Date

January 28, 2022

Life after bankruptcy - what happens next?

What happens after you file bankruptcy? Learn more about mandatory credit counselling, rebuilding your credit, and taking out a loan or mortgage.

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Life after bankruptcy — what happens next?

Meeting with a Licensed Insolvency Trustee (LIT) to file for bankruptcy is a difficult step to take towards your financial health. If you’re considering making this move or you’re currently in the process, it’s normal to have questions. You may have an understanding of how bankruptcy can help, but you have no idea what your life will look like on the other side of your bankruptcy filing. Here are answers to common questions about life after bankruptcy. - thumbnail

Meeting with a Licensed Insolvency Trustee (LIT) to file for bankruptcy is a difficult step to take towards your financial health. If you’re considering making this move or you’re currently in the process, it’s normal to have questions. You may have an understanding of how bankruptcy can help, but you have no idea what your life will look like on the other side of your bankruptcy filing. Here are answers to common questions about life after bankruptcy.

What happens after I file bankruptcy? 

When you file for bankruptcy, your LIT will guide you through the process and bankruptcy costs. This includes collecting any applicable assets from you that can be sold to partially pay back debts.   

Your LIT will also become your representative to your creditors who will no longer be allowed to send debt collectors or threaten you with legal action. 

The total length of a first bankruptcy is usually around nine months. However, a bankruptcy may take 21 months if you’re considered to have “surplus income” based on your monthly income and standard of living.

While your LIT manages your financial situation, your biggest responsibilities over the course of the bankruptcy period will include filing monthly income and expense reports, completing two mandatory credit counselling sessions, and beginning to rebuild your credit.

What will I learn at mandatory credit counselling?

Credit counselling may be the most important part of filing bankruptcy. The goal is to help you identify the source of your financial troubles and learn techniques to prepare you for the future. This can be done with your LIT or a certified insolvency counsellor.  

The first session is within the first two months of bankruptcy and focuses on money management. You’ll talk about your spending habits, credit cards, different types of debt, and warning signs to look out for. The counsellor will help you look through your finances to build a basic budget that will keep you on track both during and after the bankruptcy process. 

The second session usually occurs around five months later. The counsellor will check to see if you’ve been sticking to the budget you made in your first session and ask about any issues you may have encountered. They may have you create a list of financial goals for yourself and help you understand your relationship with money. Lastly, they’ll help you address any habits that may have led to your unique financial situation and teach you some techniques to start rebuilding your credit. 

Once you’ve completed your counselling sessions and your bankruptcy period, you’ll be legally discharged of your unsecured debts. Then you can move forward with a fresh start and apply what you’ve learned. 

How long will I have “bad credit” after bankruptcy? 

When people say bankruptcy hurts your credit, what they’re mainly referring to is the R9 rating added to your credit report when the bankruptcy is filed. This indicates to creditors that you filed for bankruptcy, and this flag stays on your report for six years after your debts are officially discharged —  plenty of time to build positive money management habits and get your financial life back on track. 

Can I get approved for a mortgage or loan after bankruptcy?

Yes, but it depends on the lender. For a period of time after bankruptcy, you’ll likely be considered to be a higher lending risk. As such, your borrowing options will decrease, and the interest rates will increase. You may be asked to provide a larger down payment on a mortgage, and you’d be more likely to need a co-signer for a loan.  

If you find yourself in this position, you’re strongly advised to avoid high-interest lenders that offer products like payday loans because they’re prone to putting you into another debt spiral. You can read about how they high-interest loans works here , but the short story is that they charge a lot of interest — sometimes up to 600%. Many of their customers are forced to take out a second high-interest loan to pay off the first one, and the spiral begins.

Will my credit score go up after bankruptcy? 

The good news is that you can start rebuilding your credit immediately after a bankruptcy. A great first step is to follow the credit advice you received from your counselling sessions and stick to your new budget

  • Track how much money is coming in and going out every month.
  • Chart your expenses so you can see where your money is going.
  • Break down your costs into categories like housing, food, transportation, savings, utilities, and personal spending.

These are smart ways to ensure you’re always in control, able to make payments in full and on time, demonstrating financial responsibility and rebuilding credit.  

Also consider getting a copy of your credit report so you can track your progress. Seeing your credit repair journey with your own eyes can be a great motivator to stay on track. Once you’re feeling comfortable, consider easing into controlled credit card spending. When used as a tool for building credit, rather than an easy payment, credit cards can be quite helpful.

How can a secured credit card help me?

While credit cards are an important part of rebuilding credit, they may not be an option for someone who recently filed bankruptcy. It’s possible you won’t be approved for a traditional credit card right away. Or you simply might not feel ready yet. That’s where secured credit cards come in.  

A secured credit card is a low-risk alternative to regular credit cards. It works essentially the same way, but your secured card limit is determined by a cash deposit you pay in advance. Think of it like a bike with training wheels. 

Secured credit cards allow you to start using credit on a regular basis to repair your credit score. It allows you to practice the techniques you learned from your credit counselling sessions, like only buying what you can afford, only using 35% of your credit limit every month, and budgeting to make payments on time. After a year of responsible credit history on your secured credit card, you may start seeing gradual improvements to your score again and qualify for a traditional credit card.

Can I have a life after bankruptcy? 

Yes. Of course you can. And the role of a Licensed Insolvency Trustee is to help you clear your debt and teach you skills to stay out of debt moving forward. By using what you learn, making a realistic budget for your lifestyle and rebuilding credit, you can have a wonderful, rich, and debt-free life after bankruptcy. 

If you need any help with bankruptcy or credit counselling, contact a BDO LIT today

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Date

January 28, 2022

Life after bankruptcy - what happens next?

What happens after you file bankruptcy? Learn more about mandatory credit counselling, rebuilding your credit, and taking out a loan or mortgage.

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