A question we often get from people is, “How does insolvency affect my credit rating?”
But to answer that, we first need to talk about something else: a credit file.
A credit file is a database of information about a person’s credit history. If you’ve ever applied for credit, then you probably have a credit file.
Agencies such as Veda, Dun & Bradstreet or Experian create credit files, using information from credit providers, courts and other organisations. These files can be accessed online, and include information such as:
- Personal information (e.g. full name, date of birth, address and employment information)
- Credit enquiries made in the past five years (e.g. loans sought for household or personal reasons)
- Current credit relationships and repayment history
- Details of overdue debts
A credit file can also include publicly available information—court writs, judgement and types of personal and corporate insolvency—and can affect whether or not a person can obtain credit.
How insolvency can affect your credit rating
So how does insolvency fit into all of this? Here’s a summary of how the different types of insolvency can affect a credit file.
- Personal Insolvency
Acts of personal insolvency (e.g. bankruptcy, debt agreements and personal insolvency agreements) will affect a credit rating. Credit agencies will keep a record of the insolvency on the credit file for five years or more, depending on the circumstances. The act will also be recorded permanently on the National Personal Insolvency Index—an electronic register of all personal insolvency proceedings.
- Corporate Insolvency
Corporate insolvency (e.g. liquidations, voluntary administrations and DOCAs) will be recorded on the Director’s personal name search. Credit reporting agencies can also keep a record of the insolvency on the director’s credit file. The insolvency may or may not affect the person’s ability to obtain credit, and it’s up to the lender to make the decision.
So what about referring tax debts to collection agencies? Can that affect a client rating?
The Australian Taxation Office (ATO) understands that some taxpayers may have trouble paying their tax debt. If your client has a tax liability, the ATO’s approach is to work with your client so you can meet your obligations. If your client doesn’t meet their obligations, the debt can then be referred to an external collection agency.
The collections agency’s primary task is to either:
- secure the debt in full
- organise a payment arrangement.
These debts aren’t sold to the collection agency, and any remaining debts are referred back to the ATO for further action.
Each credit provider has lending criteria they use to base their decisions. (Credit reporting agencies don’t make decisions or recommendations.) Some institutions may also use a “rating” or “score” in conjunction with the file and lending criteria when assessing an application.
But a bad credit report and rating can affect a person’s borrowing options. If they have a bad report, lenders could see them as a bad credit risk and:
- reject the application
- provide a lower Loan-To-Value (LTV) ratio
- charge your client higher interest rates on their loans.
When we advise people or companies in financial difficulty, we recommend the most suitable option for their circumstances. And in extreme circumstances that could mean bankruptcy or liquidation. But for those people with a bad credit rating, choosing one of those options can help them get back on their feet and move towards improving their financial affairs.
Ignore offers to ‘fix’ or ‘improve’ your credit rating
A lot of companies and people out there prey on those suffering financial distress. They claim that for a fee they can ‘fix’ or ‘improve’ someone’s credit report, even though credit-reporting agencies can do this for free.
Unfortunately, default listings and other historical information can’t be removed from your client’s credit file unless:
- they’re proven to be wrong
- you can negotiate a settlement deed where the other party removes information from your client’s credit file.
We don’t provide credit file repair services. But there is a place for it if:
- it’s used in the right circumstances
- your client is aware of what can be realistically achieved.
We also recommend that clients speak to the Ombudsman service (which is free) for help in resolving their credit file issues.
Lodging a default on a credit file
A person can lodge a default on another person’s credit report if:
- a creditor has asked for payment, but it hasn’t been received
- the amount is more than $150
- the creditor can’t get in contact with them
- 60 or more days have passed since the due date for payment.
Your client must be notified that they may report the overdue payment, before they actually report it.
If your client thinks a default has been incorrectly listed against them, they should contact the creditor and seek to have the error rectified. If that doesn’t work, they should make a complaint to the relevant Ombudsman.
Default listings generally stay on the report for five years, although some can stay on for seven years.
When a debt is paid it stays on the credit report, but is changed to show it’s been paid.
When advising people with unmanageable debt about their options, we often talk about their credit rating. They usually want to avoid getting a bad credit rating, despite the fact many of them already have one.
Everyone’s circumstances are different, and there’s no one-size-fits-all solution. So while being realistic about the client’s financials situation, and what can happen in the future, we:
- recommend options that suit each person’s situation
- provide a plan to move forward
- treat bankruptcy or liquidation as a last resort.
What’s happened in a person’s financial affairs to date is history. It can’t be changed. The good news is that there’s always a way to plan a practical course of action to revive their financial life.