How will bankruptcy affect me in the future?
Deciding to go bankrupt can have long lasting effects on lots of areas of your life. As we have explored in other articles, bankruptcy is often a good option if you’re struggling with unaffordable debt, and you can write off most of your debts to give yourself a clean slate financially. However, this is a formal insolvency process with strict rules and it can affect other parts of your life such as your home and career.
How can bankruptcy affect me?
Bankruptcy carries a stigma which means that many people disapprove of this solution without fully understanding it. If you go bankrupt, you may experience conflicting feelings of relief and guilt, particularly if your friends and family do not understand your decision. People often struggle with these feelings and the emotional impact of bankruptcy, which causes them to suffer unnecessarily. This is not a decision that you should be ashamed of, particularly since the really good news is that bankruptcy is not the end of the road financially. If you are worried about the perception of bankruptcy and how you will manage this, there are many support groups and forums out there which could be a good place to talk with other people that are going through a similar experience.
Although being bankrupt at some point in your life will have a negative impact on your credit report, meaning it will affect how future lenders view you and make it difficult to get further credit, the situation will get easier as time goes by, especially if you work to improve your credit rating by keeping on top of all payments and not borrowing more than you can afford to pay. After just one year you could be entirely debt free, which is not a bad price to pay for a reduced credit score.
How long does bankruptcy stay on record?
Bankruptcy will stay on your credit file for six years after the bankruptcy order is made. At this point, the process will start. This information warns lenders and creditors that you may be at a high risk of defaulting or falling behind on payments, which will make it difficult to take out more credit. But, if you are in a lot of debt anyway, your credit score is likely to be very poor anyway. It is possible that declaring bankruptcy will not affect a credit record any more than multiple defaults already on a poor credit rating will.
Does bankruptcy affect your employment?
Generally, it is unlikely that you will have any employment problems, but you should be aware that you may face restrictions if you work certain job sectors, noticeably the financial or law enforcement industries. It would be sensible to check with your employer or union representative just to be sure that you will not be affected. In most cases, you don’t need to tell your employer if you go bankrupt. But there are some jobs you cannot do if you declare bankruptcy, and if you already do one of these jobs, you may lose it when you become bankrupt. You should be particularly careful if you have professional qualifications and always check with your industry body.
Some industries where bankruptcy will an effect on your job include:
- Armed forces
- Cash handling
- Financial services
- Pub licensee
- Self employed as a sole trader or partnership
If you are self-employed and decide to go bankrupt, your existing business will be closed down and you will have to start to trade again. This is not the case if your company is a limited liability company registered at Companies House, but depending on the circumstances of your bankruptcy, you may be banned from remaining as a director of that company.
This may sound scary, but the reality is that lots of people worry unnecessarily about their job and bankruptcy. Unless you work in one of the areas above, it is very unlikely that you will have any employment problems, but it is important that you get advice about your job before you make a decision.
Can you get a bank account after bankruptcy?
Yes, you can get a bank account. You may only be able to get a basic bank account, but most high street banks now offer basic bank accounts which are suitable for bankruptcy. These accounts have restricted features compared to a standard current account. For instance, you will be able to withdraw and deposit money to and from your account, but you won’t be able to get a cheque book. This also means that it is unlikely that you will get a bank account with an overdraft facility or the capability to carry out direct debits. Many of these accounts do not have a visa card and you will only be able to withdraw cash using the account card. You can get pre-loaded accounts if you need to shop online with your card. This means that you have no chance of going overdrawn and owing more money to the bank.
Can you get a mortgage after bankruptcy?
Whether or not you can get a mortgage after bankruptcy will depend on a number of factors, but do bear in mind that it is not an exact science. What is certain is that any mortgage will be offered on poor terms compared to the market standards. For example, you may face high interest charges and arrangement fees, and a shorter term than usual. You are likely to struggle to borrow big mortgage sums and will often be expected to pay a large deposit between 20 and 40% of the property’s value.
Generally speaking, it is a good idea to wait at least 2 years following the bankruptcy to buy a house as you are more likely to get better terms and a lower interest rate. There is no guarantee that after 2 years you will qualify for a mortgage. In all honesty, it is unlikely that you will get a mortgage while the bankruptcy still appears on your credit file.
Any lender will want to lend to someone with negative marks on their credit score, including missed payments, defaults and bankruptcy. These indicate that the borrower is a potential non-payment risk. The good news is that there are specialist lenders who may consider your mortgage application while bankruptcy still appears on your file. There are often additional conditions attaching to these mortgages and you may need a guarantor with substantial equity in their own property.
For the best chance of qualifying for a mortgage, particularly with a smaller deposit, it is a good idea to wait until your credit rating is back to a reasonable score. Unfortunately time is the only way to improve a bad credit score and there is no ‘magic solution’. In order to get a good mortgage deal, you are best waiting until after your bankruptcy is off your file completely; so, six years from when you first declared bankruptcy.
Overall, it will not be easy to get a mortgage after bankruptcy and you should assume that you need a larger deposit than someone on the same income who has not been bankrupt. Time and patience are key to obtaining a mortgage, especially once you have been bankrupt. You have to think carefully if you will need a mortgage in the next six years, but remember that if your credit rating is already poor, you are still very unlikely to get the mortgage you need, with or without bankruptcy on your record.
Can you rent after bankruptcy?
Renting somewhere new when you are bankrupt can also be difficult as the application process usually involves a credit check. That said, it is not impossible to rent whilst bankrupt and after bankruptcy.
There are 4 main ways around this problem:
- Find somewhere to rent privately, not through a letting agent
- Get a guarantor
- Have a very large deposit – or pay a number of months in advance
- Delay your bankruptcy until after you have moved
If you are already renting a property when you go bankrupt, there may be a clause in your Tenancy Agreement which allows your landlord to end your tenancy if you are made bankrupt. But in practice, this is unlikely to happen as a landlord would not want to get rid of a good tenant. The process of finding a new tenant is likely to be time consuming and expensive. If you live in a council or housing association property, it is extremely unlikely that you will lose your home or struggle to meet the rental criteria.
As with any debt solution, bankruptcy has pros and cons. If you are seriously considering how to manage your debt, you should look very carefully at whether bankruptcy would suit you. We would always recommend you take independent advice before making a decision.