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The unfortunate truth? Debt problems happen. When all other debt relief options have been exhausted (consumer proposal, debt consolidation loan, debt management program, etc.), filing for bankruptcy is often the right choice. But what about your credit? How badly will it be affected and how long will it take to recover?
What Is Bankruptcy?
Personal bankruptcy is a legally binding process in Canada, which is 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, a debtor must have lived or worked in Canada for at least one year, must owe at least $1,000, and be judged as “insolvent” (not financially able to pay their debts within an appropriate timeframe). It’s necessary to note here that only unsecured debt (credit card debt, personal loans, income taxes, etc.) will be eligible to be covered by personal bankruptcy. Secured debt, such as mortgage payments and car loans, will not be covered. Rather, your assets can be seized and sold to recoup payments.
How Does Bankruptcy Work?
The process starts with the debtor hiring a Licensed Insolvency Trustee, someone trained to file consumer proposals and bankruptcies in Canada. The LITs job 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.
Signing & Filing Bankruptcy Documents
You’ll work with your LIT to sign all the necessary paperwork. Once your LIT had filed the documents with the government and the bankruptcy court, you will become legally bankrupt.
Protection From Your Creditors
Once you’ve filed for bankruptcy you will be legally protected from your creditors. Your trustee will contact your creditors on behalf to deal with your debts. You will also be able to stop making payments to your creditors.
Dealing With Assets
Next, it is 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 to be given to the appropriate creditors.
Once you have completed all your bankruptcy duties (make monthly payments, file monthly reports to your trustee, attend credit counselling), you will receive a Certificate of Discharge. This means you are no longer under obligation to pay the debt you owe to any creditors included in your bankruptcy.
The Impact Of Bankruptcy On Your Credit
Bankruptcy should only be used as a last resort, because of the damage it can do to someone’s finances and credit. When you declare bankruptcy, you’ll be assigned the lowest credit rating (9), which can severely impact your credit scores.
Bankruptcies typically stay on your credit report for six to seven years 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 twice as long, 14 years.
Can You Rebuild Your Credit After Bankruptcy?
Yes, it is possible to rebuild your credit after bankruptcy, however, it can be difficult as the bankruptcy remark will remain on your credit report for at least 6 years. This means any time a lender reviews your credit report, they’ll be able to see the bankruptcy there, which is a huge red flag for most lenders.
As a result, it can cause those lenders to reject your applications for new credit. To be able 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.
Ways You Can 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:
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. Your payment history can account for around 35% of your credit scores depending on the credit scoring model used.
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. Though it is recommended you pay the full amount as high balances affect your debt to credit ratio which may negatively impact your credit.
Pay Your Cell Phone Bills
Some cell phone companies report payments to the Canadian credit bureaus. If you believe you won’t have a hard time keeping up with your cell phone bills, finding a cell phone company that does report to the credit bureaus can prove to be advantageous. Cellphone charges are relatively small compared to most loans or credit card bills, but it may positively impact your credit just the same.
Get A Copy Of Your Credit Report
Once again, this is something you should do at least once a year regardless of your financial status. You can request a free copy of your credit report from one of Canada’s credit bureaus, Equifax or TransUnion. Once you have it, review it for errors, dispute any you might find, and make sure all other information is accurate and up-to-date.
Apply For A Secured Credit Card
In this day and age, credit cards can be necessary. However, bankruptcy and poor credit will definitely impact your ability to both retain your current unsecured credit cards and be approved for new ones. So, consider getting a secured credit card. These cards are often advertised for those with bad credit and will require a deposit of $200 to $500. Once you start managing your secured card responsibly, you may see an improvement in your credit scores. Keep in mind that all credit scores react differently and it takes time to work toward improving your scores.
Don’t Apply For Too Much Credit At Once
While bankruptcy will certainly impact your ability to get approved for credit products, it is still possible to acquire them. But, when applying, 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”.
Hard inquiries will cause your credit score to drop slightly and can remain on your credit report for 3 years with Equifax and 6 years with Transunion. Too many hard credit inquiries are usually seen as a sign of financial distress to most 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 is removed after a specific amount of time (this depends on whether the information is positive or negative). Anyone promising to help you get negative information removed from your credit report for a fee is trying to scam you. No one can improve your credit but you.
Apply For A Savings Loan
A savings loan is a credit-building product that certain companies offer. 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. After making the payments for the agreed-upon period, the company will give you back the money you paid, minus any interest and fees.
Restart Your Savings Goals
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 good savings will allow you to make healthier financial and credit decisions.
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. Get a cheaper cell phone plan, cancel your subscriptions and gym membership if need be, anything you can do to reduce your overall spending. Then, it’s good to set up an automatic transfer to a separate savings account, adding to it with every paycheck, specifically to deal with any remaining expenses from your bankruptcy and other financial emergencies.
Contribute To An RRSP
Since your RRSP (registered retirement savings plan) technically qualifies as an asset, it’s possible that if you had one open before you went bankrupt, the funds within might have been seized to pay your creditors. However, once your bankruptcy term is over, you can start to contribute to it again. If you didn’t already have an RRSP account, open one with your bank and start putting some money into it on a regular basis. The more you contribute, the better your income tax return will be.
How long will it take to rebuild my credit after bankruptcy?
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Always Speak To A Professional
If you’ve recently gone bankrupt, one of the most important things you can do is to keep in contact with your Licensed Insolvency Trustee and make sure that your case is going as planned. Remember, they are trained to deal with cases just like yours for a living. Do everything they say and complete all of your bankruptcy duties to ensure that your bankruptcy goes through properly and finishes as quickly as possible. Once you’ve done that, you can speak to a financial advisor about the various ways you can go about improving your finances and your credit. Be smart, have patience, and slowly you’ll be able to get back on track.
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