Navigating Credit Card Debt: Prior to, During, and Following Bankruptcy
As a Licensed Insolvency Trustee, aiding individuals and businesses in achieving financial stability is a daily affair. Quite often, the management of credit card debts becomes the focal point of concern. This article aims to guide individuals on the effective management and potential forgiveness of credit card debts. It sheds light on the subject of credit cards and bankruptcy and provides information on obtaining debt assistance in BC.
Credit Card Utilization Prior to Bankruptcy
In a world where major banks and retailers provide consumer credit cards, it’s not uncommon for most Canadians to possess at least one. Despite being a common form of debt, many individuals become heavily reliant on credit cards for daily expenses or as a financial bridge between income and expenses, leading to unmanageable credit card debt.
According to the annual BC Consumer Debt Study conducted by Sands & Associates, over 55% of BC residents carrying credit card debt eventually filed bankruptcy or made a Consumer Proposal to resolve their debts.
Often, there are no warning signs on credit histories indicating difficulty in repaying debts. Unexpected events such as job loss or illness often strain finances, leading individuals to seek debt solutions. Here are some early warning signs that credit card debts might become a problem:
- Ignoring credit card balances while maintaining multiple credit cards with outstanding balances.
- Frequently using credit cards to borrow money, rather than as a substitute for cash.
- Shuffling funds from one credit card to another to meet payments or using other credit forms like overdrafts or payday loans to pay your credit card.
- Only being able to make minimum monthly payments towards your balance.
Remember, Licensed Insolvency Trustees can provide debt advice and solutions regardless of your account standings. Don’t wait until your situation becomes critical to seek help. Reach out to a BC Licensed Insolvency Trustee from the comfort of your home and start your journey towards being debt-free today.
Credit Card Fate During Bankruptcy
When you officially file for bankruptcy, you’ll need to surrender all your credit cards, including those with zero balance, to your Licensed Insolvency Trustee. These will then be returned to the card issuer, with the exception of cards issued to third parties such as your employer or spouse.
Post the registration of your bankruptcy documents with the Office of the Superintendent of Bankruptcy, your Licensed Insolvency Trustee will inform your credit card lenders and other creditors about your bankruptcy filing. This action results in an immediate stay of proceedings, prohibiting creditors from contacting you for payment or charging further interest on your accounts. After going through the bankruptcy process and receiving an official discharge, your credit card debts, among others, will be forgiven.
Typically, bankruptcies last for 9 months from the date of signing to the official discharge. During this period, you will generally:
- Complete a monthly budget form tracking your income and expenses.
- Attend two private financial counselling sessions.
- Provide your Licensed Insolvency Trustee with any applicable tax information for filing and catching up on tax returns.
- Pay a monthly cost of $200 for the 9-month period until you are discharged.
Obtaining a Credit Card During Bankruptcy
While it’s generally advised against applying for new credit until after your bankruptcy is complete, you are allowed to apply for a new credit card at any point during the bankruptcy process. However, if you’re applying for credit of $1,000 or more, you must disclose to the potential lender that you’re not yet discharged from bankruptcy, regardless of whether you’re specifically asked.
Secured credit cards or prepaid credit cards are alternatives that people may use during and post-bankruptcy. It’s also worth noting that mortgage renewals during and after bankruptcy are usually approved if your account is in good standing. Learn more about keeping your house if you file bankruptcy here.
Resolving Credit Card Debt Without Declaring Bankruptcy
Not everyone who wishes to simplify their debt repayment wants to file for bankruptcy. Many consider consolidating credit card debt to streamline their payments and establish a manageable interest rate. However, people often mistakenly believe that their options are limited to consolidation loans and bankruptcy.
In Canada, not only can you file bankruptcy to settle credit card debt, but you can also avoid bankruptcy and consolidate without borrowing by making a Consumer Proposal to your creditors. If you can make some payments towards your debts, consolidation with a Consumer Proposal can be far less costly and much faster to get you out of debt than by taking out a consolidation loan through a bank.
Here’s how a Consumer Proposal works:
- A Licensed Insolvency Trustee assists you in crafting a debt settlement offer to your creditors, consolidating your debts and proposing an amount for repayment in full settlement of all your debt. This proposal can include various types of debt – from credit cards to tax debt, student loans, and more.
- Your creditors have 45 days to consider your proposal. If a majority (by dollar value) agree, it becomes legally binding on all your creditors. As Consumer Proposals provide some debt repayment (unlike bankruptcy, where creditors often receive nothing), they are almost always accepted.
- Typically, Consumer Proposals lay out monthly payment terms, which can vary greatly depending on your circumstances – anywhere from a single lump-sum payment to monthly payments over a period of up to five years. Terms of 24 to 36 months are very common. You can pay off your Consumer Proposal early at any time, with no penalty.
- Once your Consumer Proposal is completed, the unpaid balance of those debts will be written-off/forgiven by your creditors, leaving you debt-free.
Learn about the three types of Debt Consolidation in Canada
Obtaining a Credit Card After Bankruptcy
Bankruptcy doesn’t permanently prevent you from acquiring new credit. In fact, credit history and scores can change dramatically within a short span of time. For many, the time needed to complete bankruptcy and re-establish their credit history often proves to be much faster than if they tried to pay off the unmanageable debt (with interest) on their own. A credit card is often the first type of new credit people obtain post-bankruptcy.
As part of your bankruptcy process, you’ll attend two private financial counselling sessions. These will equip you with the knowledge, tools, and resources to use once your bankruptcy is complete:
- When establishing new positive credit history, many Licensed Insolvency Trustees suggest starting with a low limit secured credit card, issued by a lender who will report your transactions to credit bureaus.
- Around the one-year post-bankruptcy mark, you may be more likely to obtain a standard unsecured credit card at “best rates”.
Credit Scores Post Bankruptcy
In Canada, filing for personal bankruptcy will reflect on your credit history for 6 years from the date that you are discharged from bankruptcy. However, it’s quite possible to get new credit before your bankruptcy “expires” from your credit history.
Many people find that their income, savings, or other factors are satisfactory qualifying factors for lenders when applying for a new credit card. Besides credit cards, it’s not uncommon for individuals to be granted financing for a new vehicle and even a new mortgage within two or three years of being discharged from bankruptcy.
Application for a New Credit Card
When you’re ready to get a secured or standard credit card after your bankruptcy is complete, consider the following factors before submitting your credit card applications:
- Have you reviewed your credit history for errors? Ensure that your credit reports are accurate.
- What rates are being offered for borrowing? Understand the interest rates and any annual fees you will need to pay before accepting any new credit.
- Will you be able to pay off the balance in full and on time each month? It might be a good idea to start small, keeping your limits low on new cards.
Debt Assistance
Dealing with debt-stress can be challenging, especially when struggling to manage credit cards or other debts. A Licensed Insolvency Trustee can help you assess your situation and evaluate potential solutions. As the only debt management professional legally empowered and endorsed by the government to assist people with their debts, we’re here to ensure you get the information you need to make the best choice for your unique situation.
Ready to get a plan to be debt-free? Connect with a local Licensed Insolvency Trustee for a free confidential debt consultation.
