If you’re drowning in debt and have exhausted all options, bankruptcy might be your best option. While bankruptcy should only be used as a last resort, it can help relieve you of much of your debt.
Unfortunately, there are consequences to filing for bankruptcy, including a major blow to your credit score. The question is, how do you rebuild your credit after bankruptcy, and how long will it take?
Key Points
- Filing for bankruptcy will have a negative effect on your credit which will last for years.
- Once your bankruptcy is discharged, you should take immediate steps to rebuild your credit.
- You can start repairing your credit profile in several ways, including taking out a secured credit card, using a credit building loan, and having your rent reported to the credit bureaus.
Can You Rebuild Your Credit After Bankruptcy?
Yes, you can start rebuilding your credit immediately after your bankruptcy is discharged, even though the bankruptcy remark will remain on your credit report for at least 6 or 7 years after the date of discharge.
In fact, it’s highly recommended that you take immediate steps to fix your credit score as soon as possible following bankruptcy discharge, as it can take quite a while to see any improvements.
| How Does Bankruptcy Impact Your Credit? When you declare bankruptcy, you’ll be assigned the lowest credit rating (R9), which can severely impact your credit scores. First-time bankruptcies typically stay on your credit report for 6 to 7 years after discharge, depending on the credit bureau and province you live in. If this is your second time filing for bankruptcy, this information can stay on your credit report for 14 years. |
Can I Use A Loan To Build Credit After Bankruptcy?
As mentioned, even if you’ve been discharged, your credit report will still show your bankruptcy for a few years following the discharge. That means any time a lender reviews your credit report while your bankruptcy is still listed, they’ll be able to see it there, which is a red flag for most lenders.
As a result, lenders may consider you a high-risk borrower and may be hesitant to lend you money. As such, using a loan to rebuild your credit after bankruptcy may be difficult. That said, you may find alternative lenders willing to extend you credit, however, they’ll often come with high interest.
How To Rebuild Your Credit After Bankruptcy
Once your bankruptcy has been fully discharged, you can start working toward rebuilding your credit. Here are a few ways that can help you rebuild your credit:
Apply For A Secured Credit Card
If you’ve filed for bankruptcy, you may not have a credit card or are unable to get one. In this case, you may have better luck applying for a secured credit card, which does not involve spending on credit. As such, these cards are easier to get approved for.
A secured credit card requires a cash deposit, which may serve as your credit limit. In this way, you’re spending money you already have, while using the card to make purchases as you would with a traditional card. By making on-time bill payments, you can improve your credit score over time.
Pay Your Cell Phone Bills
Cell phone companies may report bill payments to the Canadian credit bureaus if you’re on a postpaid plan. Like any other type of bill payment, your cell phone bill payments can help you improve your credit score, as long as you meet the billing due dates.
Have Your Rent Reported
If you’re a renter, your payments are likely not reported to the credit bureaus, unlike homeowners and mortgage payments. However, there are services available, such as the Landlord Credit Bureau (LCB) and Chexy, that can serve as the middleman between you, your landlord, and the credit bureaus.
With the help of these services, your rent payments will be reported to the credit bureau(s). With each monthly on-time payment, your credit score can rebuild over time.
Use A Credit Building Loan
Credit-building loans work like regular loans, except no money is given upfront. Instead, you make payments to the credit-building loan company for a certain period of time, who will then report each payment to the credit bureaus. Over time, these timely payments can help you build good credit.
After making the payments over the agreed-upon period, the company will give you back the money you paid, minus any interest and fees.
Tips On Rebuilding Your Credit After Bankruptcy
Regardless of which option you choose to build your credit, keep these points in mind:
Pay All Your Bills On Time And In Full
Your payment history is generally one of the most important factors in the calculation of your credit scores. As such, paying your bills on time and in full can help build your credit scores.
With credit card bills, always meet at least the minimum monthly payment. However, it is recommended you pay the full amount as high balances affect your debt to credit ratio which may negatively impact your credit.
Regularly Review Your Credit Report
Checking your credit report is something you should do regularly if you’re trying to improve your credit score. You can access your credit report and score for free in Canada through Canada’s credit bureaus and numerous third-party platforms such as Loanss Canada’s Compare Hub.
Review your report for errors, and dispute any you might find, as such inaccuracies can be unfairly pulling your credit score down.
Don’t Apply For Too Much Credit At Once
While bankruptcy will certainly impact your ability to get approved for credit products, it may still be possible to acquire them. Even if you can get approved, it’s highly recommended that you don’t apply for too many credit products within a short period of time.
When you apply for a loan or credit card, the lender will generally pull your credit report during the application process, which is known as a “hard inquiry”. These inquiries will cause your credit score to drop slightly and can remain on your credit report for 3 to 6 years. Plus, too many hard credit inquiries may be seen as a sign of financial distress to lenders and creditors.
Watch Out For Credit Repair Scams
Unfortunately, there are scam artists out there who try to profit from those desperate to fix their poor credit and acquire new credit. Remember, the information on your credit report is going to remain there until it’s removed after a specific amount of time has elapsed.
Anyone promising to help you get factual negative information removed from your credit report for a fee may be trying to scam you.
What Is Bankruptcy?
Personal bankruptcy is a legally binding process that involves discharging you from most of your debts. It stops creditors from being able to continue coming after you to collect on outstanding debts, while treating your creditors fairly.
In Canada, bankruptcies are governed by a federal law known as the Bankruptcy & Insolvency Act. This act was put in place by the federal government in 1992, as a form of relief for both the people in serious debt and their creditors.
Who Can Declare Bankruptcy?
To be able to qualify for personal bankruptcy, you must owe at least $1,000, and be judged as “insolvent”, which means you’re not financially able to pay your debts within an appropriate timeframe.
What Types Of Debt Are Covered With Bankruptcy?
Most unsecured debts may be discharged through bankruptcy. This includes debts such as credit card debt or personal loans
However, other types of debt are not discharged under the bankruptcy process, such as student loans and car loans.
How Does Bankruptcy Work?
The bankruptcy process in Canada works as follows:
Consult With A Licensed Insolvency Trustee (LIT)
Filing for bankruptcy starts with working with a Licensed Insolvency Trustee, who is someone trained to file consumer proposals and bankruptcies in Canada. The job of a LIT is to make sure all Canadian bankruptcy laws are adhered to and that the process is fair for both the debtor and creditors. Any first consultation that the debtor goes through when selecting a trustee should be free.
Sign And File Bankruptcy Documents
You’ll work with your LIT to sign all the necessary paperwork. Once your LIT has filed the documents with the government and the bankruptcy court, you’ll become legally bankrupt.
Protection From Your Creditors
At this point, you’ll be legally protected from your creditors, who will no longer be able to come after you for your outstanding debt. You’ll also stop making payments to your creditors. Your trustee will contact your creditors on your behalf to deal with your debts.
Deal With Assets
Next, it’s your responsibility to turn over all of your non-exempt assets to your trustee. The assets will be sold, and the money saved in a trust account will be given to the appropriate creditors.
Get Discharged
Once you’ve completed all your bankruptcy duties — including making monthly payments, filing monthly reports to your trustee, and attending credit counselling sessions — you’ll receive a Certificate of Discharge. This means you’re no longer under obligation to pay the debt you owe to any creditors included in your bankruptcy.
How To Start Saving After Bankruptcy
While saving money in any type of savings account won’t have any impact on your credit scores, it’s still an important part of recovering from bankruptcy. Ultimately, having a financial cushion will allow you to make healthier financial and credit decisions and provide you some extra cash in case of a last minute financial situation.
Here are some ways to jump-start your savings goals:
Save More, Spend Less
Budgeting is an important part of anyone’s financial future and a practice you should undertake immediately after going bankrupt.
Firstly, start by cutting down on any unnecessary expenses. For instance, get a cheaper cell phone plan, cancel your subscriptions and gym membership if need be, and reduce the number of times you eat out. Basically, anything you can do to reduce your overall spending should be done.
Consider also setting up automatic transfers to a separate savings account. With this arrangement, a specific amount from each paycheque will be deposited into this account to help you save on a regular basis over time without having to manually deposit on your own.
Contribute To An RRSP
If you already have a Registered Retirement Savings Plan (RRSP), consider making regular contributions. Not only will you help build a retirement fund, but you can also use the money in your RRSP to buy a home through the Home Buyer’s Plan (HBP), as long as you’re a first-time home buyer. Plus, you can use your RRSP contributions to reduce your taxable income.
Contribute To A TFSA
A Tax-Free Savings Account (TFSA) is a government-registered savings account. The money you earn in a TFSA through interest or capital gains is tax-free, which means you can withdraw funds at any time without triggering a taxable event.
Final Thoughts
If you’ve filed for bankruptcy in the past, make sure that you follow all the steps involved to ensure a timely discharge, including attending credit counselling sessions and making necessary payments. Once you’ve been discharged, you can start taking steps to give your credit score a much-needed boost. Repairing credit after bankruptcy takes time and effort, so be patient and make sure you take all the necessary steps to improve your credit.
