Bouncing Back From Bankruptcy in the UK
It’s no secret that bankruptcy and the current financial dire straits are intertwined. Mass redundancies, static wages and a general state of instability are key causes of bankruptcy we can lay squarely at the feet of the financial crisis. But then, bankruptcy and individual insolvencies famously precipitated the global recession.
Statistics held by the UK Government’s Insolvency Service demonstrate the relationship (see figure 2, here) – rises in both insolvency and bankruptcy date back to early 2005. Total individual insolvencies remain high: 25,006 in Q1 2013, compared with around 8,000 a decade ago. However, bankruptcies have actually returned to a level comparable with a decade ago (though the creation of debt relief orders did partially expedite the decline).
The realities of bankruptcy
A look at a decade of figures underlines another point: bankruptcy remains a reality for thousands of individuals every year regardless of whether the world’s economy is over a barrel or not. Even when bankruptcies are in relative decline, the reasons behind them retain a similar balance of aggravating factors. It’s a simple fact of life that people lose jobs, go through costly divorces or simply misuse credit options.
It’s important to remember that however you find yourself in bankruptcy, there is usually a way of bouncing back from it. True, the bounce is a slow one and only the disciplined will succeed, but the steps that must be taken are relatively simple:
Step one: understand credit and credit myths
Bankruptcy results in the division of most of your impractical assets and prevents you from applying for more credit for the duration of your status, which is usually one year. After such a period, it’s easy to become despondent. It doesn’t help that several widespread myths circulate about the credit status of the bankrupt. Common mistaken beliefs include:
- Being declared bankrupt ruins your credit rating forever
- Bankrupt people cannot borrow for six years
- Bankrupt individuals are placed on a blacklist
- Credit cards are exclusively available to people with good credit ratings
- The best way to repair a credit rating is to avoid borrowing
It’s important to understand that credit ratings are constantly in flux – though bankruptcy certainly has consequences, over time the effect can be counteracted, and restrictions expire. The truths that counter each of the above myths are:
- You can start repairing the damage once your bankruptcy is discharged (usually after a year). However, you should be prepared to wait for up to six months until credit will be accessible to you
- Though your bankruptcy is recorded against your credit score for six years, you can start to apply for credit as soon as your bankruptcy is discharged – it is possible to borrow from certain lenders
- There is no such thing as a credit blacklist. Credit providers simply measure your credit score against their expectations of an ideal applicant
- Credit cards for bad credit exist for former bankrupts
- Good credit reputations are built on paying back borrowed money, not on the avoidance of borrowing altogether
The myths surrounding money lending and financial problems don’t just cloud people’s judgement about their own situations – they also help stigmatise those in debt. Vanquis has a large list of credit myths on its resources pages, among other information to help those with bad credit.
Step two: understanding the risks
In step one, we brushed on the idea that the quickest way out of bad credit is to secure and borrow money on a credit card specifically marketed to people with poor credit histories. It is important to emphasise, however, that this is not without substantial risks. Bankruptcy can be overcome, but only with sensible borrowing on specialist cards.
If you borrow more than you can afford to repay, your credit rating could reach a negative range that is much harder to bounce back from. If your credit history shows that you have missed payments on a specialist card, other specialists will view you cautiously. If you are unable to get a specialist card, you may be unable to actively repair your credit history.
Step three: understand your situation
In addition to understanding the risks of counteracting bad credit, it’s obviously important to better understand exactly what your credit situation is:
- Your credit reference file contains everything that lenders can see about you. This can be obtained from the following credit agencies:
- You may have negatives against you that are unrelated to your bankruptcy but need to be overcome
- You may also find some outright mistakes – links with people you have no financial connection to, for instance. Apply to the credit agency to have a corrective notice placed on your file
- If past negatives were the result of special circumstances, you may be able to have these noted on your file
- Never attempt to hide your poor credit history – you’ll only risk making your situation far worse
This step will help ensure that you don’t have to do excessive credit repair work. It’s also important to avoid adding negatives. For example, avoid applying for many credit cards in a short period of time – this is noted on your record, and this can cause lenders to distrust you. The credit information gleaned from your reference file should already tell you whether you should be approaching a mainstream bank or a specialist for your money lending needs.
Step four: plan your spending
Budget planning is a crucial element of your bounce back. Your return to a positive credit rating is dependent on making repayments on time – ensure that you reach your targets by planning every aspect of your finances. There are numerous calculators online to help you with this:
- The Money Advice Service website contains a handy tool that will walk you through your finances in a quick and easy manner allowing you to get a strong overview of your present financial situation. The tool also offers a downloadable version of your budget that can be opened in most spreadsheet programmes, it is easy to save and there’s no need to hand over your personal details.
- The Debt Advice Foundation have a similar downloadable planner too