Bankruptcy and car finance explained

What is bankruptcy?

Bankruptcy is a form of insolvency that usually lasts for around a year. It’s typically an option for people who are experiencing serious financial difficulties and are no longer able to pay their debts. Declaring bankruptcy is a big decision that can affect your financial future, including your ability to secure a car finance loan.

How does bankruptcy affect my credit score?

There’s no sugar coating it; bankruptcy will impact your credit score. And not only will it affect your score during your bankruptcy period, but it will also stay on your credit report for up to six years. If your bankruptcy is never discharged, you could even find that it will remain on your report indefinitely. When you declare yourself bankrupt, your name will also be listed on the Individual Insolvency Register, which is publicly available.

When your bankruptcy has been discharged and you start looking to take out new types of loan, including car finance, prospective lenders may ask you about your bankruptcy. It’s also worth keeping in mind that it could take some time for your credit score to recover.

Can I get car finance during my bankruptcy?

During the time that you’re declared bankrupt, it’s highly unlikely that you’ll be able to secure any type of car finance. Most lenders will refuse to offer loans to bankrupt applicants and you are legally required to disclose your bankrupt status to prospective lenders if you need to borrow more than £500. Your receiver may also put restrictions in place that prevent you from applying for a loan. If you’re found in breach of these restrictions, you may be at risk of receiving a court order and your bankruptcy discharge could be suspended.

If that sounds like a lot of doom and gloom, it may be helpful to remember that bankruptcy doesn’t last forever. If you follow your restrictions and find that get your bankrupt status officially discharged, you can take steps to improve your credit score and find a car finance loan that’s suitable for you and your circumstances.

Can I get car finance after my bankruptcy has been discharged?  

Bankruptcy usually lasts for a year and, once it’s been discharged, you’re free to start applying for different types of finance, including car loans. However, as your bankrupt status will remain listed on your credit report for up to six years, prospective lenders will be aware that you’ve had financial problems in the past and been unable to keep up with your repayments. This means you could pose a higher risk as a borrower, and they could be reluctant to approve a new loan.

Even so, it’s not impossible to get car finance after bankruptcy. There are lenders that specialise in offering car finance to people with bad credit, including those who have had CCJs, been in an IVA, or been bankrupt in the past. You may need to agree to pay a higher rate of interest or face restrictions on the amount you can borrow to qualify.

You can also take steps to improve your credit score after bankruptcy. Depending on your circumstances, if you can live without a new car for a while, delaying your finance application until some time has passed and you’ve rebuilt your credit could increase your chances of finding an approval.

How can I improve my credit score after bankruptcy?

Credit scores aren’t an exact science, and they can be affected by a range of different factors. However, there are a few steps you can take that can help to boost your score over time after bankruptcy: 

• Pay your bills on time – while missing payments is sometimes unavoidable, just one delay could impact your credit score. Try to reduce the chances of paying late by setting up an automatic direct debit.
  
  
• Check your credit report – there are several services that allow you to check your credit score for free in the UK. This is a great habit to adopt as it helps you spot mistakes quickly. If you notice something on your report that doesn’t look right, challenge it with the relevant credit reference agency as soon as possible.
  
  
• Improve your credit ratio – maxing out your credit cards and using your entire overdraft every month probably won’t improve your score. Instead, using a smaller percentage of the total credit available can help demonstrate that you’re a responsible borrower. For this reason, consider keeping your existing credit cards open if you pay off the balance every month.
  
  
• Get on the electoral roll – you can register online for free in minutes. Make sure you register each time you move house so that your credit profile is up to date.
  
  
• Limit new credit applications – each time you apply for credit, a hard search will be carried out and this is marked on your credit report. Too many hard searches in a short period of time can concern lenders as they may worry that you’re relying on credit too much.
  
  
• Check your linked accounts – if you’ve taken out any form of finance with another person, such as a joint credit card or mortgage, your credit profiles will now be linked, and their financial behaviour could affect your credit score. Keep this in mind whenever you’re thinking about taking out a new joint loan.

Can I get bad credit car finance?

Yes, if you have bad credit for any reason, including a past bankruptcy, you may be able to secure a car loan, even if you’ve been refused elsewhere. At CarFinance 247, we understand that credit scores come in all shapes and sizes and sometimes your credit score needs some work. But having poor credit doesn’t mean you need to give up on car finance, especially if you need a new car. While we can’t guarantee that we’ll be able to find you an approval, we consider every application individually and our panel of lenders takes a range of factors into account, not just your credit score.