Pay off bankruptcy early

Can I Pay Off My Chapter 13 Bankruptcy Plan Early?

If you’ve declared bankruptcy, the chances of qualifying for a standard mortgage are slim to none. The same applies if you have had a county court judgment (CCJ) delivered against you.

Most mainstream lenders will not lend when bankruptcy appears anywhere in your credit history.

For this reason, specialist mortgage lenders exist – to fill the gaping hole in the market left behind by high-street lenders.

You may have to put down a larger deposit upfront and perhaps pay slightly higher interest rates than individuals with an excellent credit score, but hey – it’s still better than the alternative, right?

This guide explores how to pay off bankruptcy early, repair your credit once you do, and how long you must wait before applying for a mortgage.

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What happens when you file for bankruptcy?

When you declare bankruptcy, any non-essential assets you own and surplus disposable income you have is used to settle outstanding monies and priority debts owed to creditors.

This legal status lasts a year and is usually the last resort for individuals and companies unable to clear their priority debts. Once the bankruptcy period ends, any unpaid debts at that time are cancelled.

The High Court declares an individual bankrupt after receiving a petition for bankruptcy, which may be presented by the debtor,  the creditor(s), or the person (or someone acting on their behalf) bound by an individual voluntary agreement (IVA). The bankruptcy court then makes a bankruptcy order that declares the individual bankrupt.

It begs the question: Can you secure a mortgage after filing bankruptcy?

It depends on when you apply. No lender will give you a mortgage deal during bankruptcy. However, you can apply for a mortgage once you’re discharged.

It is worth noting that most lenders are generally unwilling to offer mortgages to individuals in the period immediately after filing bankruptcy.

However, a small group of specialist lenders are open to examining your current financial standing and discussing possible funding options. The only way to access these niche lenders is through an experienced bad credit mortgage broker.

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What are the options to pay off bankruptcy early?

Many individuals in the throes of bankruptcy aren’t aware that they can annul their bankruptcy potentially with an early payoff. That’s right. If you fulfil certain legal criteria, you can apply for bankruptcy cancellation. You need to show that:

• You have successfully paid off all outstanding debts or, at the very least, have used an asset such as a property to guarantee the unpaid obligations.
• The creditor(s) should not have filed a bankruptcy petition against you. For instance, you can provide evidence showing that the debt value in question was incorrect.
• You and your creditor(s) have agreed on an IVA to repay the outstanding amount(s) as an alternative to bankruptcy.

If you can show the High Court that you have fulfilled the above criteria, you can go ahead and apply for cancellation approval.

How to repair your credit after you pay off bankruptcy early

Keep in mind that an early payoff or bankruptcy cancellation will not solve the issues that led up to the bankruptcy filing in the first place. They will remain on your credit report for six years since they were first registered. If you annul your bankruptcy through an IVA, this IVA will still show up on your report when a potential lender does their due diligence.

Nonetheless, bankruptcy cancellation is still a worthwhile alternative to having a bankruptcy listed on your credit file. Once you get it reversed, ensure you get in touch with the relevant credit reference agencies (Experian, TransUnion, and Equifax are the three main ones) to have it erased.

If getting your bankruptcy annulled is not a viable option for you and you’ve gone through the bankruptcy period prescribed by law, there are certain steps you can take to repair your credit after your discharge. Here’s what you can do:

• Pay all your bills on time. Late payments are a major red flag for lenders.
• Minimise your credit utilisation ratio as much as possible. The sweet spot is 30% or below. If you have £1,000 worth of accessible credit, your unpaid balances should not exceed £300.
• Steer clear of bank overdrafts you had not planned for.
• Register as a voter on the Electoral Roll to improve your credit score, whether or not you intend to vote. This is because the information captured by the government reflects on your credit report, which, in turn, helps to validate and verify your name and address information.

It’s always a good idea to obtain your credit report from the main credit reference agencies and consult with a bad credit mortgage broker to discuss ways to improve your credit standing, especially after bankruptcy. Ensure you do this before you apply for any mortgage.

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How long should you wait before applying for a mortgage?

The answer to this depends on the mortgage lenders you approach. Most mainstream providers will not even be open to discussing the possibility of a mortgage immediately after you’re discharged from a bankruptcy case.

Others have a 12-month waiting period following your discharge, after which they may consider your bankruptcy application. The rest would only be willing to review your application after at least 36 months (3 years) following your discharge.

While the discharge process in a bankruptcy case itself takes 12 months, the bankruptcy code will show up on your credit record for six years from when it was first registered. Regardless of the wait time, you will need to show a clean bill of health as far as your post-bankruptcy credit record goes.

You have two options to consider when applying for a mortgage after being discharged from bankruptcy. On the one hand, you can wait six years before applying for a standard mortgage through a mainstream lender. You can use this time to rebuild your credit.

On the other hand, if waiting six years to begin your homeownership journey is not practical for you, you can talk to an expert bad credit mortgage broker who will analyse your credit report and advise you on the steps to take to repair your credit. They will then help you find a specialist lender who will examine your application and will likely approve it.

Mortgage eligibility requirements after bankruptcy

You’ve recently been discharged from bankruptcy. To be approved for a mortgage, what eligibility criteria will you need to fulfil?

Individuals with bad credit are generally subject to a stricter set of requirements they have to meet, compared to people with a good credit history – strict but not impossible to meet. These strict requirements minimise the mortgage provider’s risk exposure, so keep that in mind during the application process.

Mortgage amount

On average, mortgage companies generally offer mortgages valued at 4-4.5x the borrower’s annual salary. If you make £100,000 a year, you qualify for a mortgage worth anywhere between £400,000 and £450,000. People with a solid credit history may qualify for higher amounts.

Even with plenty of disposable income, bad credit resulting from a bankruptcy code might make it difficult to secure a mortgage higher than the multiplier used if you approach a high street lender.

However, a small pool of specialised lenders is willing to consider a bad credit mortgage application for a higher mortgage amount. An experienced bad credit broker has insider knowledge of the specific lenders with a higher risk appetite.

Size of deposit

To offset the risk bad credit borrowers pose to mortgage companies, most lenders require that you put down a larger deposit before they can approve your application. While the standard deposit payment requirement for individuals with good credit is 5-15% of the property value, bad credit borrowers may be required to put up at least a 25-30% payment upfront, depending on the lender in question.

Bankruptcy reasons

When considering your application for a mortgage, some lenders will want to know the specifics of the issues that led up to your bankruptcy filing. They might request records and evidence to review so that they can objectively assess the risk you pose to them and whether or not to approve your mortgage application.

Waiting period following discharge

Not many UK lenders would consider a mortgage application in the period immediately after bankruptcy. The duration after your discharge can significantly affect the interest rates and terms you get on your property loan.

Some lenders require that you wait at least 12 months following your discharge before they can even consider you for a mortgage. Others may require you to wait several years. The post-bankruptcy waiting period is at the lender’s discretion.

Employment status

Individuals with a bankruptcy filing in their credit history are often subject to strict rules around their current employment. Some lenders want to see at least 18 months of continuous employment and monthly expenses before considering ex-bankrupt borrowers’ applications. This employment duration requirement is much higher than that of standard applicants.

Debt history

For some lenders, a bankruptcy discharge isn’t enough to consider a mortgage application from a bad credit borrower. They may also want to see that you have no lingering debts from the bankruptcy.

They may want to dive deeper into your finances to check whether you have been keeping up with credit card debt payments, bills, or loan repayments. They may also want to see whether your debt history includes any mortgage defaults.

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How a bad credit mortgage expert can help

You’ve gone through bankruptcy or opted to pay off bankruptcy early. Either way, you now have bad credit and will have a hard time securing a mortgage. Your best bet would be to use a specialist broker well-versed in bad credit applicants to help you find a suitable mortgage lender.

If you have questions about bankruptcy code or how to handle discretionary income when filing bankruptcy, don’t hesitate to seek legal advice from a bankruptcy attorney.

FAQs

Is it possible to pay off bankruptcy early?

Yes, it is. You can pay off bankruptcy early and then file a petition to the High Court to have it cancelled (or annulled) so that it doesn’t show up on your credit report. Bankruptcy in the UK lasts 12 months. If you can pay off your outstanding debts within that timeframe or use a property to guarantee your unpaid obligations, you’ll be home-free.

Can I use the equity in my home to repay bankruptcy debt?

The law prohibits unsecured debt from being linked to your home. That said, it might be a good idea for you to release some of the equity in your home and use it to pay off bankruptcy early.

Before you do, consult a bad credit mortgage broker to explore your options and ensure it’s the right move for you.

How long will my bankruptcy filing stay on my credit report?

A bankruptcy, just like any other adverse credit issue, will remain on your credit file for six years.

Most mortgage lenders will usually ask whether you have ever been bankrupt, even if it is no longer displayed on your credit report.

It is worth noting that the credit issues that led up to your bankruptcy filing will still show up in your record if they remain unresolved even after you’ve been discharged.

On the other hand, if you pay off your bankruptcy early and the bankruptcy court annuls it, you can get credit reference agencies to expunge it from your credit history before the six-year period elapses.

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