How Going Bankrupt Will Affect Your Credit Rating

Going bankrupt is a way to deal with debts that cannot be repaid. Debts can result from a range of reasons including a failed business, bad planning or divorce. Bankruptcy can sometimes be a relief from living with crippling debt, however it should be considered as a last resort for a number of reasons.

How bankruptcy affect your life

Bankruptcy will affect your credit rating and this can influence your choices for the rest of your life. Although the terms of the bankruptcy are usually 12 months, your bankruptcy will show on your credit report for a minimum of six years. During this time, you are legally required to declare your bankruptcy if you are applying for credit of 500 or more. Some organisations will refuse you credit simply because you have been bankrupt or you may be charged a higher rate of interest. Some mortgage companies will not grant you a mortgage if you have ever been bankrupt. Bankruptcy may also have an effect on some types of employment. Going bankrupt could also mean that you lose your house, your car and your bank accounts will be closed and assets shared amongst the organisations that you owe money to.

An alternative to bankruptcy

An alternative to going bankrupt is an Individual Voluntary Arrangement (IVA). But what is an IVA? An IVA offers a credible option for many people to deal with their debts. It is a government scheme to help people repay their debts and avoid bankruptcy. The IVA forms an agreement between you and the companies you owe money to. The agreement is arranged through an insolvency practitioner or IVA expert to repay your debts on a monthly basis. The insolvency practitioner will work out what you can afford to pay. There is usually an initial set up cost and a handling cost for the monthly payments. The IVA can only cover unsecured debt so can't help with your mortgage or council tax and there are certain criteria that you need to meet to qualify for an IVA, such as owing more than 10,000 and having two or more creditors.

Benefits of an IVA

An IVA will still have an effect on your credit rating in similar ways to bankruptcy. However, if you are a homeowner, then an IVA is often a better option for you as your home will be protected, whereas in bankruptcy your home it likely to be sold to pay creditors. An IVA may also be a preferable option to bankruptcy if you are in certain types of employment.

Another benefit of an IVA is that monthly payments generally last for 60 months. Any unpaid debt after this period will be written off, although it is important to keep up repayments, otherwise bankruptcy may be the only option.

Once you have decided that you require an IVA, you will need to find an insolvency practitioner. They will be able to provide you with advice and guidance as well as setting up the IVA for you.