People often ask how bankruptcy or insolvency affect credit ratings.
Take the example of somebody who is unwell and needs to go to the hospital for an operation. It’s fair to say that in the days and weeks post operation the patient will not be fully well – though they are now on a course to health.
So it is with a credit rating for people in insolvency or bankruptcy.
When a person is considering insolvency or bankruptcy it follows that their credit rating is poor. There will almost always have been multiple defaults. However, after insolvency or bankruptcy, the person is now on the way to a healthy financial position which will happen in time.
We find that in the case of Personal Insolvency people can access credit very quickly again.
In the case of bankruptcy, it will take some time and it may be necessary to use non-bank lenders initially where higher interest rates are charged. But over time a credit rating returns.
It’s important to remember that in Personal Insolvency and in Bankruptcy debts will be written off against only the borrower applying for insolvency or bankruptcy. As most loans that were taken out by more than one borrower are “joint and several” this means that where one party has been adjudicated bankrupt the full debt remains due from the other borrowers.
This is also true with guarantors. A guarantor’s liability is a contingent liability – in other words, the guarantor gets called upon where the principal debtor has defaulted. Where a borrower applies for insolvency or is declared bankrupt, there’s an automatic event of default which means that the lender can call upon the guarantor to make good on the guarantee.
In short bankruptcy and insolvency does not assist co-borrowers or guarantors and often makes their situation worse.
Once you are adjudicated bankrupt you will furnish the Official Assignee with a Statement of Personal Interests.
This Statement will set out your income and your outgoings.
The Official Assignee has regard to the guidelines on Reasonable Living Expenditure needs as published by the Insolvency Service of Ireland. If your income is more than these guidelines the Official Assignee will ask you to agree to make payments to him for 3 years. The amount of this monthly payment will be the difference between your earnings and the guidelines.
If your income is at or below the guidelines no payments to the Official Assignee are required.
It is also possible to buy out the payments. So, for example, if the Official Assignee decided that you could afford €100 per month the full payment over 3 years would be €3600. The Official Assignee will agree to a discount on the €3600 if it is paid up front.
The benefit to having no payments or to buying out the payment is that you are no longer under review by the Official Assignee once you are discharged from bankruptcy. If you are making payments and your circumstances changes for the better, you are required to tell the Official Assignee. He can then require you to increase those payments during the remaining period.