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How to Rebuild Your Credit After Bankruptcy
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The unfortunate truth? Debt problems happen. It’s important to remember, as you build your finances, assets, and credit, that saving enough money to prevent serious debt problems should be considered a top priority. Then again, situations sometimes occur that push people down the steep slope that is bankruptcy. Their debts become too large to manage and they’ve exhausted all other options (consumer proposal, debt consolidation loan, debt management program, etc.). So, they hire a licensed insolvency trustee and start the long, time and money consuming hike, back up that slope towards rebuilding their credit.
So, how exactly do you rebuild and repair your credit after being discharged from bankruptcy?
Trying to figure out what debt management option is right for you? Use this infographic.
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. 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 covered by a personal bankruptcy. Secured debt, such as mortgage payments and car loans, will not be covered.
Read this to know the differences between bankruptcy in Canada vs. The USA.
As we’ve mentioned in some of our previous articles, bankruptcy should only be used as a last resort, because of the damage it can do to someone’s finances and credit. However, once a debtor has indeed run through all other possibilities and decides that personal bankruptcy is the only option, here’s how it will work.
How Does Bankruptcy Work?
The process starts by the debtor hiring a federally licensed insolvency trustee, someone trained to file consumer proposals and bankruptcies. Any first consultations that the debtor goes through when selecting an insolvency trustee should be free. However, that debtor needs to be aware that while a bankruptcy eliminates their unsecured debts, the legal process is certainly not free. They need to make sure they have enough money to pay an insolvency trustee for their services, as well as any other legal fees they might come across. Then, once they’ve hired a trustee, and both parties have determined that bankruptcy is the only plausible choice, the case will begin. First, their unsecured lenders will be contacted and any actions that they’ve brought against the debtor, such as wage garnishment, will cease. The trustee will provide those lenders will all the information and legal documents required and file any outstanding tax returns that the debtor might also have up until the date their bankruptcy was declared.
During that time, some of the debtor’s secured assets, including their house, car, RESP (except in Alberta), etc. may be seized as collateral to satisfy their creditors, depending on how much they owe. If it is the debtor’s first bankruptcy and they have no surplus income (if a debtor’s household income exceeds the government’s limit), their case should be discharged after 9 months. However, if they do have sufficient surplus income, the court may decide to extend their bankruptcy for up to 21 months. If it’s their second bankruptcy, their discharge might even be pushed to 24 months (36 months if the debtor has surplus income). If the debtor fails to complete their bankruptcy duties by not making their legal fees, not surrendering their assets or skipping the required two counselling sessions, etc. they will not qualify for a discharge on time (for more information on surplus income payments, read this article).
Rebuilding Your Credit After Bankruptcy
Remember, your finances and assets are not the only things that will be affected after declaring personal bankruptcy. Your credit will also be damaged. If it’s your first bankruptcy, the information will remain on your credit report for a minimum of 6 years after the date of your discharge. If it’s your second or third bankruptcy, it will remain for up to 14 years, but times may vary in accordance with the province/territory you live in. Once your credit does take this significant hit, any time a lender reviews your credit report, they’ll be able to see the notice of bankruptcy there, which is warning sign that you have trouble managing your money. As a result, it can cause those lenders to reject your applications for new credit. While there are private lenders out there that will work with borrowers who do have bad credit, be forewarned that their interest fees will be much higher than those of a typical lender, like a bank.
To find out how long information stays on your credit report, read this.
So, once your bankruptcy has been fully discharged, you can start working toward rebuilding your credit and improving your damaged credit score bit by bit. It will take some time and effort, but it is possible.
Pay All Your Bills On Time and in Full – This is one we cannot stress enough, not just for those who are dealing with a bankruptcy, but as a way to prevent it in the first place. It’s very important to deal with your bills in a timely fashion, paying them in full whenever possible. This means that any utility bills, cell phone bills, cable bills, etc. With credit card bills, always meet at least the minimum monthly payment. While most utility bills do not show up on your credit report, some cell phone companies do report your payments to the two Canadian credit bureaus, so responsible bill payments will work in your favor. However, if you fail to pay your utility bills for months on end and the company you’re dealing with hires a debt collector, the credit bureaus could be informed and your credit will get damaged.
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, a 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 $200-500, in case the borrower should go into default. Once you start managing your secured card responsibly, your credit score should improve little by little, until you can qualify for a regular unsecured card. Remember, once you have it, it’s best to just stick to the one secured card. Don’t apply for too many all at once and do not go over your credit limit.
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.
For Loans Canada’s essential guide for saving, click here.
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.
Don’t Apply For Too Much Credit at Once – While a bankruptcy will certainly impact your ability to get approved for credit products, it is still possible to acquire them. But, be aware that when a lender pulls your credit report during the application process, a “hard inquiry” will be placed on your report. Hard inquires will cause your credit score to drop slightly and can remain there for 3-6 years. So, not only will you have a bankruptcy notice on your report, but applying for too many credit products is another sign of financial distress, signaling to creditors that you’re being rejected several times.
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 legally permitted for the credit bureaus to remove it. So, no matter what, do not give any information or money to anyone claiming they can expunge a bankruptcy notice from your credit report for a fee. For that matter, be extremely cautious of any organization that advertises they can fix your bad credit with very little effort on your part because it’s likely a scam. No one can improve your credit but you.
Check out this infographic for everything you need to know about your credit score.
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 see 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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Margaret Johnson is in the business of helping Canadians tackle their debt, deal with credit issues, and regain control of their finances.