Rebuilding Credit After Bankruptcy
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It is a common misconception that a person has to wait 6 years after his discharge, until the record of his bankruptcy drops off the credit bureau report, until he or she can start rebuilding credit after bankruptcy. This is not true! A person can start to rebuild credit as soon as he is discharged from bankruptcy.
Rebuilding credit after bankruptcy will be quick and painless If you follow the steps provided here.
You will be able to get a secured credit card and a car loan shortly after you are discharged.
Any discharged bankrupt will be able to get a mortgage – the hardest credit to secure – at an interest rate comparable, or better, than a person who has never gone bankrupt, two years after the bankruptcy discharge.
Rebuilding credit after bankruptcy – Step 1 – Get your Bankruptcy Discharge or the Certificate of Completion for your Consumer Proposal or Division I Proposal.
After you have filed for bankruptcy or a proposal, you will need to follow your trustee’s directions on how to gain your Absolute Discharge or Certificate of Completion.
If you have not gained your Absolute Discharge or Certification of Completion, it is impossible to gain any form of borrowing, even with private lenders. Attempting to gain financing before your discharge is futile.
When you have completed this step you can go on to step 2
Rebuilding credit after bankruptcy -Step 2 – Clean up your credit.
Check your credit report and write to the credit bureau to correct any errors.
Never pay anyone to clean up your credit report. Do it yourself following our detailed steps.
The credit bureaus will correct mistakes on your credit report. They will not remove information that is correct.
Now that you have your Absolute Discharge, you need to clean up your credit score, or ensure that it is clean already. It is very common to see multiple errors on credit scores. Once you are discharged your existing balances should be marked as included in bankruptcy
Check your Credit Report to see if you have to correct errors.
Note: A credit card in your name is required to place these orders. You can pay for Equifax’s report online and have it instantly. Note that the online report costing $23.95 includes your credit report and your credit score.
The online report costing $15.50 only includes your credit report.
You can pay for TransUnion’s report online and have it instantly.
Correcting Errors on EQUIFAX
- Use the online dispute method; or
- Use the Equifax form, which you fill out online. You would use this form if you are disputing bankruptcy or proposal related items. Don’t forget to include copies of your Discharge Certificate or Certificate of Full Performance of your proposal, and the List of Creditors and all other relevant documents.
Correcting Errors on TRANSUNION:
- Full name
- Current address
- Previous address (if less than two years at current address)
- Date of birth
- Social Insurance Number (optional)
- Employment information (optional)
- Telephone number (optional)
- Name of the company you have a dispute with (from your credit report)
- Account number, if available, of the disputed item (from your credit report)
- Reason for your dispute (e.g., you have paid the account, etc.)
- Documentation to support the amendment you have requested. If the amendments are to your personal information (e.g., name), please provide supporting identification documentation, such as change of name certificate, marriage certificate, etc.
If you are still not satisfied that your file is correct:
- You may wish to contact your provincial / territorial regulator responsible for consumer affairs (as credit reporting agencies falls under provincial / territorial jurisdiction).
- You can also contact the Federal Privacy Commissioner (except in the case of Quebec, B.C. and Alberta where you should contact the Provincial Privacy Commissioner). The Personal Information Protection and Electronic Documents Act (“Personal Information Protection and Electronic Documents Act”(PIPEDA) also sets out ground rules for how private sector organizations can collect, use or disclose personal information in the course of commercial activities. Under “Personal Information Protection and Electronic Documents Act” PIPEDA individuals have a right to see the personal information that a business holds about them, to correct any inaccuracies and to lodge a complaint with the Privacy Commissioner of Canada if they are unhappy with how an organization is handling their information.
Please note: If the incorrect information comes from a federally regulated financial institution, the Financial Consumer Agency of Canada (“Financial Consumer Agency of Canada” FCAC) website provides additional information on how to get errors corrected.
When you have completed this step you can go on to step 3
Rebuilding credit after bankruptcy – Step 3 – Gain New Credit.
Re-Established Credit has to be New Credit
After you receive your bankruptcy discharge you need to get new credit to start rebuilding your credit and increasing your credit score. By handling your new credit responsibly you will show lenders that you are responsible managing your money which will help your credit score improve.
You must ensure that you always make your payments on time and pay the full amount borrowed back when due. When you make charges on your new credit card make sure that you don’t charge more than 75% of your available credit – even if you intend to pay for it in full. Once your credit has been reestablished for several months you can request more credit.
A Bankruptcy Canada tip is to get a secured credit card and use it for small monthly purchases, such as your gym membership.
This secured credit card is recommended because they report your payments to the credit bureaus.
After You obtain the secured card you should do the following:
RAISE YOUR SCORE: You want to get your FICO score back up to about 700 or higher, because then you can qualify for a mortgage.
You can check your FICO credit score every four months or so to measure how you are doing. When you check your own credit score it does not adversely affect your credit score. If you are making multiple credit applications and creditors are checking your credit score this will have a negative effect of your credit score.
FICO scores are just guidelines, and don’t mean that you cannot be approved even if your FICO score is low. There are other factors that can affect lending decisions based on credit worthiness. Some factors that might persuade a lender to be more lenient towards granting a loan to a borrower with a lower FICO score include:
- A larger down payment
- Low debt-to-income ratios
- Excellent money saving history
- Reasonable explanations for negative items on a credit history
2) INCREASE YOUR LIMIT: If you start off with the minimum $500 limit, you will want to increase your limit on your card using this form to show that you can handle a higher limit.
A $1,500 or $2,000 limit is better than a $500 limit as it shows more responsibility. You will find that after 12 – 18 months of responsible credit card use you will qualify for an unsecured credit card.
What is a Good Form of Credit To Gain After Bankruptcy?
Any credit is good credit so long as the payment record and fact of the debt is reported to the credit bureau. A secured credit card is one of the most cost effective ways to rebuild your credit. Other debt such as auto loans and RRSP loans are also popular.
CMHC only needs one form of re-established credit for 12 months after bankruptcy, but Genworth, CMHC’s competitor, asks for 2 forms of credit for a minimum of 24 months after bankruptcy.
Here are some After Bankruptcy Lenders who will give careful consideration to lending you money, knowing you have been in bankruptcy:
When you have completed this step you can go on to step 4
Rebuilding credit after bankruptcy – Step 4 – Accumulate your Down Payment.
The government has imposed a stress test, effective November 30, 2016, which makes it more difficult to qualify for a government insured mortgage.
Canadian Mortgage and Housing Corporation (CMHC) has provided a list of requirements to qualify for insurance on your home mortgage:
- The home is located in Canada.
- You will typically have a down payment of at least 5% of the purchase price of the dwelling, depending on the dwelling type.
- Single-family and two-unit dwellings (5% minimum down payment)
- Three- or four-unit dwellings (10% minimum down payment)
- Normally, the minimum down payment comes from your own resources. However, a gift of a down payment from an immediate relative is acceptable for dwellings of 1 to 4 units. For eligible borrowers, additional sources of down payment, such as lender incentives and borrowed funds, are also permitted. Check with your lender for qualifying criteria and availability.
- Your total monthly housing costs, including Principal, Interest, property Taxes, Heating (P.I.T.H.), the annual site lease in the case of leasehold tenure and 50% of applicable condominium fees, shouldn’t represent more than 32% of your gross household income (Gross Debt Service (GDS) ratio).
- Your total debt load shouldn’t be more than 40% of your gross household income. The Total Debt Service (TDS) ratio is your P.I.T.H. + the annual site lease in the case of leasehold tenure and 50% of condominium fees (if applicable) + payments on all other debt / gross annual household income.
- You also need to think about closing costs (for example, legal and land transfer fees) equivalent to 1.5% to 4% of the purchase price. Many first-time buyers are surprised by these costs.
- Closing costs include but are not limited to one-time items such as lawyer fees, GST and PST as applicable, land transfer tax if applicable, adjustments, etc., to allow you to complete the house purchase.
When you have completed this step you can go on to step 5
Rebuilding credit after bankruptcy – Step 5 – Contact a Mortgage Professional who is experienced at helping people, who were in bankruptcy, filed a proposal or a consumer counselling debt program, get a mortgage.
Caution, if you plan on going to your local bank for a mortgage!
First they probably don’t know the rules on getting you a mortgage at the best rates possible. Second they are likely to turn your mortgage application down. Worst yet, you may find yourself locked into a poor mortgage that will cost you thousands of dollars more than by using an experienced mortgage professional.
Mortgage professionals will get you a mortgage at the same interest rate, as the most credit worthy person who has never been in bankruptcy. You will pay nothing for the services of a mortgage professional.