaged credit score.

    Bankruptcy can be a fresh start for many people, knowing that you no longer have to worry about debts being chased, letter and phone calls. It is in most cases a relief, but you should always seek advice before deciding to go ahead with voluntary bankruptcy as it will leave your credit in pretty bad shape which can take years to recover from. In most cases you will be unable to get any sort of credit, even companies offering loans for bad credit will turn you down.

    Being Discharged from Bankruptcy

    While there is no doubt that you will have a poor credit history for years after insolvency, it isn’t the destruction of your financial future that some people appear to believe. While a bankruptcy after discharged stays on your credit reports for 6 years, the impact diminishes over time. Believe it or not, you can begin rebuilding your credit as soon as you are discharged from bankruptcy.

    A ‘discharge’ is issued at the end of your bankruptcy, and it relieves you from your debt obligation. You only receive this opportunity once you have completed the requirements. After the debt has been discharged, creditors are not allowed to take collection action which means no more letters, calls or threats to sue. Please note that they can enforce liens attached to secure debts which means creditors can repossess and sell property attached to a lien even after discharge.

    Depending on the type of bankruptcy, certain debts can’t be discharged including:

    • Domestic obligations such as alimony and child support.
    • Court costs.
    • DUI debts and other fines resulting from criminal activity.
    • Debts not listed on your bankruptcy.
    • Certain taxes such as business taxes.
    • Student loans.

    While you should be discharged from bankruptcy after twelve months, it can sometimes happen sooner.

    Start to Rebuild Your Credit Profile

    You should begin with the basics when attempting to improve poor credit history. At this stage, lenders need to see that you have enough income to handle your existing obligations with a little left over to repay loans. After bankruptcy, you can’t receive another debt discharge for eight years.

    The sensible thing to do is create a budget to ensure you remain on top of your finances permanently. Don’t be afraid to ask a credit counseling service for assistance if necessary. Next, build a small emergency fund; as little as £250-£300 can ensure you don’t fall prey to payday lenders in the event of an unforeseen expense. Your emergency fund also prevents you from running up credit card debt too quickly.

    Although it will make for tough viewing, check your credit reports and dispute any false information that will negatively affect your credit score. Now, you must find out your credit score to analyze your current situation. Stick with one credit score type and check it monthly. Your best bet is probably the classic FICO score which ranges from 300 to 850.

    According to Experian, 60% of people have a ‘Good’ or better score which begins at 670. After bankruptcy, you will be in the 300-549 range which is ‘Very Poor’ and makes it tough to get decent credit.

    Borrowing Money After Bankruptcy

    Successfully repaying loans and credit cards is a great way to rebuild your credit profile but a poor credit history, and a bankruptcy makes it hard to gain the trust of lenders. One of the best ways to rebuild credit is a secured credit card. You deposit into a savings account, and it secures a line of credit. The credit limit is normally your deposit amount minus fees. For example, if you make a £500 deposit on a secured card with an annual fee of £25, your credit limit is £475.

    Unfortunately, your credit score will drop slightly for a short while if you are rejected so make sure approval is all but guaranteed. It is best to apply for a secured card at a credit union as they are more lenient with poor credit history than larger banks.

    Another option is a secured loan which is typically covered by community banks or credit unions. There are two types of secured loan:

    1. You borrow against money already on deposit. You can’t use this money when paying off the loan.
    2. You get the loan without an upfront payment, but the loan is put into a savings account and given to you once you have made the necessary payments.

    The financial institution then sends a report regarding your payment history to the credit bureaus.

    Advice for After Bankruptcy

    The sad reality about recovering from bankruptcy is that you’re in a difficult financial situation. Even if you receive credit, the interest rate will be much higher than if you have a high credit score. Why? Because lenders know that a person with a low credit score is at greater risk of defaulting on a loan. When you declare bankruptcy, you will have a poor credit history clearly on display once you are ‘discharged.’

    Rebuilding your credit in this scenario is a long process which requires patience and consistency of repayments. It should go without saying that you must pay your debts on time and it is imperative that you keep credit card balances low relative to the card limits. This ratio of debt to limit is also known as credit utilisation.

    Try and keep this level at 30% or below. For example, if you owe £300 on a card with a £1,000 limit, your credit utilization level is 30%. Remember, your payment history is responsible for a whopping 35% of your credit score, so the best way to rebuild your credit after bankruptcy is to spend within your means, and make small and steady on-time payments.