Can I get a loan if I've been bankrupt?

Looking to take out a loan, but been bankrupt in the past? Our handy guide examines what effect this can have what you need to know before applying for a loan or other form of finance.

5 min read

Will I be able to get a loan?

Declaring yourself bankrupt is a serious decision to make, but how much of an effect will this have on your credit rating going forwards? Will you be able to obtain a loan during this period and will you be able to take on credit after you’re discharged from bankruptcy? We’ll take you through everything you need to know.

What is bankruptcy?

Bankruptcy is a form of insolvency designed to provide relief for people who wouldn’t be able to afford to pay back their debts in a reasonable amount of time. Once your bankruptcy is agreed, all of your current debt repayments will be frozen, and then become the responsibility of a Trustee. If you have assets to your name – such as a property or a car – it’s likely that these will be sold and the money used to pay towards your debts.

You will normally be ‘discharged’ from bankruptcy after 12 months and after this any remaining unsecured debts that you have will be written off. However, everyone’s bankruptcy is different and in some cases you could be expected to keep making payments for up to three years, if you can afford to.

Loans and undischarged bankrupt

During bankruptcy you must, by law, disclose that you are bankrupt if you apply for credit of more than £500, meaning you’re very unlikely to be able to obtain credit from the vast majority of lenders.

This doesn’t mean it will be impossible to get a loan, but it’s unlikely that you’ll be able to get accepted for credit while you’re bankrupt as the majority of lenders will turn you down. Even if a lender does accept you for a loan, it’s likely to only be for a relatively low amount.

The loans that you’ll be able to be accepted for are likely to come with a higher interest rate as well, so it’s important not to borrow more than you think you’ll be able to repay – but ideally stay away from credit completely while you’re going through bankruptcy.

Loans when discharged from bankruptcy

Once you’ve been discharged from bankruptcy, you may still have some difficulty applying for loans from high-street lenders as they might refuse you credit because of your previous history. This is because your bankruptcy will stay on your credit file for at least six years, so lenders will be able to see this when you apply. Even once the bankruptcy has gone from your credit history some lenders (particularly mortgage lenders) will ask you if you’ve ever been bankrupt when you apply, so even further down the line your bankruptcy could still affect your ability to obtain credit.

That’s why you might consider taking out a loan designed for people with a bad credit history, as you could be more likely to get accepted for these if you’ve had problems managing credit in the past.

Alternatives to a loan

If you’re in need of some extra cash, a loan isn’t your only option. But before you consider any of these alternatives, think long and hard about whether you really need to borrow the money or not – after all, you don’t want to find yourself in a situation where you find that your debts are overwhelming you again.

Credit card

If you only want to borrow a small amount, a credit-building credit card like the Ocean credit card could be a good option for you, once your bankruptcy has been discharged. These cards often come with a lower credit limit and higher interest rates but if you use them responsibly and make your repayments on time they could be a good way of re-building your credit history and demonstrating to lenders that you’re able to manage credit.

Credit unions

Another option is to go for a credit union, a co-operative set up in the community to invest and lend to each other. These loans can come with high interest rates, but they should still be more competitive than payday loans or other forms of high interest rate credit. You’ll usually have to be a member of a credit union to borrow from it, so have a look in your area to see if there’s one that you can join.

Budgeting loan

Alternatively, if you need money to cover the cost of things like furniture then you could be eligible for an interest-free budgeting loan from the Government. You need to have been getting income related benefits like Income Support or Pension Credit for at least 26 weeks and must still be getting these when your application is being processed. For more information, click here.