For many who have gone through bankruptcy and emerged out the other end, you may be wondering if you’ll ever be eligible to get finance again – especially if much of your property has been repossessed or liquidated. If you are nervous or unsure about getting finance, such as car finance so you can buy a vehicle to get to work or conduct business, there are ways of getting a loan so you can get on with life and potentially rebuild your finances and creditworthiness.
Here are some tips on getting finance after bankruptcy, and how the entire process unfolds.
What is bankruptcy and how it works
Though some believe bankruptcy means being broke and unable to cover debts. This is partially true, but not the whole story. Bankruptcy is in fact a legal process that an individual, not a company, enters into when creditors or courts deem them unable to settle their debts in a timely manner. This means the individual is declared bankrupt by a court.
The bankrupt individual is appointed a trustee and a process of settlement with creditors begins. At this point, all personal debts are cleared in Australia – the process does not cover foreign jurisdictions. After three years and one day, your bankruptcy is then discharged. Note that trustees can extend this period up to eight years if they lodge an objection. Your name is also permanently registered on the National Personal Insolvency Index.
What debts are cleared after bankruptcy
Bankruptcy covers most unsecured and secured debts. A secured debt is tied to an asset, known as a security. A creditor has a right to repossess your property if it is financed by a secure loan and you cannot keep up repayments, which may include but is not limited to a house/dwelling, a vehicle, or furniture or whitegoods.
Unsecured debts are also released under bankruptcy. This includes credit cards, unsecured personal loans, utilities bills, overdrawn bank accounts, and most professional fees such as medical or legal bills.
Your creditors may also allow, at their discretion, the release of Centrelink or ATO debts, victims of crime debts, or toll fines.
Bankruptcy does not cover court-imposed penalties and fines, HECS/HELP debts, unliquidated debts, debts you owe after your bankruptcy begins, and child support or maintenance.
What are the restrictions on bankrupts after discharge?
There are no formal or legal restrictions on discharged bankrupts – one can apply for finance or credit again, and you may travel overseas. You will not have any restrictions on employment or spending, although some professions or industry bodies may self-impose restrictions.
Can you get finance after bankruptcy?
Yes, discharged bankrupts can still get finance after you have been discharged from your bankruptcy, not before. However, since your credit score is likely far below average and the bankruptcy is listed for at least five years from the date of commencement, many lenders and banks will be reluctant to lend to you. At this point, you may be eligible for bad credit finance or an impaired credit loan. Though they have far higher than usual interest rates (sometimes as high as comparable credit cards) they do give you the option to finance an asset and help rebuild your credit score over time.
Tips for getting finance
If you are in need of a vehicle and looking for finance, there are avenues available to you.
First, you should enlist the help of a financial adviser or counsellor to ensure you stay on track with any repayments for loans or debts you may enter into after you are discharged. This means creating and adhering to a strict budget and financial framework to demonstrate you are making advances towards being a responsible borrower and financially secure.
It is preferable that you approach a broker rather than different individual lenders for finance as you want to keep a strict limit on how many times your credit file is checked by financial institutions. Getting your credit file checked more often with the intention of gaining credit – known as a hard credit enquiry – will show up on your credit report and could indicate to other lenders you are in financial difficulties again.
The more often hard credit checks show up on your credit report, the worse your credit score gets. You must consent to hard or full credit enquiries. If you aren’t sure you should proceed, talk to your financial adviser or counsellor.
If you are able, save up a substantial deposit for your car or vehicle before you enter the market. This means you won’t have to borrow as much, and lenders may look favourably on your application due to the lower risk involved.
You may have to temper your expectations a little when it comes to buying a car. To keep your loan amount as small as possible, you may want to look at older vehicles or certified used cars instead of new ones – or if you are looking for a new car, make sure that they aren’t too expensive and well within your budget.
You should also run the calculations for your entire purchase and repayments – this should include your monthly repayments, insurance, estimated fuel, scheduled servicing, and other expenses you may incur over any given month. You need to show lenders or brokers that you will have no foreseeable problems servicing or paying back the loan over the loan period.
Take your time investigating the many loans and lenders that are in your reach. Not all lenders are reliable or wise choices for you, and if you find yourself unable to make the repayments, they can further worsen your financial situation. Before taking out a loan, get guidance on its terms and conditions so you are aware of what you are getting into. Again, ask your counsellor or adviser for advice.
When you are approved, ensure you always have enough money in your direct debit accounts to avoid late or dishonour fees. By paying off your loan and being reliable can make a long way into repairing your credit score and rebuilding your financial status.