Credit Building

Will filing for bankruptcy affect my credit score?

Mar 8, 2023

Filing for bankruptcy is a really big decision and shouldn’t be taken lightly. However, for people struggling with money problems and mounting debt, it can also offer a new start and a foundation to rebuild their lives. But how does bankruptcy affect your credit score? Loqbox takes a look.

While bankruptcy can be a bit of a reset button for those in serious debt, it should only ever be considered as a last resort. The effect on your finances can be dramatic and long-lasting.

Your assets, like your house or your car, can, in certain circumstances, also be seized by creditors. Filing for bankruptcy also has a big impact on your credit score. Read on to find out more.



What is bankruptcy?

When a person’s debts are more than £5,000, and they don’t have the funds or means to pay them back, they can declare themselves bankrupt. It’s basically a legal way of saying that you’re no longer able to repay your debts. The money you owe is more than the assets you possess.

Once you’ve been declared bankrupt, the value of any of your assets — like your car or your house — can be distributed to the lenders that are owed money. You’re able to keep enough money for daily living, but anything above the basics  can be put  towards your debts. Your bank account could be frozen, your cards cancelled, and your savings could be seized. 

However, you’re then legally protected from further legal action on the debts. Bankruptcy can only be filed by individuals, not companies or partnerships. But lenders can actually declare you bankrupt - so it’s good to be aware of that! If you don’t repay your loans, credit cards or mortgage, you could find that eventually you’re declared bankrupt. 




Checking if bankruptcy is the best option for you and how to apply

Life isn’t always plain sailing, we know. If you’ve checked for other options on dealing with debt, weighed up the impact that bankruptcy can have on your overall finances, and still know it’s the best path for you, then here’s what you need to know:

Applying for bankruptcy yourself isn’t free. It costs £680 to start the legal procedure, and the government has put together this full guide of what to expect afterwards.

If you are worried about your debts then the best thing to do is to seek out free, regulated debt advice.  A number of charities exist in the UK to help make sure you know what your options are.

If you’re reading this article though, chances are you want to know exactly how filing for bankruptcy affects your credit score, how long it stays on your credit report, the timeline of how it affects your score, and how you can improve your credit score after bankruptcy happens, so read on.



Does bankruptcy affect credit scores?

Bankruptcy means you’re legally protected from your debts. While that may provide some much needed relief, bankruptcy can have a really negative impact on your financial situation and your credit score which could cause big problems in the future. You’ll likely see your credit score drop a lot after bankruptcy. 


What will my credit score be after bankruptcy?

When you declare bankruptcy and the note is added to your credit report, you will likely see your credit score drop considerably.

This is because you will be seen by lenders as ‘high risk’ (even though you may have very valid reasons for your circumstance). In fact, for at least a year after you are declared bankrupt, you legally have to inform any lenders of it if you attempt to borrow any more than £500.


How soon will my credit score improve after bankruptcy?

For those based in the UK, it could take years. Your credit scores show how creditworthy you appear to lenders. Although they don’t look at your credit score, it’s a useful summary for you to understand your credit report and probability of being accepted for loans, credit cards, mortgages, etc.

Your score is generated using information held on you by the top three credit reference agencies (CRAs) in the UK: Experian, Equifax and TransUnion.

If you don’t know your credit scores, you can actually take a peek at each of the main CRAs for free using these super useful services. They let you see your credit scores as often as you’d like to without impacting them:

ClearScore (uses Equifax data)*
Credit Club (uses Experian data)
Intuit Credit Karma (uses TransUnion data)
*We like to be open and honest. If you sign up for ClearScore using this link we get a small commission.

When you’re made bankrupt, a note will be placed on your credit report for six years (yes, six years!). During that time, any lenders who do credit checks on you will see it and may consider you to be high risk. Lenders don’t like risk. However, that’s not all that happens in six years. So how does bankruptcy affect you over time?

One year later…

You’re usually discharged from bankruptcy after 12 months, assuming your official receiver (the person put in charge of your finances) believes you’re ready. It can be delayed if not.

But if it goes ahead, you’ll be officially cleared of your debts. Some other restrictions will also be lifted, like being able to borrow more than £500 without having to tell the lender about your bankruptcy.

Two years (and three months) later…

Two years and three months after you were declared bankrupt, the official receiver will decide what action will be taken with any assets of yours that have been seized.

At this stage they may decide to sell your equity in the property, apply for a charging order (so that they receive the equity if you sell in the future), or release the equity back to you.

Three years later…

Whatever decision the official receiver makes about your property by the two year and three month mark will have to be acted upon within nine months (this deadline is three years after you declared yourself bankrupt).

If you didn’t declare property or assets when filing for bankruptcy and they are discovered later, this deadline will run from the date when the asset is discovered instead.

Four years later…

Somewhere between the third and fourth year you will likely stop any income payment arrangements (IPA) that were ordered as part of your bankruptcy.

At the time of declaring, the official receiver may have asked you to make payments every month on top of your living costs. Your last payments will typically be three to four years later.

Six years later…

Finally — your bankruptcy is cleared from your credit report. All of the debts that were defaulted on before you declared bankruptcy will be removed and your credit report will be clear. If you’re at this stage, you should check your credit reports with all three top CRAs using the links above. You can learn how to correct errors here.

It is possible, if the official receiver deemed that your actions in declaring bankruptcy were seriously dishonest, that your bankruptcy restriction undertaking (BRU) could be imposed for up to 16 years! As always, honesty is the best policy.


How much will my credit score increase after bankruptcy falls off?

Although bankruptcy has a dramatic impact on your credit score, the good news is that it doesn’t last forever! After six years, the bankruptcy note will be lifted from your credit report. And although it may feel like a dark cloud overhead at the moment, when the worst has passed, you’ll be free to fully rebuild your credit again — focusing on building a fresh record of good credit use to improve your score.

If you are looking for a fast and proven way to boost your credit score, get started with
Loqbox Grow. You simply make your regular £2.50 a week Loqbox membership payments and we report your responsible financial activity to the top three CRAs in the UK: Experian, Equifax and TransUnion. Building your credit history as you go, easy!

Improvements to your credit score are not guaranteed

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