When you’re no longer able to repay your debts, you file bankruptcy. This is a legal process through which you get much-needed relief from some or all of your debts. During a bankruptcy, your creditors no longer can contact you to repay your debts. In the meantime, a representative works with you to begin repayment and negotiation with debtors.
However, bankruptcy isn’t something to enter lightly. It’s a type of debt forgiveness that stays on your credit report for several years. It can impact your ability to take on more debt, get a home mortgage, or even travel overseas. While it’s true bankruptcy is the right solution for many, it’s best to think of it as a last resort option. With that in mind, how long does bankruptcy stay on your credit report?
How Does Bankruptcy Work?
First, how does bankruptcy work? This is a way to start fresh by forgiving debts that you can’t pay. If you find yourself struggling to make ends meet, you might decide that bankruptcy is the best solution for you. This is a legal process where the court protects you throughout the bankruptcy process, assigning a trustee to manage your debts and assets.
Anyone can apply for bankruptcy, and there is no required amount of debt you need to have. However, your debt must be insolvent. That means you’re no longer able to pay your debts when they’re due.
To apply for bankruptcy, you need to submit a Bankruptcy Form through the Australian Financial Security Authority. You need to give details about your income, assets, debts, and business involvement. Though a final resort, bankruptcy frees many from the burdens of their debts so they can get a fresh start.
What Are the Consequences of Bankruptcy?
With that in mind, what are the consequences of bankruptcy? Because this is considered a final resort, it comes with pretty extreme consequences. For some, this is still an effective way to manage debt. For others, it might not be the best fit. Here are the consequences of being bankrupt:
- Income: If you earn over a certain threshold, you must make compulsory payments to your trustee. The amount depends on your situation and dependents.
- Employment: Your trustee also needs to be aware of your employment status, whether you change jobs, or change your income in any way.
- Savings: While you can save money during bankruptcy, this needs to be kept in a normal savings account. If you move funds, they could be used to repay your debts.
- Travel: Your ability to travel overseas is also limited while bankrupt. If you wish to travel overseas, you will need to submit an application to your trustee.
- Assets: Your trustee is also responsible for selling assets, like vehicles, real estate, and more.
- Credit: For a period of 5 years, you have to inform credit providers of your bankruptcy whenever you apply for credit over a specific amount. This makes it difficult to apply for loans, credit cards, or mortgages.
- NPII: Lastly, your name appears on the National Personal Insolvency Index (NPII) forever. This continues even after the limited period of bankruptcy ends.
While these consequences are steep, they’re temporary for the most part. Once you’re through with your bankruptcy period, you will no longer have these restrictions associated with your finances or credit ability.
How Does Bankruptcy Impact Your Credit?
Similarly, how does bankruptcy impact your credit score? More importantly, how long does bankruptcy stay on your credit report? Once your bankruptcy ends, most of your debts are released. That means you no longer need to pay them. However, your credit will still be impacted for several years. It shows your bankruptcy for either:
- 5 years from the date you became bankrupt or
- 2 years from when your bankruptcy ends
Whichever happens later is how long your credit is impacted. Even then, it can take a lot of time to rebuild your credit rating to good standing. Still, it’s helpful to have this fresh start with your finances. This helps you build a new life with the big-picture in mind.
Additionally, once your bankruptcy ends, you have no restrictions on applying for credit or loans. While you might need to improve your credit rating, this is at the discretion of the lender.
How to Rebuild Your Credit After Bankruptcy
Life after bankruptcy relatively goes back to normal. One of the biggest differences is the negative hit to your credit, but you can still take action. With each positive mark on your credit history, your overall score rises over time. The better your rating, the more options you have when it comes to favourable loans, credit, and mortgages.
1. Keep up payments with your non-bankruptcy accounts.
Not all accounts are closed during your bankruptcy. Keep in mind which accounts remain active, and continue to pay these balances down. As you lower your debt-to-income ratio, you boost your credit. If you can, make more than your minimum payment. By continuing to pay on time, you show lenders you’re reliable.
2. Stay with your job.
Another important way to show stability on your credit report is to stay with your current job. While job-hopping won’t impact your credit score directly, it’s tricky to do while bankrupt. Additionally, you want to show that you have reliable, sustainable income. Your job history is one of the most important factors when applying for a loan or credit.
3. Be smart about applying for new credit.
While there are a lot of great reward cards out there nowadays, don’t feel tempted to apply for the sake of it. Remember that each new lending application prompts an inquiry into your credit report. Too many of these can hurt your credit score over time. Make sure you’re a good fit for any new credit cards or lines of credit and consider whether this is debt you need to take on.
4. Keep your balance low.
If you have any other loans or credit cards, keep your balance as low as possible. When your balance is low, it shows that you’re using a smaller percentage of available credit. It’s recommended to never use over 30% of available credit, and this is much easier to repay. You want to avoid falling back into the debt-repayment cycle.
5. Check your credit report regularly.
Lastly, make sure you check your credit report regularly. Even though bankruptcy damages your credit report, there still might be other errors. You want to dispute any errors as soon as possible to keep your account up-to-date. You can check your credit report from the bureaus for free each year, so take advantage of this.
What Are the Alternatives to Bankruptcy?
Similarly, bankruptcy isn’t always the best fit for every situation. Before you declare bankruptcy, consider some alternatives to see if they’re a better fit to get your debt under control. When in doubt, talk to a financial professional about the best options for you.
- Debt Agreement: First, a debt agreement is an agreement between yourself and your lender that you’ll repay your debts in new terms. You might agree to smaller repayments or a lump-sum repayment, depending on your situation. However, this still can impact your credit rating.
- Personal Insolvency Agreement (PIA): This is similar to bankruptcy, and a trustee is appointed to manage your financial affairs. This still is recorded on your credit report.
- Informal payment arrangement: An arrangement with your lender to pay off your contract outside of the original terms is an informal debt agreement. However, you need to keep the account in good standing to avoid impacting your credit.
- Consolidation loans: Sometimes it makes financial sense to pay off all of your debts with a single consolidation loan. This is especially true if you can find a better interest rate and loan terms. Still, make sure you can pay this loan back on time to avoid any late fees or high interest rates.
Though there are legitimate alternatives to consider, bankruptcy might still be the best fit for you. If you’ve already tried to negotiate with your lender, for example, this might be your last resort. Similarly, if your liabilities and debts exceed your income and assets, it’s time to take action. In simple words, if you’re unable to continue repaying your debts on time and you don’t know what comes next, it’s very possible bankruptcy is the right solution.
Take Action to Control Your Debt
In conclusion, there’s no shame around filing for bankruptcy. For many Australians, this is an effective way to find relief from long-term debt. Not only does it stop lenders from harassing you, but it gives you the space you need to repay your debts over time. Unfortunately, this does come with significant consequences.
Luckily, these don’t last forever. While your credit will be impacted for 5+ years, this is still an opportunity to start fresh. If you’re considering bankruptcy, now is the time to take action. A debt-free future is possible, but you have to take the next step. When in doubt, you’re not alone. The team at Debt Busters are here to guide you every step of the way. Schedule a call today to talk about your options.