For many, bankruptcy serves as a last resort when debt becomes unmanageable. It provides a legal means to find some relief, but it also brings significant implications for your financial future, most notably on your credit score. This guide will explore how soon your credit score can improve after bankruptcy in Canada.
Defining Bankruptcy
Personal bankruptcy, governed by the Bankruptcy and Insolvency Act, is a lawful process in Canada that allows individuals with substantial debt to find some relief. It was established by the federal government in 1992 as a solution for both those in serious debt and their creditors.
Who is Eligible for Bankruptcy?
To qualify for personal bankruptcy, you must have lived or worked in Canada for at least one year, owe at least $1,000, and be deemed “insolvent” – incapable of paying your debts in a reasonable timeframe. It’s important to note that only unsecured debt (e.g., credit card debt, personal loans, income taxes) can be covered by personal bankruptcy. Secured debt, such as mortgage payments and car loans, is not covered.
Understanding How Bankruptcy Works
The process begins with hiring a Licensed Insolvency Trustee, a professional trained to file consumer proposals and bankruptcies in Canada. Their job is to ensure adherence to all Canadian bankruptcy laws and that the process is fair for both the debtor and creditors.
Completing and Filing Bankruptcy Documents
Working with your LIT, you’ll sign the necessary paperwork. Once filed with the government and the bankruptcy court, you become legally bankrupt.
Protection from Creditors
Once bankruptcy is filed for, you are legally protected from your creditors. Your trustee will deal with your debts on your behalf, and you can cease making payments to your creditors.
Handling Assets
You’ll need to turn over all of your non-exempt assets to your trustee. These assets will be sold, and the money will be kept in a trust account to be distributed to the appropriate creditors.
Discharge from Bankruptcy
Upon completion of all duties associated with bankruptcy, you will receive a Certificate of Discharge. This means you are no longer obligated to pay the debt owed to any creditors included in your bankruptcy.
Note: Bankruptcy is a complex process, and it is crucial to consult with a LIT before making any decisions.
The Impact of Bankruptcy on Your Credit
Bankruptcy significantly damages your finances and credit. When you declare bankruptcy, you’ll be assigned the lowest credit rating (9), which can dramatically impact your credit scores.
Bankruptcies typically stay on your credit report for six to seven years, depending on the credit bureau and province you reside in. If this is your second time filing for bankruptcy, this information can stay on your credit report for twice as long, 14 years.
Is It Possible to Rebuild Your Credit After Bankruptcy?
Yes, it is possible to rebuild your credit after bankruptcy. However, because the bankruptcy remark will remain on your credit report for at least six years, lenders who review your credit report will see the bankruptcy, which can lead to rejection of new credit applications. To rebuild your credit after bankruptcy, you’ll need to find lenders who are willing to extend credit to those who’ve previously declared bankruptcy.
Strategies for Rebuilding Your Credit After Bankruptcy
Once your bankruptcy has been fully discharged, you can start working towards rebuilding your credit. Here are a few strategies that can help improve your credit score:
Pay Your Bills on Time and in Full
Your payment history is a significant factor in calculating your credit scores. Paying your bills on time and in full can help rebuild your credit scores.
Pay Your Cell Phone Bills
Some cell phone companies report payments to the Canadian credit bureaus. If you can keep up with your cell phone bills, finding a cell phone company that reports to the credit bureaus can be beneficial.
Regularly Review Your Credit Report
It’s essential to request a free copy of your credit report from one of Canada’s credit bureaus, Equifax or TransUnion, at least once a year. Review it for errors and ensure all other information is accurate and up-to-date.
Apply for a Secured Credit Card
Consider getting a secured credit card. These cards are often advertised for those with bad credit and usually require a deposit of $200 to $500. Once you start managing your secured card responsibly, you may see an improvement in your credit scores.
Avoid Applying for Too Much Credit at Once
When you apply for a loan or credit card, the lender will generally pull your credit report during the application process, known as a “hard inquiry”. Too many hard credit inquiries are typically seen as a sign of financial distress to most lenders and creditors.
Beware of Credit Repair Scams
Some individuals try to profit from those desperate to fix their poor credit and acquire new credit. Remember, the information on your credit report will remain there until it is removed after a specific amount of time. Anyone promising to help you get negative information removed from your credit report for a fee is likely trying to scam you.
Apply for a Savings Loan
A savings loan is a credit-building product offered by certain companies. It works like a regular loan, except no money is given upfront. Rather you make payments to the company for a certain period of time. Each payment you make is reported to the credit bureaus, which may help build your credit.
Re-establish Your Savings Goals
While saving money in any type of savings account won’t impact your credit scores, it’s an important part of recovering from bankruptcy. Having a good savings will allow you to make healthier financial and credit decisions.
Spend Less, Save More
Budgeting is an important part of anyone’s financial future. Start by cutting down on any unnecessary expenses. Then, set up an automatic transfer to a separate savings account, adding to it with every paycheque, specifically to deal with any remaining expenses from your bankruptcy and other financial emergencies.
Contribute to an RRSP
Once your bankruptcy term is over, you can start to contribute to your RRSP (registered retirement savings plan) again. The more you contribute, the better your income tax return will be.
FAQs on Rebuilding Your Credit After Bankruptcy
How Long Will It Take to Rebuild My Credit After Bankruptcy?
The time it takes to rebuild your credit after bankruptcy depends on how responsibly you manage your credit products after bankruptcy. There’s no precise timeframe; it solely depends on your ability to access credit and how well you manage it.
How Long Will Bankruptcy Affect My Credit?
A bankruptcy will remain on your credit report for 6-7 years depending on the credit bureau and province you live in. If it’s your second bankruptcy, it will stay on your credit report for 14 years.
Can I Get a Loan After Bankruptcy?
Yes, it is possible to get a loan after bankruptcy. Some alternative lenders accept borrowers who’ve previously declared bankruptcy, but they often charge high-interest rates.
How Much Does Bankruptcy Cost in Canada?
In Canada, there is a base fee of $1,800 to file for bankruptcy. Other costs are specific to the debtor based on assets and income.
Consulting with a Professional
If you’ve recently gone bankrupt, it’s important to keep in contact with your Licensed Insolvency Trustee and ensure that your case is proceeding as planned. They are trained to deal with cases like yours. Once you’ve completed all of your bankruptcy duties, you can speak to a financial advisor about various ways to improve your finances and your credit. With patience and smart decisions, you’ll gradually get back on track.
