Contrary to what you might think, bankruptcy does not impact your credit forever. We meet lots of people who are afraid to ask for debt help because they don’t fully understand how bankruptcy works and how long it will stay on their credit report.
In this blog, we will explain how bankruptcy affects your credit and how to go about rebuilding it.
The truth is that filing for bankruptcy is a financial recovery strategy. It provides immediate debt relief and it helps you improve your financial health. In the long-term, this actually helps you rebuild your credit.
There’s no denying it has a significant impact on your credit.
For Equifax, Canada’s largest credit bureau, bankruptcy stays on your credit report for 6 years after the date of discharge. And for TransUnion, it’s 7.
But what about your credit rating and your credit score?
Your credit rating is a record of your credit history and contains information about your credit balances, limits, and payment history, and personal details such as occupation and employment history.
Your credit rating is evaluated on a scale of R1 to R9. R1 is a perfect score and R9 is the lowest. Bankruptcy will result in an R9 rating. This makes it much harder to get credit from lenders while you are going through bankruptcy and in the 6-7 following bankruptcy.
As for your credit score, this is measured on a scale of 300 to 900, 900 being the best. Filing for bankruptcy can cause your credit score to drop over 200 points right away, even if you’ve had good credit up until then.
However, if you are a candidate for bankruptcy, it’s important to know that your credit is probably already affected by your current debt levels.
The Financial Consumer Agency of Canada has a variety of resources that will allow you to access your credit report and find out your credit score.
Because of the effect it can have on your credit and some of the myths surrounding bankruptcy, many people wonder if bankruptcy is the right or wrong thing to do.
There is certainly a stigma attached to filing for bankruptcy. But we know that people declare bankruptcy for a wide variety of reasons. Losing a job, divorce, illness, drastic rent or mortgage increases, and the list goes on.
Unexpected financial challenges happen, and they are the biggest reason why someone is no longer able to manage their debt.
Most people want to repay their debts but, for circumstances often beyond their control, are unable to. In short: bankruptcy is simply a legal process that helps you resolve your debt so you can start your financial recovery.
Bankruptcy is a way of legally protecting you from your creditors. It’s a safety net sanctioned by law. It’s meant to give you a chance to start again and overcome your financial challenges. It shouldn’t be seen as a punishment. Bankruptcy is the first step on a path to rebuilding your financial health.
Are you interested in learning more about bankruptcy alternatives?
There are other debt relief and debt forgiveness options, namely the consumer proposal, which reduces your total debt and has no impact on your assets.
A consumer proposal can reduce your debt often between 30-70%. Similar to bankruptcy, only a Licensed Insolvency Trustee can administer a consumer proposal, which involves negotiating with your creditors and agreeing on a new debt repayment amount.
A consumer proposal also stops your creditors from taking any legal action against you. It too has an impact on your credit score, but is less serious than bankruptcy.
Once someone is forced to file for bankruptcy, it can take anywhere from nine to 36 months to come out on the other side of it.
There are a variety of steps you can take to rebuild your credit score. It’s important to remember that rebuilding credit is a process. It won’t happen overnight. Sticking to these steps will make a big difference in the long run.
Having a budget is key to ensure you aren’t overspending. It helps to know what kind of spender you are.
You have to be mindful of what money is coming in and what is going out. There are lots of different budgets out there and there’s no one size fits all solution. The key is to come up with some way to track your spending so you’re staying within in your means.
Don’t leave it up to chance. Your credit score is a direct reflection of your financial health and your ability to manage your financial obligations. If you show you’re capable of not overspending and are making your bill payments in full and on time it really makes a big difference to improve your credit score over time.
Secured credit cards are credit cards that are backed by a cash deposit you make. This also typically becomes your credit limit. Imagine you deposit $200, this means you get a $200 limit on the card. If you don’t pay your bill, the card issuer will take the money from your deposit.
You want to eventually build towards a limit of about $2,500 to $3,000 on these secured credit cards.
If you’re using any form of credit to pay for things after entering bankruptcy you want to show that you can manage the responsibility of paying the money back.
It may seem like a late payment is not that serious but paying on time is part of your financial obligation towards your lender. When you pay fully and on time you are fulfilling the financial obligation and are proving that you are creditworthy.
This allows you start building a payment history. Paying in full and on time shows a future lender that you can be trusted to keep your financial obligations.
It takes up to two years of credit history to demonstrate your reliability so it’s good to get in the habit of fully paying off your credit right away. There’s an added bonus to this strategy too. Paying everything at once and on time means you don’t pay interest.
Since using credit is really just delaying payment you want to keep your balances low and use credit responsibly. Maxing out credit cards is the worst thing you can do in this situation.
This doesn’t mean never use credit cards. It means use credit cards in a way that won’t get you into trouble and you know you can pay back the money without worrying about it.
You shouldn’t spend more than 30% of your credit limit at most. Ideally you should stay under that 30% though.
The more you use credit responsibly, the faster your credit score will improve. This means that you need to apply for new credit to improve your credit score. “Borrow, pay it off and repeat.”
Lenders want to see that you’re someone who can be trusted to pay them back on time without issues. When lenders see that you have a history of paying off your debts, this lowers your risk profile.
Rebuilding your credit after bankruptcy takes time and isn’t easy, but it is certainly doable.
Unfortunately, there is no set date for how long the entire credit recovery process takes. It depends on a variety of factors and each individual situation is different.
You can begin the process of rebuilding your credit after filing for bankruptcy though and it may take as little as one year under the right circumstances.
In order for this to happen you need the discipline to follow healthy financial habits consistently through. Doing so is the best way to rebuild your credit as quickly as possible.
If you’re feeling the pinch you’re not alone. With inflation and rising interest rates, many Canadians are adding to their debt levels to get by. The average Canadian now owes $1.83 for every dollar of disposable income they make, according to Statistics Canada.
It’s important to remember that bankruptcy is a last resort and there are other options available.
If you’re struggling with debt and need help, our Licensed Insolvency Trustees can provide debt relief advice for free and help you find a personalized solution. If bankruptcy is the recommended option, they’ll be there to guide you through the entire process.