How Bankruptcy Affects Your Credit Score

Bankruptcy is a serious financial issue that can have a major negative impact on your credit score. In Australia, there are two types of bankruptcy: voluntary and involuntary. Voluntary bankruptcy occurs when a debtor chooses to give up their assets to pay off their creditors. Involuntary bankruptcy is when a creditor or creditors make an application to the court to have a debtor declared bankrupt.

No matter how bankruptcy is initiated, it can have a drastic effect on a person’s credit score. When a person is declared bankrupt, the Australian Financial Security Authority (AFSA) will report the bankruptcy to the credit reporting bureaus, which will be reflected on the debtor’s credit score.

The first, and most obvious, effect of bankruptcy on a credit score is a significant drop in the score. Depending on the individual’s credit history, the credit score can drop anywhere from 100 to 200 points. This is one of the most damaging things to a credit score and will remain on the credit report for at least five years.

In addition to the drop in credit score, the bankruptcy will also remain on the credit report for seven years. This means that any potential lenders or creditors will be able to see that the borrower has a history of bankruptcy and will be less likely to extend credit to them.

Another effect of bankruptcy on a credit score is that it can make it difficult to obtain new credit. This is because lenders are hesitant to lend money to someone who has a history of bankruptcy. Even if the person is able to obtain new credit, they may face higher interest rates and stricter repayment terms.

Finally, bankruptcy can also affect a person’s ability to find employment. Employers are increasingly running credit checks on potential employees, and a history of bankruptcy can be seen as a sign of financial irresponsibility and can lead to a job offer being withdrawn.

Although bankruptcy can have a major impact on a credit score, it is important to remember that it is not the end of the world and there are ways to rebuild your credit. It is important to make all payments on time, and to pay off any debts as quickly as possible. It is also important to take steps to build up savings and to create a budget to help manage money more effectively.

By taking the right steps, it is possible to rebuild your credit score, even after a bankruptcy. Although it may take time, it is possible to return to good credit standing, and to be able to access credit and employment opportunities in the future.