How to rebuild your financial life after bankruptcy


If you are among the thousands of Britons who filed for bankruptcy in 2011, don't despair. There is a light at the end of the tunnel.


Filing for bankruptcy can feel like one of the lowest possible points in your life. However, it is important that you treat bankruptcy as a clean slate. With some time, patience and care, it is possible to rebuild your financial life.

What is bankruptcy?
Bankruptcy is a process put in place to help individuals deal with debts they are unable to pay. The bankruptcy order forces the individual to agree to some restrictions and allow for their finances to be investigated.

After you file for bankruptcy, your assets are shared out among your creditors and used to repay your debts. After a set period of time, usually 12 months, you are discharged from bankruptcy, meaning that you are freed from any outstanding debts.

Unfortunately, filing for bankruptcy will significantly harm your ability to obtain a mortgage or other form of credit in the future. In the event that you are accepted for credit, it is likely that the interest rate will also be much higher than you have paid in the past.

Evidence of your bankruptcy will remain on your credit report for up to 10 years. However, experts suggest that you can start to improve your credit rating in just over a year.

What to do after you've filed for bankruptcy.
Rebuilding your financial life takes time and patience, but it can be achieved. Here are some steps you can take to improve your current position.

1. Obtain a copy of your credit report.
The first thing to do after being made bankrupt is to pull a copy of your credit report and check that everything is correct. Analyse what damage the bankruptcy has caused and what can and cannot be dealt with at this time. You can get a copy of the report for a maximum fee of £2 from one of the credit rating agencies in the UK, such as Experian or Equifax.

The report should show all of your discharged debts as having a zero balance. However, if they don't, contact the creditor and explain the situation. Then contact the credit rating agencies and ensure the information gets updated.

2. Keep up with repayments.

Staying on top of the credit available to you will do wonders to your damaged credit rating and could be just the lifeline you need.     

Bankruptcy does not necessarily clear all outstanding debts so some will still need to be paid. These often include mortgages and student loans. It is absolutely essential that you keep up with these repayments, making them on time and preferably paying more than the minimum.

Staying on top of the credit available to you will do wonders to your damaged credit rating and could be just the lifeline you need.

3. Consider secured credit.
Secured credit means that the lender has to put down a deposit, ranging from 10% to 100% of the credit limit. This will be held in escrow in the event that the borrower does not meet minimum repayments.

A secured credit card can help you rebuild your credit rating, as long as you can afford to pay the deposit in your own cash.

4. Start saving for emergencies.
Emergency funds are essential. However, saving up large sums of money to cover the cost of your household expenses for long periods of time can take a long time.

As important as emergency funds are, all you really need immediately after bankruptcy is enough cash to cover minor things, such as the car being repaired or another unexpected bill. Start by ensuring that you always keep £100 spare in your current account, and try to deposit £300 to £500 in a savings account.

5. Take advantage of credit-builder schemes.
The number of credit facilities available to people with bad credit has shot up in recent years, with one of the most popular options being a credit-builder credit card. These credit cards have higher interest rates and low credit limits; but when used effectively, they can help you improve your credit rating. 

Users should make purchases to the value of around 40% of the credit limit (for example, by spending £80 when you have a £200 limit) and then repay the balance immediately.

The card should be used as a substitute for the money available in your account, not to borrow money. This will demonstrate to future lenders that you can be a reliable borrower.

6. Avoid credit repair scams.
There are plenty of companies out there claiming to be able to improve credit ratings after people have been discharged from bankruptcy.

These offers can be tempting, but one look at the fees should set alarm bells ringing. There is nothing that a credit repair company can do to improve your credit rating that you cannot do yourself.

See related: 6 tips for dealing with debt stress; How to rebound from a poor credit score

Published: 3 November 2011