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What is bankruptcy?

Bankruptcy is a legal process which will start when you’re unable to repay your debts and all other solutions have been exhausted.

If you have assets such as property or vehicles, they will be sold to settle all or part of what you owe.

The bankruptcy process is designed to make sure your assets are shared fairly amongst the lenders and businesses you owe money to, and helps you to make a debt-free fresh start.

You can either declare yourself bankrupt by application, or creditors can apply to make you bankrupt if you owe them more than £5,000.

Can you get a loan after bankruptcy?

Bankruptcy negatively affects your credit score, which makes it much harder to borrow money once you’ve been declared bankrupt. This is because lenders view you as high-risk and will be concerned you’ll be unable to pay back anything they lend to you.

After bankruptcy, it will be more difficult to get things like:

• Loans
• Mortgages
• Credit cards
• Car finance

Once you're declared bankrupt, it's against the law for you to borrow more than £500 from a lender without telling them you're currently bankrupt.

After your bankruptcy ends (typically after 12 months), a record of it will stay on your credit report for six years. This means it could be harder for you to borrow money at this time, and you may only have access to certain loans designed for those with a bad credit score, meaning the cost of your borrowing will be more expensive.

How long after bankruptcy can I get a loan?

You can apply for a loan once you’re discharged from bankruptcy which is usually after 12 months. Being discharged ends your financial restrictions and releases you from most of your debts.

At this point, you’re free to apply for credit, however, the bankruptcy will be recorded on your credit file for six years. This means your loan choices will be limited, and the annual percentage rate (APR) will be higher on any loan you're eligible for, meaning the loan will be more expensive.

Although you’re legally allowed to apply for a loan once discharged from bankruptcy, some lenders may require you to be free of insolvency for two or three years before lending money to you.

Bear in mind your bankruptcy can be extended for longer than 12 months if you don't comply with the financial rules set by your trustee.

How much can I borrow after bankruptcy?

It depends on the loan company and their attitude to risk. Many lenders have specific policies for bankruptcy loans, so you may be lent a different amount of money than the amount you applied for.

To demonstrate you are creditworthy and can be trusted to repay a loan, lenders may ask you to provide evidence of successful borrowing since your bankruptcy, for instance, by using a credit-building credit card and always repaying the balance in full and on time.

How to get a loan after bankruptcy

Loans for people currently bankrupt are limited to £500, but after bankruptcy, there's no limit to how much you can apply to borrow. Unfortunately, you'll be charged a higher rate of interest, or you could be refused a loan altogether.

However, there are some steps you can take to increase your chance of success, even with a bad credit score.

• Cooperate fully with your trustee during the bankruptcy process.
• Sign up for an online credit reference agency like Experian, Equifax, or Transunion to access your credit report and check your score.
• Make sure your credit report is up to date, the information is accurate, and request any errors are corrected.

The official receiver does not tell the credit agencies when your bankruptcy ends, so you'll need to inform the credit agencies of your discharge and make sure your credit report is updated.

How to improve your credit score

The best way to boost your chances of getting a loan after bankruptcy is to build your credit score.

Now you are debt free, you can improve your credit rating by:

• Making sure you're registered to vots at your current address (even if you have no intention of voting)
• Sticking to the terms of any credit agreements
• Always paying any utility or telecom bills on time
• Use less than 25% of your credit limit if you have a credit card
• Not withdrawing cash on a credit card
• Limiting your applications for new credit products to one or two within a six month period
• Never being late or missing a payment on any credit products you've taken out
• Making sure all three major credit reference agencies have your current name and address correct
• Checking your report for anybody you're financially linked to and correcting the credit reference agencies if you're no longer linked to them (for example ex-housemates or ex-partners)

Are there any alternatives to bankruptcy loans?

Your loan options are reduced once you've been declared bankrupt, but there are some types of credit available to you once you’re solvent again.

Before applying for more credit, consider whether you really need a loan and if other options are available.

Here are some alternatives to a bankruptcy personal loan:

Credit building credit cards

This type of credit card is designed to help you build your credit score or get your credit rating back on track after bankruptcy or other experiences that have damaged your credit rating.

Credit builder credit cards usually have low credit limits and high APR’s initially, but if you pay off your balance in full and on time each month, you can avoid the high interest payments and build trust with lenders.

You can boost your credit score over time by sticking to the terms of the credit agreement. This means staying within the credit limit and no late or missed payments.

Guarantor loans

Guarantor loans are a type of unsecured loan where someone else (usually a close friend or family member) guarantees that the loan repayments will be made if you can't make the repayments. This reduces the risk of lending to you in the eyes of your lender.

The loan terms are the same as a personal loan, but you and the guarantor will have affordability and credit checks performed on you. This type of loan typically has lower rates of interest if your guarantor has a good credit rating.

Budgeting loan

If you've received benefits from a scheme like Income Support or Pension Credit for six months or more, and you need to borrow money to buy essentials like furniture or a fridge, you could be eligible for an interest-free budgeting loan from the Government. You may qualify for a Budgeting Advance if you're on Universal Credit.

Secured loans

A secured loan is also known as a homeowner loan because you need to own your own home to qualify. The equity in your mortgaged property is used as security against the loan.

If you’ve got a bad credit score or have been insolvent, you have a better chance of getting a secured loan than a personal loan because your property guarantees the debt.

Interest rates could be lower too, however, if you’re unable to repay the loan, your home could be repossessed, and the proceeds of the sale will be used to recover the money you owe.

How can I rebuild my credit after bankruptcy?

Once you've been through the bankruptcy process, which typically lasts 12 months, you can make a fresh start, free of debt. However, in the future you may still find that you're refused credit or only offered bad credit loans, which can be more expensive.

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