Contrary to what you might think,bankruptcydoes notimpactyour credit forever. We meet lots of people who are afraid to ask for debt help because theydon’t fully understand how bankruptcy works and how long it willstayontheircredit report.
In this blog, we will explain how bankruptcy affects your credit and how to go about rebuilding it.
The truth is that filing for bankruptcy is a financial recovery strategy. It providesimmediate debtreliefandithelps you improve your financial health. In the long-term, thisactually helpsyourebuild your credit.
How does bankruptcy affect my credit rating and my credit score?
There’s nodenyingithas asignificantimpact on your credit.
For Equifax,Canada’s largest credit bureau,bankruptcy stays on your credit report for 6 years after the date of discharge.And for TransUnion, it’s 7.
Butwhat about yourcredit ratingand yourcredit score?
Your creditratingisa record of your credit history and containsinformationabout your credit balances, limits, and payment history, andpersonal details suchasoccupation and employment history.
Your credit rating is evaluated on ascale of R1to R9.R1isa perfect score and R9isthelowest.Bankruptcy willresult inan R9 rating. This makes it much harder to get credit from lenderswhile you are going through bankruptcy and in the 6-7 following bankruptcy.
As for your credit score, thisis measured on a scale of 300 to 900, 900 beingthe best.Filing forbankruptcycan cause your credit score to drop over 200 points right away, even if you’ve had good credit up until then.
However, if you are a candidate for bankruptcy, it’s important to know that your credit is probably already affected by your current debt levels.
TheFinancial Consumer Agency of Canadahas a variety of resources that will allow you toaccess your credit report and find out yourcredit score.
Bankruptcy stigma: is it “bad” to declare bankruptcy?
Because of the effect it can have on your credit and some of the myths surrounding bankruptcy, many people wonder if bankruptcy is the right or wrong thing to do.
There is certainly a stigma attached to filing for bankruptcy.But we know thatpeople declare bankruptcy for a wide variety of reasons. Losing a job, divorce,illness, drastic rent or mortgageincreases, and the list goes on.
Unexpected financial challenges happen, and they are the biggest reason why someone is no longer able to manage their debt.
Most people wanttorepay their debts but,for circ*mstances often beyond their control,are unable to.In short:bankruptcy issimply a legal process that helps you resolve your debt so you can start your financial recovery.
Bankruptcy is a way of legally protecting you from your creditors. It’s a safety netsanctioned by law.It’s meant to give you a chance to start again andovercomeyourfinancial challenges.It shouldn’t be seen as a punishment. Bankruptcyis the first step on a pathtorebuildingyour financial health.
Bankruptcy alternatives
Are you interested in learning more about bankruptcy alternatives?
There are other debt relief and debt forgiveness options, namely theconsumer proposal, whichreduces your total debt and hasno impact on your assets.
A consumer proposal can reduce your debt often between 30-70%.Similar tobankruptcy, only a LicensedInsolvencyTrustee can administer a consumer proposal, which involves negotiating with your creditors and agreeing ona newdebt repaymentamount.
A consumer proposalalsostopsyour creditors from takinganylegal action against you.Ittoo hasanimpact on your credit score, but isless serious than bankruptcy.
How long will it take to rebuild credit after filing for bankruptcy?
Once someone is forced to file for bankruptcy, it can take anywhere from nine to 36 monthstocome out on the other side of it.
There area variety ofstepsyou cantaketo rebuild your credit score. It’s important to remember that rebuilding credit is a process. It won’t happen overnight.Sticking tothese stepswill make a big difference in the longrun.
How to rebuildyour credit
1. Keep your expenses lower than your income
Having a budget is key to ensure you aren’t overspending.It helps to know whatkind of spender you are.
Youhave tobe mindful of what money is coming in and what is going out. There arelots of different budgetsout there and there’s no one size fits all solution.The key is tocome up withsome wayto track your spending so you’re staying within in your means.
Don’t leave it up to chance.Your credit score is a direct reflection of your financial health and your ability to manage your financial obligations.If you show you’re capable of not overspending and are making your bill payments in full and on time it really makes a big difference to improve your credit score over time.
2. Use a secured credit card
Secured credit cardsare credit cards that are backed by a cash deposit you make. This also typically becomes your credit limit.Imagine you deposit$200,this meansyou get a $200 limit on the card. If you don’t pay your bill, the card issuer will take the money from your deposit.
You want to eventually build towards a limit of about $2,500 to $3,000 on these secured credit cards.
3. Pay your bills on time and in full
If you’re using any form of credit to pay for things after entering bankruptcy you want to show that you canmanagethe responsibility of paying the money back.
It may seem like a late payment is not that serious but paying on time is part of your financial obligation towards your lender. When you payfullyand on time you are fulfilling the financial obligation and are proving that you arecreditworthy.
This allows you start building a payment history. Paying in full and on time shows a future lender that you can be trusted to keep your financial obligations.
It takes up to two years of credit history to demonstrate your reliability so it’s good to get in the habit of fully paying off your credit right away. There’san added bonusto this strategy too. Paying everything at once and on time means you don’t pay interest.
4. Keep your balances below their credit limits
Since using credit isreally justdelaying payment you want to keep your balances lowanduse creditresponsibly. Maxing out credit cards is the worst thing you can do in this situation.
This doesn’t mean never use credit cards. It means use credit cards in a way that won’t get you into trouble and you know you can pay back the money without worrying about it.
You shouldn’t spend more than 30% of your credit limit at most. Ideally you should stay under that 30% though.
5. Apply for and establish new credit
The more you use credit responsibly, the faster your credit score will improve. This means that you need to apply for new credit to improve your credit score. “Borrow, pay it off and repeat.”
Lenderswant to see that you’re someone who can be trusted to pay them back on time without issues.When lenders see that you have a history of paying off your debts, this lowers your risk profile.
Rebuilding your credit after bankruptcy takes time and isn’t easy, but it is certainly doable.
How long can full credit recovery take?
Unfortunately, there is no set date for how long the entire credit recovery process takes.It dependson a variety of factors andeach individual situationis different.
You can begin the process of rebuilding your credit after filing for bankruptcythoughand it may take as little as one yearunder the right circ*mstances.
In order forthis to happen you need the discipline to follow healthy financial habits consistently through.Doing so is the best way to rebuild your creditas quickly as possible.
What should you do if you are considering bankruptcy?
If you’re feeling the pinch you’re not alone. With inflation and rising interest rates, many Canadians are adding to their debt levels to get by. The average Canadian now owes $1.83 for every dollar of disposable income they make,according to Statistics Canada.
It’s important to remember that bankruptcy isalast resort and there are other options available.
If you’re struggling with debt and need help, ourLicensedInsolvencyTrustees canprovide debt relief advice for free and help youfind apersonalizedsolution. If bankruptcy is the recommended option, they’ll be there to guide you through the entire process.
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