Bankruptcy & Your Credit Report
Many misunderstandings surround the Canadian financial industry, among which the credit reporting system stands out. Most adults in Canada, whether employed, having a bank account, or having ever tried to access credit, are likely to have been reported to a credit reporting agency. However, a surprising number of people are unaware of these agencies’ workings.
The first myth about credit reporting is that it’s executed by non-profit or government agencies, whereas, in reality, credit reporting agencies are profit-based businesses. Their primary function is to furnish lenders with information that aids them in deciding whether to grant credit to individuals. They work for the lenders, not for the individuals.
The second myth is that these agencies accurately report all your financial transactions, which is not true. They only report what their member lenders report to them. For instance, businesses not members of a credit reporting agency will not have their transactions with you reported on your credit report.
Understanding these two myths can provide greater clarity about the concept of credit reporting in Canada.
The Impact of Bankruptcy on Your Credit Report
Bankruptcy, designed to give individuals a fresh start by eliminating their unsecured debts, can significantly impact your credit report. The government, not your bankruptcy trustee, reports your filing for bankruptcy to the credit reporting agencies. They also report when you complete your bankruptcy.
Debts listed on your credit report by your lenders before your bankruptcy filing need to be dealt with to remove them from your report. In some instances, lenders continue to report debts already cleared by bankruptcy. Therefore, it is recommended that individuals obtain a copy of their credit report 3 to 6 months after their discharge to verify that everything related to the bankruptcy is reported correctly.
A person’s credit report is usually an accurate representation of their financial history with major banks and credit granters. If you file for and are discharged from bankruptcy, these facts are correctly presented on your report. It may seem contradictory that bankruptcy can be a fresh start if it appears on your credit report. However, your unsecured debts are eliminated once you are discharged. If you don’t file bankruptcy and continue to miss payments, this will also negatively impact your credit report. By starting over, you can rebuild your credit, and your past ‘history’ becomes irrelevant.
Duration and Impact of Information on Your Credit Report
Credit bureaus may retain positive or negative information on your credit report, including information on payments that you did or didn’t make on time. This information is kept on your credit report for a certain duration, which varies based on the type of financial information, your province or territory, and the credit bureau that created the report.
Positive information includes credit accounts that you’ve paid as agreed and have no negative history. Credit bureaus retain positive information on your credit report for different durations.
Active credit accounts that you’ve paid remain on your Equifax credit report as long as the account is open. Closed accounts stay on your Equifax credit report for up to 10 years. TransUnion retains a record of positive credit information for a period of 20 years, regardless of whether the account is active or closed. The positive information kept on your credit report may improve your credit score.
Negative information may include late or missed payments, accounts sent to collection agencies, bankruptcies, and more. According to provincial laws, credit bureaus may keep negative information on your credit report only for a certain period. For instance, negative information about accounts such as credit cards and loans may stay up to six years. Credit checks by lenders; Equifax retains this information for three years, while TransUnion keeps it for six years. Bankruptcy stays on your report for six or seven years, depending on the province. Negative information on your credit report may hurt your credit score.
A judgment is a debt you owe through the courts due to a lawsuit. This information typically stays on your credit report for six years. However, TransUnion keeps this information on file for seven years in Newfoundland and Labrador, Ontario, and Quebec, and for ten years in Prince Edward Island.
How Bankruptcy Affects Your Credit
Personal bankruptcy is a legal process aimed at eliminating debt, but it has a short-term effect on your credit rating and score.
Here are some ways bankruptcy will appear on your credit report:
- The Office of the Superintendent of Bankruptcy sends information to the credit bureau when you file for bankruptcy. The bureau then adds a note at the bottom in the legal or public record section stating the type of proceeding (bankruptcy) and the filing date. The date of discharge is added to this section when you are discharged.
- Individual creditors also update the debt information they provide in the trade account section to say that the debt was ‘included in bankruptcy’.
In general, a first bankruptcy will remain on your credit report for six to seven years after discharge, depending on the credit bureau. This duration extends to 14 years for a second or subsequent bankruptcy. Each credit bureau has slightly different policies, so it’s crucial to understand what they specifically state:
- On your TransUnion credit report, bankruptcy and all accounts reported as included in that bankruptcy are removed seven years from the date of discharge. If you file more than once, each bankruptcy will remain for 14 years from the date of discharge.
- Bankruptcy stays on your Equifax credit report for six years after your discharge date or seven years after the filing date without a discharge date. If a second bankruptcy is filed, then the first re-appears on your credit report, and both bankruptcies stay for 14 years after the discharge dates.
It’s natural to worry about the effect bankruptcy will have on your credit rating. However, you should know that most people can repair their credit after filing bankruptcy and borrow again. Depending on your credit report’s contents, you may even be able to obtain a new secured or even unsecured credit card during your bankruptcy. Declaring bankruptcy can sometimes be the first step in improving your credit score. If you have debts you can’t repay, continuing to carry those debts until you eventually default or max out your credit will negatively affect your score until you deal with your debt problem.
Rebuilding Credit After Bankruptcy
The objective of declaring bankruptcy is to allow you to eliminate debts that are currently causing financial problems. Ignoring those debts will not improve your credit score. Life after bankruptcy provides you with an opportunity to begin the process of repairing your credit score and improving your credit rating.
The best advice is to pay your bills on time, avoid bouncing any checks, and not overdraw your account at the bank, even if you have overdraft protection. Show the credit system that you are a responsible money manager and that when you borrow money, it’s because you want to, not because you have to. In this way, you will repair your credit and avoid a bad credit report in the future.
Here are some steps to restore your credit after bankruptcy:
- Pay all bills on time.
- Get a copy of your credit report every four to six months after completing your proposal or bankruptcy to ensure the report’s information is accurate and up to date. If there are errors, contact the credit reporting agency directly.
- Open a savings account and use the account for savings and emergency funds. Savings don’t get reported to the credit bureau, so savings don’t directly rebuild your credit, but they do improve your finances.
- Consider getting a secured credit card. After completing your bankruptcy or after your proposal is accepted by the creditors, obtain a secured credit card. For example, Home Trust Visa offers secured credit cards.
- Apply for only one secured credit card as multiple applications will show on your credit file and potentially lower your score.
- Use any credit card obtained very sparingly and pay the balance as soon as used or as soon as the billing arrives. Interest is calculated on the initial balance, and delayed payments result in a lower rating.
Fresh Start Program For Credit Rebuilding
At Bankruptcy Canada, we want to help you take full advantage of the fresh start you can achieve by filing bankruptcy or a consumer proposal to eliminate your debt. To help, we have developed a comprehensive education and support program for our clients designed to provide you with the skills and resources you need to rebuild your finances and your credit after filing insolvency. Our credit counselling enhances the mandatory credit counselling required when you file insolvency with additional tools, support, and special online resources about budgeting, credit repair, dealing with creditor calls, and much more. Our goal is to help you achieve a full financial recovery.
What to Do If You Can’t Pay Your Bills?
If you can’t pay your bills today, call one of our offices, or email one of our trustees today.
We offer a free, no-obligation consultation. One of our experts will personally review your situation and answer your questions.
Let us help you choose the correct solution to solve your debt problems. Simply contact our team today.