Significant defaults and Bankruptcy. What is the difference if applying for credit?

So just speaking to a mate who was telling me about a friend of his who has fallen into significant financial hardship. Bank repossessed and just sold the home which will cover the mortgage.

Ontop of that he has about 6 defaults totaling around 30k from various credit cards and some personal loans which were sold to debtors.

He said his friend is just considering going bankrupt and I instinctively said that's a bad idea. He asked me "why? What is the difference between a number of bad defaults and going bankrupt". I couldn't really answer except for a default sits on your file for 5 years and bankruptcy for 7.

So what is the difference in terms of acquiring future finance? I know some lenders will overlook defaults and other lenders like pepper will overlook more significant defaults BUT would any lender consider 30k of paid defaults for future lending?

What are the major differences? And what does one do if they have this problem? How can you consolidate debt with a destroyed credit file? Or is your only option to go on payment plans for each debtor?

 

A mate or a client?

You have lots of friends with finance scenarios!

In terms of lending - pretty sure he's in trouble either way. I can't see any lender giving the green light with massive financial defaults like that. Maybe a private lender with huge fees/high rates/low lvr - but even then I doubt it. I could be wrong though - I generally steer clear of the impaired credit stuff.

Cheers

Jamie

 

Pepper is king.

 

haha I promise I have no intention of swooping in to become another PC broker. You guys and girls well and truly have this place covered!

I am fascinated by finance though so who knows! Been working as an IT coordinator now for 10 years. My mates know I live and breath property outside of that so tend to ask me anything and everything. But TBH I would much rather speak about and learn about all this stuff than fix another mates computer because he has been visiting some suspect websites.

From what you guys have taught me over the past years I would probably have more clue than 80% of Aussie brokers anyway .

P.S - We just moved head office and now have a table tennis table. Chasing leads or playing some table? Hmmmm I'm pretty content!

 

Lenders won't like unpaid defaults because the person could be bankrupted and their loan will come to an end.

Bankruptcy may not be as bad as the debts can no longer be chased.

But there are important reasons other than finance for not going bankrupt and this is mainly to do with licencing. You won't be able to work in certain professions if you were previously bankrupt - financial planning, finance broking, real estate etc. It may also be difficult to get security clearances.

 

That many defaults or bankrup won't make much difference to chances of finance it the rates etc. practically bankruptcy has a timeline and a process while defaults can be messier to deal with.

 

Sorry coming back to this, and I guess the reason I raised the topic is if bankruptcy and large defaults have the same effect on getting credit in the future then realistically bankruptcy is not really a bad option.

The negatives are 2 years longer on your file and as @Terry_w suggested the effect it can have on your employment. Again though, even with this, it is only going to be for 7 years and if you didn't work in those industries it doesn't seem a big deal.

 

That is why some people use bankruptcy as a money making strategy.

 

Your joking!!
So what they amass a heap of debt which is used to purchase assets that they perhaps "hide" and then just claim bankruptcy.
Rinse and repeat 7 years later.

 

Yep

 

You stay on the national personal insolvency register forever - not just X amount of years. If you're applying for credit you're asked if you've EVER been bankrupt or have entered into an act of bankruptcy which you will need to disclose. This is not the case for defaults - all is forgiven in 5 years.

Then there's other non direct implications like insurances and the like where with some policies you're asked if you've ever been bankrupt, service providers who do credit checks...

You can't be a company director, if you're self employed you need to tell everyone you deal with that you're bankrupt (no idea how this would happen in real life though) your income is garnished and you need permission to travel overseas.

If it came down to a default or bankruptcy on my credit I know which I would prefer....

 

Your can't be a company director while bankrupt, (or a trustee), but you can after.

 

But this is all assuming the person answers truthfully.
In the case of what Terry was suggesting, i am pretty sure they are not answering "Yes" when asked.

 

In the case of lending the bank can and will check the NPII. May as well add a fraud conviction to your bankruptcy....

 

haha so a bankruptcy in terms of lending is a life time sentence.
That was really the point i was trying to get to.

 

It would be a breach of the bankruptcy act.

But unlikely the lender would take it further.

 

Bankruptcy is not ideal it never leaves your record. Better to chip away at the defaults and have them delisted in five years.

 

A personal insolvency agreement falls off your credit report after 5 years, but is on the NPII forever.

Brokers out there, if an individual has a PIA on their record from more than 5 years ago, how do lenders deal with this? Is it an issue, or is it largely irrelevant once it leaves your credit report?

 

I have never encountered someone who was in this situation. Some lenders used to ask have you ever been bankrupt but many dont and i doubt they would do a bankruptcy search so I suspect most lenders would never know.

If it did come to notice you would probably be limit3d to 80% lvr

 

Just for kicks

How would one use bankruptcy to make money?
Isnt therr a law saying that soending credit when you know you cant afford it is illegal?

Do you get heaps of credit cards . Max them all out and run?
Do you set up a small business get heaps of stock on credit and default?

Or is it much bigger scale?