Does liquidating your company impact your credit rating?

Molly Monks - IP at Parker Walsh
January 10, 2024

Financial stability and a good credit rating are essential for individuals and businesses alike. When facing financial difficulties, the decision to opt for liquidation, a process that involves winding down a company and settling its outstanding debts, can have far-reaching consequences, including the potential impact on one's credit rating. In this article, we will explore how liquidation can affect your credit rating.

Understanding Credit Ratings

Before delving into the impact of liquidation on credit ratings, it's essential to grasp what a credit rating is and why it matters. In the UK, credit reference agencies, such as Experian, Equifax, and TransUnion, compile credit reports that contain information about an individual's or business's financial history and creditworthiness. Lenders use these reports to assess the risk associated with lending money.

A credit rating or credit score is a numerical representation of your creditworthiness. The higher your credit score, the more likely you are to be approved for credit, such as loans, credit cards, or mortgages. A lower credit score, on the other hand, may hinder your ability to secure credit on favourable terms.

The Impact of Liquidation on Credit Ratings

Liquidation can have an impact on your credit rating, but the extent of this impact depends on several factors, including the type of liquidation and your financial history.

  1. Type of Liquidation: In the UK, there are primarily two types of liquidation: members' voluntary liquidation/MVL and creditors' voluntary liquidation/CVL. MVL occurs when a solvent company chooses to wind up its affairs, typically having a milder impact on the credit rating of its directors and shareholders. In contrast, CVL involves the liquidation of an insolvent company and can have more severe repercussions on the credit rating of those involved.
  2. Personal Guarantees: If you have provided personal guarantees for your company's debts and the company enters into a CVL, your personal credit rating may be negatively affected, as you may become personally liable for some of the debts.
  3. Creditors' Claims: The way creditors' claims are settled during liquidation can also impact your credit rating. If creditors are paid in full, it may reflect more positively on your credit history than if they receive only partial payments.
  4. Individual Bankruptcy: If you are an individual and your personal finances are closely tied to your company, liquidation might lead to personal bankruptcy, which can significantly harm your credit rating. Bankruptcy remains on your credit report for several years, making it challenging to access credit during that time.

Rebuilding Your Credit Rating After Liquidation

While liquidation can have a negative impact on your credit rating, it's not necessarily a permanent stain on your financial record. There are steps you can take to rebuild your credit over time:

  1. Budgeting and Financial Discipline: Demonstrating responsible financial management and budgeting can help rebuild your creditworthiness.
  2. Secured Credit: Consider applying for secured credit cards or loans, where you provide collateral, to gradually rebuild your credit.Timely Payments: Ensure that you make all your payments on time, as this is a critical factor in improving your credit rating.
  3. Review Your Credit Report: Regularly check your credit report for inaccuracies or discrepancies and address any issues promptly.

In conclusion, liquidation can have a significant impact on your credit rating, especially if it involves personal liabilities or bankruptcy. However, it is not the end of your financial journey. With time, discipline, and responsible financial behaviour, you can work towards improving your credit rating and rebuilding your financial stability. It's essential to seek professional advice when facing liquidation to fully understand the implications for your credit and overall financial health.

Molly Monks M.I.P.A
Licensed Insolvency Practitioner at Parker Walsh

I am Molly Monks, a licensed insolvency practitioner at Parker Walsh. I have over 20 years of experience helping directors with the financial struggles they may face. I understand that it can be overwhelming and stressful, so I offer practical straightforward advice, which is also free and confidential. I spend time with directors to get a good understanding of their business and their goals, therefore providing the best tailored advice possible.

Email: molly@parkerwalsh.co.uk

Phone: 0161 546 8143

WhatsApp: 07822 012199

If you have any questions about your business, we're always happy to help. Our advice is free and confidential.
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