Recovering Financially After Bankruptcy

Ever wondered what exactly bankruptcy is and how it can affect your finances? Learn more about the process, what's involved and the ways in which it may impact your credit score, ability to borrow and finances in general.

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What is bankruptcy?

Bankruptcy is a formal process that is undertaken when you are unable to repay your debts. It involves a legal declaration that you are unable to meet your financial obligations and may be made voluntarily or through a court process known as a sequestration order. There is no minimum or maximum amount of debt that needs to be accumulated in order to declare bankruptcy, but a creditor may move to declare you bankrupt if you owe them $5,000 or more. In Australia, there is no fee if you do choose to apply for bankruptcy voluntarily.

Guided by the Bankruptcy Act 1966, the process sees you relinquish control of your assets and finances. Once you've declared bankruptcy, a trustee will be assigned to your case and will then manage the process, helping to clear your debts and settle any issues you may have with your creditors.

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Does declaring bankruptcy clear debt?

The process may offer relief from your debts, providing an opportunity to start afresh financially in some circumstances, and typically lasts for three years and one day after your application is approved by the Australian Financial Security Authority (AFSA). It's important to note that in some circumstances the trustee can apply to have the bankruptcy period extended to five or eight years.

Even though you may have been legally declared bankrupt, there are some forms of debt that won't be cleared and you will need to continue paying. These can include:

• Any HELP debts or student assistance loans you may have
• Any fines or penalties that may have been imposed by the court

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How does bankruptcy affect your finances?

Although bankruptcy may seem like a neat solution to your financial woes, it's important to realise that it can have long term effects on your finances. Once a trustee has been appointed, they are able to claim and sell some of the assets that you own in order to recover the money you owe. Assets such as your home, vehicle, shares and investments can all be recovered by your trustee.

Helping to indicate how trustworthy you are as a borrower, your credit score can also be affected by bankruptcy. Although most credit reporting agencies won't necessarily specify how bankruptcy will affect your credit score, it is viewed as a negative addition to any credit report, especially since it remains on file for five years or more.

Bankruptcy can affect more than just your financial situation, with the process also potentially affecting your employment and travel prospects. Having declared bankruptcy, you may face restrictions in working in certain trades or professions. Although an outright ban may not apply to most trades and professions, there may be limitations applied to industry licences and professional association memberships. You will also be unable to become a company director without the permission of the court. While your finances are being managed by a trustee, you'll also need to request permission to travel overseas.

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How long does bankruptcy stay on your credit report?

Although bankruptcy typically lasts for three years and one day, it remains on your credit report for five years. Credit agencies may choose to keep your bankruptcy on your credit report for five years from the date that you declare bankruptcy or for two years following the end of your bankruptcy, whichever is longer.

Bankruptcy will no longer appear on your credit report after five years but you will remain on the National Personal Insolvency Index indefinitely. Some lenders may choose to check for your name as a part of the credit approval process, meaning that it may affect your ability to borrow money or get a credit card in the future.

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Building your credit score after bankruptcy

Rebuilding your credit score after bankruptcy won't be an easy process, but it can be done. It will take time and, unfortunately for most, there are no quick fixes. The best place to start is by taking stock of your finances and assessing any loans and debts that you may have.

To help avoid getting into the same situation again, it can be a good idea to draw up a monthly budget that will help you manage your finances in the long term. You might choose a detailed budgeting method that lays out how every dollar of your income will be allocated or you could opt for a bucketing-style technique that helps you understand how you're spending your money across categories such as savings, entertainment and rent, bills and groceries. No matter which budgeting option you choose, be sure to account for any upcoming repayments, ensuring that you meet any financial obligations on time. Paying your utility bills and phone bill on time can also assist in building a better standing with credit agencies.

Once you're able to borrow money or use credit again, it may be tempting to take out a loan or start using a credit card. If you are more financially secure at this time, it might be an option to consider, but if you are yet to fully financially recover, it may be best to hold off for a while longer to allow you to start building credit after your bankruptcy. It's important to remember that you will need to make any repayments that you commit to, so be sure to take this into consideration when weighing up your options. Soon after your bankruptcy ends, your credit score will typically be quite low so lenders may also be more reluctant to approve your application.

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How soon after bankruptcy can you borrow money again?

Once your bankruptcy has come to an end - typically three years and one day after your application was accepted by AFSA - you can apply for credit and start to borrow money again. At this time there are no longer any restrictions on making applications, but the outcome of your applications may vary at the discretion of the lender. Soon after your bankruptcy has ended, your credit score is likely to be quite low, which may not leave you in good standing to be granted loan approval and other types of credit.

If you are thinking of applying for credit after bankruptcy, consider waiting a year or two before you do so. This time will allow you to rebuild your credit score, gain stable employment and build other evidence that will prove that you're a good candidate for a lender's services.

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Weighing up your options

If possible, it's best to weigh up your options prior to declaring bankruptcy. There are several different avenues that are worth exploring, including consolidating your debts accessing financial counselling, debt negotiation and financial hardship relief. Although not all options will suit every situation, undertaking some research before making a final decision is an important step to take as bankruptcy will continue to affect your life for several years after the initial period ends. Bankruptcy can have serious impacts on your finances, your employment and your ability to access credit.