While declaring bankruptcy may be able to provide you with some degree of immediate relief in terms of your debts, it will also generally have a long-lasting impact on your personal financial situation. Part of this is the mark it could leave on your credit report and credit score.
While your bankruptcy will generally last for three years and one day from the date you were declared bankrupt, credit reporting agencies will keep note of that same bankruptcy for the longer of the following two periods:
- five years from the date you became bankrupt
- two years from when your bankruptcy ends
Additionally, your name will be permanently listed on the National Personal Insolvency Index, which keeps track of insolvency proceedings in Australia.
How would bankruptcy affect my credit score and report?
While it’s impossible to guess how badly any individual’s credit score will be impacted by bankruptcy – the algorithms used by lenders and credit reporting agencies are entirely secretive – it’s safe to say a bankruptcy will likely have a negative effect on your credit score.
As mentioned, your credit report will note a bankruptcy for five years from the point at which you declared bankruptcy, meaning your credit score could be impacted by the bankruptcy for the same period.
Your best bet is to get your bankruptcy sorted out and closed in as little time as possible – your credit report will display the bankruptcy for a minimum of five years, but depending on how long it takes you to get out of bankruptcy, that period could end up being closer to a decade. The sooner you get the bankruptcy wrapped up, the sooner you can start getting your credit score back on track.
How might I get my bankruptcy discharged early?
The Australian Financial Security Authority advises that while a bankruptcy will usually be discharged 3 years and 1 day after your bankruptcy application was accepted, you may be able to ‘annul’ your bankruptcy. Annulment is the early cancellation of your bankruptcy, and can be potentially be done in one of three ways:
- Paying off all your outstanding debts in full – this includes interest, realisations charges, and any expenses charged or incurred by your trustee
- Arrange a ‘composition’ with your creditors; this is a negotiated agreement in which they accept a final payment which is less than the sum of your total debt
- Prove in court that you should not have been made bankrupt in the first place – the AFSA recommends you seek your own legal advice regarding this option
If one of your outstanding loans is a credit card debt, you may be able to utilise a balance transfer (responsibly) to manage your debt and make it easier to pay off.
The table below displays a snapshot of credit cards with 0% balance transfer offers on Canstar’s database. These results are sorted by the length of the 0% balance transfer period (longest to shortest), then provider name (alphabetically).
How could bankruptcy affect my ability to get a loan?
While a poor credit score can reduce your chances of being approved for a loan or credit, bankruptcy may prevent you from being able to even apply for credit or a loan with many lenders. In certain circumstances, it is a criminal offence if you are bankrupt or subject to a debt agreement to obtain (or attempt to obtain) credit.
Many lenders have a policy to decline loan applications made by bankrupt people. This means they could see the bankruptcy recorded on your credit report and immediately deem you ineligible for the loan/credit you’ve applied for, regardless of your overall credit score and history.
If you do want to apply for credit or a loan while bankrupt, your options will most likely be quite limited, and only include small-scale forms of lending like personal loans, depending on the lender in question and the size of the loan you’re applying for.
If you do apply for a loan above a certain limit you must let the lender know about your bankruptcy. This limit is indexed quarterly. At the time of writing, the indexed credit limit set in the Bankruptcy Act and regulations is $5,703. This means for loans worth more than $5,703, you must disclose your bankrupt status when:
- seeking to obtain goods or services on credit, by hire purchase, or cheque
- when leasing, hiring, or promising to pay for goods and services
- when seeking to obtain an amount by promising goods or render services
You may have better success applying for a loan or credit which is secured in some way, usually against a vehicle. Keep in mind that if you own one or more vehicles when you declare bankruptcy, you can only hang on to them if your equity share in the vehicle(s) is $7,800 or less and they are used mainly for transport.
When it comes to taking out a loan, some lenders stipulate that in order to be used as security for a loan a vehicle must be worth above a certain amount, often in the ballpark of about $5,000 – this means that even if you’re allowed to hang on to your vehicle after declaring bankruptcy, it may not be eligible for use as security against a loan from your lender of choice.
As well as trying to avoid bankruptcy in the first place, if you do find yourself declaring bankruptcy, you may be able to minimise the impact on your credit score by taking appropriate steps to reduce the duration of the bankruptcy period.