Bankruptcy & Your Credit
In Canada, there are various legal processes you can follow to get rid of debt.
Bankruptcy is one of these processes, though it is widely considered the most extreme.
When an individual files for bankruptcy, they are absolved of unsecured debts, but this comes at a price.
Some assets may need to be sold, and the most significant impact is on your credit report.
How does bankruptcy affect your credit?
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The short answer is that it has a negative effect that lasts for many years.
To help you understand this, we’ve compiled the following pieces of information:
What happens to your credit report when you file bankruptcy?
Whenever certain financial things happen in your life, the credit bureau is usually notified.
A typical example of this is when you apply for money – the bureau becomes aware of this and gets added to your credit report.
The same happens when you file bankruptcy.
The credit bureau is notified of this by the Office of the Superintendent of Bankruptcy Canada.
All of the creditors you owed money will also inform the bureau if your debts to them were included in the bankruptcy.
Both of these have an impact, but for different reasons.
Firstly, notifying the credit bureau of bankruptcy allows them to add this to your report.
Secondly, creditors informing the bureau of your debts allows them to remove the debts from your report.
This can be important when it comes to rebuilding your credit.
How is your credit rating affected?
You might assume that bankruptcy can aid your credit rating.
After all, you’ve removed a lot of unsecured debts, which is known to cause a decline in rating.
However, it will have the opposite effect on your credit rating in Canada.
This is because the credit bureaus will give you an R9 rating on your report.
What does this mean?
Well, you can receive lots of different codes on your credit report, which indicate different things.
R stands for revolving or recurring credit, which relates to money you borrow up to your credit limit or an ongoing debt.
It’s not always bad to have this as it gets graded from 0-9.
An R0 means your credit is too new to rate or you’ve been approved and not used any.
R1 shows you have paid your debt as agreed or within 30 days of billing.
Doing this can actually help you improve your credit score as it shows you’re a trustworthy lender.
However, R9 is the worst rating you can get.
Any number higher than R1 is likely to hurt your credit score, so R9 is the worst possible rating you can wish for.
How long does bankruptcy stay on your credit report?
The good news is that bankruptcy – and your R9 rating – won’t stay on your report forever.
It will be cleared following your discharge from bankruptcy.
Unfortunately, the clearing doesn’t happen instantly, or even in the near future.
In Canada, you will most likely receive your credit report from these two bureaus:
When you file bankruptcy, the details will remain on your report for at least 6 years following your discharge date.
This happens when you are using Equifax, but TransUnion will keep your bankruptcy for 7 years.
So, it depends on who you use, but 6 years is the shortest it will remain on your report, and this is for first-time bankruptcies only!
If you file for bankruptcy again, any subsequent ones are on there for 14 years following your discharge date.
Again, both credit bureaus take a slightly different approach here.
With TransUnion, every bankruptcy after your first one is on there for 14 years.
With Equifax, the same happens, only your original bankruptcy comes back as well.
Should I worry about my credit when filing bankruptcy?
Yes and no.
Yes, you should be concerned by how long this remains on your report and what it does to your score.
It will be near enough impossible to apply for credit when you have this on your report.
So, it’s worth considering other options before you take the plunge.
Even something like a consumer proposal stays on your report for less time and can help you clear your debts.
On the other hand, bankruptcy can be the only thing that helps you get rid of debt.
As such, it gives you a fresh start to then rebuild your credit report.
So, if this is your only debt-relief option, we advise you to not worry too much about your credit score/rating.
Yes, it will take a hit, but you can still build it back up.
How can you rebuild credit after bankruptcy?
Thankfully, rebuilding your credit is seemingly straightforward when you look at it on paper.
You’ve already dealt with one major issue – your mounting debt – and now you can do these things to improve your rating:
- Pay your bills on time to avoid any missed payments on your report.
- Check your credit report for any errors, specifically looking for debts included in your bankruptcy that still linger on the report.
- Set a budget to save money and avoid overspending. This can have a secondary effect on your credit report by preventing the need to borrow money.
- Avoid applying for lots of credit all at once. Ideally, the only thing to apply for is a secured credit card. Then, use it sparingly to build credit without falling into debt.
Following these best practices will help you gradually ease your credit back to a positive place.
When your R9 rating has finally been removed, you’ll be back in a healthy financial position.
Get help with bankruptcy and debt-relief today!
It’s vital to take action against your debts.
We offer professional guidance for anyone with financial problems in Canada.
As Licensed Insolvency Trustees, we can take you through the legal process of bankruptcy.
We’re also qualified to give credit counselling that can help you rebuild your score and feel more financially independent.
If you’re interested in this service – or any other debt-relief services – please contact us today.
Either give us a call or fill in our online evaluation form to schedule a consultation.
How to File for Bankruptcy
What is Bankruptcy?
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What is the Cost of Bankruptcy in Canada?
How to Rebuild Credit Following Bankruptcy
Personal Bankruptcy in Canada
What Debts are Erased in Bankruptcy?