When you become bankrupt, an appointed trustee takes legal possession of your share in any property and wields the power to sell it and repay your debts with the surplus. Of course, this serious consequence of bankruptcy is often one of the hardest to accept – especially for those who unfortunately lose their family homes and experience repossession of their property.
Understandably, it can be hard to envisage owning property again after going through mortgage debt, bankruptcy and then foreclosure - however, even if you have been declared bankrupt in the past, you can still own property! Bad credit mortgages are a query that a lot of people with mortgage debt who are facing bankruptcy want to know more about.
In this article we will bust mortgage debt myths, break down Australian mortgage debt and answer the burning question of how to get a mortgage with bad credit (if it is at all possible).
What to Expect at the End of Bankruptcy
Whether you applied for a debtor’s petition or a creditor made you bankrupt (sequestration order), bankruptcy normally ends three (3) years and one (1) day from that date AFSA (Australian Financial Securities Authority) accepted the application. After this point, you are automatically deemed “discharged from bankruptcy”.
Note that in some circumstances (i.e. failure to provide information including revealing all assets and debts, failure to disclose all income, failure to make compulsory repayments, or insufficient explanation as to how money was spent) a trustee may lodge an “objection to discharge” and have your bankruptcy extended by up to 8 years. If you aren’t sure when your bankruptcy ends, contact your trustee. If your trustee is AFSA, you can complete an “End of Bankruptcy Enquiry” through the AFSA website.
Do note that even if you become discharged, there may still be some debts you remain liable for, such as court penalties and fines, child support and maintenance, HECS & HELP debts, debts incurred after the bankruptcy begins and unliquidated debts. Also note that if your trustee still hasn’t sold your real estate assets after you are discharged, you may still need to provide your current financial information to them – be sure to double-check this before you go ahead with any real estate purchase.
How to Fix Bad Credit
Once your bankruptcy has ended you are technically released from asset limitations, travel restrictions and are free to apply for credit. Under these circumstances it can take some time to rebuild your credit rating, as it is at the credit provider’s discretion *whether they will lend to you* (Link article: Credit Files, Scores and Reports in Australia)*. At this point, we recommend obtaining a free copy of your credit report from a reporting agency (such as Equifax - call 138 332 or visit mycreditfile.com.au).
Once you obtain a copy of your credit file, double-check that all loans and debts listed are in fact yours, make sure everything is accurate and up to date, and that your personal details are correct – there are many people out there who share the same name, so it’s important to request a rectification should you find inaccurate credit file information which could negatively rate against your credit score! As part of this report, you should also receive information about which factors are impacting your score, such as payment history and your credit utilisation rate (how much you owe divided by your credit limit). Note that it can take some time for changes and updates to be reflected in your score – so don’t expect a fast credit repair!
Even if your credit score isn’t the greatest, there are some steps you can take to improve it, and in reality - this is the best way to get a mortgage with bad credit. Number one is to start paying your bills on time! Because past performance is usually a strong indicator of future performance, lenders are very interested in payment history.
If you haven’t done so already, set up automatic payments or reminders to ensure you pay current bills on time and bring missed payments up to date as soon as possible. The next best thing you can do to improve your credit score is to reduce your credit utilisation rate to below 30%.
The easiest way to do this is by paying down credit card debt. Note that your credit utilisation rate takes up to 30 days to update based on when your credit card company updates their balance information with the credit reporter. Also note that holding an open credit account with a zero balance (even if you don’t intend to use it and as long as it isn’t costing you in ongoing fees), or requesting a credit limit increase can help boost your credit utilisation rate provided you have the discipline not to overspend.
Opening a new credit account can also boost this factor – but again, be wary as the presence of multiple credit report enquiries can have a short-term negative impact on your credit rating. Another option is to become an authorized user on another person’s account (provided that they are responsible with credit).
There are “credit repair” companies out there that claim to be able to help people get “bad credit mortgages”, “clean credit” or “fix debt” – but be wary – they may not be able to achieve this for you, and often charge exorbitant fees to do administrative tasks which the average person is more than capable of doing. Unfortunately, the reality is that other than the few things mentioned in this article, there is no quick fix for bad credit – realistically the best and sometimes only thing you can do is pay your bills consistently and be patient until your score normalises.
The length of time it takes to rebuild your credit history depends on the factor that is negatively impacting you – bankruptcies can remain for up to ten (10) years, delinquencies such as registry with a collection agent or nonpayment endures for seven (7) years, and credit report inquiries last for two (2) years.
The good news is that negative information will eventually cycle off your credit report! Having a strong credit score can help you qualify for a good interest rate when the time does come to purchase a property… and if you are looking to get into the market, you will need to save a deposit anyway! Considered in this light, time is on your side!
Struggling with Debt
If you are reading this because you are struggling with debt and want to understand the implications of going bankrupt, please get in touch with our office. Our team will be able to assess your current financial circumstances to help you figure out a course of action and get back on track with your finances. Call us on 1300 003 328 for an obligation-free consultation.