Understanding the Impact of Personal Insolvency on Credit Scores
If you have unmanageable debt and your weekly income doesn’t cover your day-to-day living expenses, you might be facing personal insolvency. Personal Insolvency is defined as a situation where you are unable to pay your debts when they fall due. Personal insolvencies still prevelant, with the Australian Financial Security Authority (AFSA) recording 9,545 personal insolvency cases in Australia during the 2021/22 financial year. If you’re facing personal insolvency, there are a number of options available to help. But these options can have a long-term effect on your credit score which may impact your future when applying for credit.
What is a Credit Score?
Your credit score is a number based on an analysis of your credit file which helps a lender determine if they should lend money to you. It will contain:
- Your personal information,
- The type of credit providers you have used,
- The amount of credit you have borrowed,
- The number of credit applications and enquiries you have made,
- Any unpaid or overdue debts you may have defaulted on, and
- Any Debt Agreement, Personal Insolvency Agreement or Bankruptcy you have entered into in recent years.
Since September 2018, due to the introduction of the new comprehensive credit reporting system, your credit report will contain more information about the credit products you hold. This gives you a more complete picture of your credit history. Your credit score will increase and decrease over time and can change even if your financial habits haven’t. This could be because you applied for a new loan or a credit card, or a listing on your credit file expired.
Formal personal insolvency options, however, negatively impact your credit score. The length of time your credit score will be impacted depends on the type of engagement you entered into.
How Do Personal Insolvency Options Affect Your Credit File?
Ways to deal with personal insolvency generally fall into three ‘formal’ options and one ‘informal’ option. Formal engagements are legislated under the Bankruptcy Act 1966 and involve an independent person being appointed to manage your affairs. An informal agreement is an arrangement made directly with your creditors and does not come under the Bankruptcy Act. It therefore doesn’t come with the lasting consequences attached to other formal debt relief options and will not directly impact your credit score.
The Bankruptcy Act and Regulations contain threshold limits when it comes to borrowing. Bankrupts and Debt Agreement debtors must disclose their bankrupt or debtor status when seeking to obtain credit, or goods or services on account, for amounts above $6,624 or as updated. This extends to leasing, hiring or promising to pay for goods and services; or when seeking to obtain an amount by promising to supply goods or render services.
The comparison table below shows the effects each personal insolvency option has on your credit file.
|How Long It Lasts
|National Personal Insolvency Index (NPII)
|Tailored to your circumstances.
|An individual creditor may list a default on your credit file.
|Under the Bankruptcy Act, nothing will be formally listed.
|Between 3 to 5 years.
|A record of your details is kept for up to 5 years.
|Your name will appear for 5 years from the date the Debt Agreement was made or from the date the obligations are complete; whichever is later.
|Personal Insolvency Agreement
|Depends on what you negotiate with your trustee and creditors.
|A record of your details will be kept for 5 years, sometimes longer.
|Your name will appear permanently.
|3 years from the day you file your statement of affairs.
|A record of your Bankruptcy is kept for 5 years from the date you became Bankrupt, or 2 years from when your Bankruptcy ends; whichever is later.
|Your name will appear permanently.
Each personal insolvency option will impact your credit score differently. This is why knowing your credit score is crucial when you want to apply for credit after personal insolvency.
How to Check Your Credit Score
After you have finished your Debt Agreement, Personal Insolvency Agreement or Bankruptcy, it is important to check your credit rating to see where it is at. You can get a free credit score check from a number of online providers such as My Credit File and Credit Simple. Your credit report will give you an overview of the impact personal insolvency had on your credit score. It will also give you an indication of how long it will take before your credit score is healthy again.
Getting into a better credit position before you apply for your next loan will help increase the likelihood of you getting approved. This can be done by lowering your credit card limits, limiting your applications for credit and making your loan repayments on time. The good news is there are steps you can take after you have finished your Bankruptcy to improve your credit score.
How to Repair Your Credit Score After Bankruptcy
Beware of fake companies who claim they can fix or improve your credit report for a fee. Default listings and information can’t be removed from your credit file unless they’re proven to be wrong. However, there are ways you can improve your credit position by yourself.
- Make loan repayments by the due dates.
- Pay off your existing debts on time.
- Cancel your credit cards.
- Grow your savings.
- Work on getting full-time or part-time permanent employment.
- Consider getting a term-deposit account.
Unfortunately, the credit repair process is not instant. But rebuilding your credit score before you start applying for loans will give you a better chance of getting approved.
How to Apply for a Loan After Bankruptcy
There aren’t many lenders who will give you a second chance straight after you’ve been discharged from Bankruptcy. But it’s not impossible. Many lenders have a policy to decline loan applications made by people who have been Bankrupt. This means that if they can see your Bankruptcy recorded on your credit file, they will immediately deem you ineligible for the loan or credit you’ve applied for, regardless of your overall credit score and history. In most circumstances, lenders who will offer you a loan after Bankruptcy will charge higher interest rates.
Although this is the case, you may potentially have a better chance of getting approved for a secured loan such as a car loan or home loan rather than an unsecured loan, like a credit card or personal loan. Ultimately, the final decision is up to the individual lender, but it’s important you take responsibility to avoid falling into unmanageable debt again. If you can show that you can repay your debts on time and have a stable income, then there’s a chance you may still be able to apply for a car loan or home loan and receive a reasonable interest rate.
How We Can Help
What happens in your credit file is history, but there’s always a way to plan a practical course of action to revive your financial life. Bankruptcy gives you the opportunity to start fresh and save. This allows you to live off your earnings and avoid becoming reliant on credit again.
When you have unmanageable debts, the best way to deal with them is to seek professional help early and quickly. We offer all of the options discussed above. To understand what the right option is to deal with your debts, contact us today on 1800 534 534 or chat with us in the chat window.
For more information on personal insolvency, check out our personal insolvency page here.