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Can I pay off my bankruptcy early?

How to annual a bankruptcy

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By Pete Mugleston   Mortgage Advisor

Last updated: 13th January 2019 *

Customers with a bankruptcy on their file usually struggle to get credit and are often left out in the cold by mortgage lenders. But the good news is that your bankruptcy might be reversible - we’ve put together this guide for those hoping to repair their credit rating.

You’ll find the following topics covered in-depth below…

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Can I reverse a bankruptcy?

Customers often ask us “can I pay off my bankruptcy debt early?” And for some who have the potential to borrow and enough equity in their property, the answer may well be yes!

Bankruptcy annulment is a process by which an individual can reverse a bankruptcy order, repay their debts owed, and restore their credit file to the point at which they went bankrupt, basically by borrowing the money (secured against their property as a main first or second charge mortgage) and repaying all creditors.

Many who go bankrupt do so to clear significant levels of debt that they are simply unable to repay. We come across hundreds of people that have suffered a life event (such as illness, bereavement, redundancy) that forced them into bankruptcy, who are now back on their feet and looking to get back onto the property ladder, some of whom may well have been able to annul the bankruptcy had they enquired about it earlier.

Get in touch and the advisors we work with will talk you through the main points you need to know about the annulment of a bankruptcy order in the UK.

What happens to my credit file after an annulment of a bankruptcy order?

A bankruptcy reversal does not normally delete or undo any credit issues leading up to it, so if late payments and arrears are registered on the credit file, they are likely to remain there for up to 6 years. The bankruptcy of course is removed, and for many, this has a major impact on credit history / credit score, as well as general life.

Often, those who have gone bankrupt have a hard time getting their creditors to update the credit reference agencies in a timely manner, so if you have annulled and your report is still showing the debt as outstanding, or if the bankruptcy still appears on your report, then this needs chasing up with the agencies (check all 3 of call credit, Equifax and Experian) and perhaps also the insolvency department.

Why would someone annul a bankruptcy?

Reversing a bankruptcy can have wide reaching impact, and the extent of this can be more for some than others, depending on individual circumstances.

  • Impact on future borrowing
    Typically those who have gone bankrupt are considered higher risk by lenders for at least the next 6 years (at times longer than this, where some will never approve an application from someone who has ever been bankrupt in the past). Being higher risk often means more deposit, and a smaller number of lenders available that will consider an application, which in turn limits options and can mean higher rates.Had the individual annulled the bankruptcy / not entered into it in the first place, then it may be there are no adverse effects on the credit file and thus, no future borrowing related issues. If the bankruptcy was not due to unpaid credit (sometimes people are bankrupt due to unpaid tax) and the credit report is otherwise clear, then this is especially true. Conversely, those who have large amounts of personal debt and masses of missed payments may see less impact by avoiding bankruptcy as it may be they are not able to borrow for a similar period as had they gone bankrupt anyway. For more on borrowing after bankruptcy see our article here
  • Impact on future plans
    Those able to annul and come out with a decent credit file, may well be able refinance / move house / buy a new property sooner. Those who follow through with the bankruptcy may need to save more deposit / wait longer to apply (see article above).
  • Impact on living conditions
    If a borrower is struggling to meet repayments on their mortgage and it is to be part of the bankruptcy order, then they are likely to also be facing repossession and need to sell the house or give the keys back. Post repossession, landlords and agents are more wary of approving applications to rent property, and it can be difficult to find somewhere to live, especially in an area or property you desire, without a large deposit, upfront rental payment, or guarantor. There are also fewer lenders that would consider new mortgages in future, which limits options down the line further.

A restructure of finances can also include extending the term of debts which may help to reduce monthly payments, and thus help avoid a repeat of circumstances that lead to the bankruptcy.

  • Impact for self-employed directors
    Self-employed borrowers who go bankrupt due to a failing business or unpaid tax, may find it especially hard to get approved for a mortgage, even with some specialist lenders that regularly consider bankrupt applicants. This is generally because of the perceived risk that the borrower will continue to run a poor business and be unable to sustain income levels to afford the mortgage required. For this reason, most lenders that consider bankruptcy mortgages would only do so if the self-employed borrower is now no longer running a business and is in full time, stable employment. Annulling the bankruptcy therefore allows the borrower to continue in the business and obtain a mortgage in future without having to navigate this issue.Also, and perhaps more importantly, it is not permitted for someone to be director of a Ltd company when bankrupt, so avoiding or annulling the bankruptcy allow the individual to continue as company director when they would otherwise be forced to resign.
  • Personal benefits
    Some borrowers would rather not leave debts unpaid, and feel a sense of value in overcoming the issues they have faced to pay back what they owe without the need to sell their house or write the debts off altogether. It’s not for everyone of course, and some are certainly well advised to go bankrupt as the best course of action for their circumstances.

How do you annul a bankruptcy?

We regularly hear the question “what is the best way to pay off my bankruptcy”? And it isn’t quite as simple as filling out a bankruptcy annulment application forms at the bank.
If you have the cash, then it may be best advice for you to use that, if not and you want to annul.

Then in order to complete on an annulment, the individual would need to meet the criteria for the following:

  • Be within 2 years of bankruptcy registration date (possible later than this, but less straightforward)
  • Have either the funds to repay the debts owed + fees, or the ability to borrow the money to do so. If borrowing, the individual will need enough equity in their property, an acceptable income source that satisfies affordability assessments, and the credit file to support an application (not all applicants are approved).

If these are satisfied then the individual would need a specialist solicitor to determine the viability of the annulment, and a specialist financial advisor to establish eligibility with the right lender(s). Make an enquiry and we can refer you to the right advisor!

Finance options can be to either:

  • Refinance the current main mortgage in whole, borrowing enough extra to repay the debt
  • Securing a second mortgage on top of the current mortgage
  • Refinancing everything onto a short term regulated bridging loan
  • Securing a short term second charge regulated bridging loan on top of the current main mortgage

Most of the above options, given the circumstances, of course are deemed higher risk finance by lenders and attract higher rates and fees as a result. The goal would be that they are all short term however, so once the annulment has completed, the advisor would refinance you back onto the best available mortgage product, which with a clean credit file, should mean better rates and perhaps even mainstream table topping deals if the rest of your credit file is clear.

Affording a bankruptcy annulment loan

As with any borrowing, affordability is a factor. Even with £millions of equity in a property, lenders will be unable to consider an application from someone who doesn’t have the income to support repayments. Affordability can be more flexible with the bridging finance options as they can be taken on a roll-up basis, meaning that interest is added to the loan and drawn from the equity from the outset (borrowing 100k may only release 90k to you, if the rate was 10% pa, for example). In order to take a bridging loan however, a clear exit strategy needs to be in place – this is often either sale of property (in which case the property would need to be officially listed for sale before the money was released), or refinance (in which case the applicant would need to evidence approval in principal before applying – not simple to do if the current credit file shows bankruptcy status!).

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Impact of other credit history issues on bankruptcy annulment loans

If you are borrowing from equity in your property to annul a bankruptcy then establishing eligibility can only be done through application. The lender will assess your situation almost as though the bankruptcy were not in place, and look at your ability and willingness to repay the new loan plus other debts, following completion of the annulment. If your credit history is seeded with multiple events and issues such as defaults, CCJS, debt management and other issues unrelated to or long before the bankruptcy, and they see clear signs that you are unlikely to repay the money they lend, they’ll find your application hard to approve.

Specialist UK lenders that consider bankruptcy annulment loans like the story to make sense, and favour applicants who have suffered from an unforeseen life event, looking to make right now they are back on their feet, as opposed to a serial borrower with scores of unpaid debts and no real reason as to why other than overspending and a repetitive inability to mismanage finances.

Affect of property type on bankruptcy annulment loans

If the property is your main residence then the lenders that consider an application may be different, or terms offered may be different, than if you have equity in an investment or commercial property upon which you want to secure finance.

Equally, the construction of the property can have an impact, and suitable property usually needs to be of solid habitable construction, from acceptable build material. Traditional brick built houses are likely to be fine, concrete pre-fabricated homes or listed buildings with thatched roofs are likely to limit the number of lenders that will consider an application.

Updated: 13th January 2019
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FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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