Getting a Loan After a Bankruptcy Discharge

The current economic landscape is not a pretty one. Job security is fleeting and debts are rising, and for many, the prospect of declaring bankruptcy is not an unlikely one. It can be a very distressing and emotional struggle, but is it the end of the world? – Far from it. With proper planning and dedication, you can begin rebuilding your credit and take on new loans to build the financial future you want.

Don’t Stall on That Discharge

The first step is to get your bankruptcy discharge as soon as possible. Consult with your trustee to figure out your responsibilities and how to accomplish them. You will have to file a pre-bankruptcy return, provide T4 slips and tax information to your trustee and they will receive the post-bankruptcy refund. You are required to submit proof of income and expenses every month to determine your surplus income which will be used to make monthly payments during your bankruptcy. This is in addition to the monthly payments you are required to make for estate administration. 

You will have to give up certain assets, such as a home if it’s mostly paid off, or an expensive car. Credit cards must also be delivered to your trustee. In addition to all of this, you will be required to attend two credit counselling classes, the first one within 60 days of declaring bankruptcy and the second within 210 days. You will have to wait a minimum of 9 months to be eligible for discharge, and this time can be extended depending on your circumstances, so it is important to fulfill your duties without hesitation.

Learn more about the bankruptcy surplus income payments.

Ways to Rebuild Your Credit After a Bankruptcy

Bankruptcy can do serious long-term damage to your credit report and credit score. Not only can a record of it appear in your credit history for seven years, but all accounts that are associated with the process will also receive R9 credit ratings. In addition, it will become tough to get approved for new credit products and appealing interest rates. 

Don’t worry, if your credit has been ruined by bankruptcy, there are several financial products available in Canada that can help you rebuild it, including but not limited to:

Secured Credit Cards

Bankruptcies can harm your credit so badly that you won’t qualify for a normal credit card. Thankfully, you may be able to get a secured credit card, which requires a deposit equal to your desired credit limit to activate. Like a traditional credit product, the secured card will then show up on your credit report. 

Afterward, all you have to do is make responsible payments and that should gradually heal your credit. Once your card term ends and any outstanding debt is repaid, your security deposit will be returned and your creditworthiness will ideally be improved.

Credit Builder Loans

Similar to secured credit cards, credit builder loans appear on your credit report and affect your credit score. That, coupled with their easy approval requirements can also make them great for people who don’t have credit histories or good credit scores. The more payments you make in full and on time, the faster your credit will heal. 

Unlike a traditional loan, the best way to make use of a credit builder loan is to avoid paying your debt off quickly. While doing this would normally help you save on interest, in this case, the more responsible payments you make over time, the better. 

Check out these other credit building services. 

Can You Get a Loan After a Bankruptcy Discharge?

After bankruptcy, many lenders won’t approve you because your prior debt problems and damaged finances make you too risky. Then again, every lender has different approval requirements, so it may be possible to qualify for some credit products, like:

Personal Loans

Even though your unsecured debts have been forgiven, bankruptcy can leave you with bad credit, no assets and a drained bank account. These problems could lead to a denied application when you try to borrow new credit from your bank or credit union.

However, once your case has been discharged, there are plenty of alternative lending businesses that will approve you for a personal loan, despite your bankruptcy. Instead of focusing on your credit score and prior debts, these bad-credit-friendly lenders will be more concerned about your income and whether you can repay them on time. 

Things to know about bad credit personal loans:

• Alternative lenders may charge higher interest rates and fees
• The lender may ask you to provide collateral or a cosigner as loan security
• Private lenders are harder to regulate (chance of scams and predatory rates)

Car Loans

In Canada, there are many alternative lenders and vehicle dealerships that offer bad credit car loans to drivers with previous bankruptcies. In fact, since most car loans are secured against the vehicle itself until you’ve paid it off, you may have an even greater chance of being approved than you would with some unsecured personal loans.

Plus, if your lender/dealer reports to Equifax and/or TransUnion, any complete, timely payments should gradually heal your credit. Some lenders and dealerships will also allow you to refinance your loan if you can’t afford your current repayment plan.  

Things to know about bad credit car loans:

• Higher rates and more fees can apply (dealership fees, etc.)
• Late, incomplete and missed payments could further damage your credit
• Defaulting on your loan can lead to your car being repossessed and resold 

Mortgages

A mortgage is one of the largest and riskiest loans you can apply for, so many lenders will deny your application if you’ve recently gone bankrupt. That said, every lender has different requirements and the longer you wait for your finances and credit to be repaired, the easier it is to get approved. Here’s what you might need to qualify: 

Prime Insured or Traditional Mortgage: 

• To be discharged from bankruptcy for a minimum of 2 years and 1 day
• A loan-to-value (LTV) ratio of at least 95%
• A total-debt-service (TDS) ratio of 44% maximum
• A CMHC mortgage insurance policy (if your down payment is less than 20%)
• A minimum down payment of 5% on the first $500,000 of the home’s final sales price (plus 10% on any larger amounts)
• An improved credit history (minimum 1 year), that displays 2 credit products (credit card, auto loan, etc.) and at least $2,000 – $3,000 of accumulated credit

Subprime Mortgage:

• To be discharged from bankruptcy for a minimum of 3 – 12 months
• A minimum LTV ratio of 85%
• A maximum TDS ratio of 50%

Private Mortgage:

• A minimum down payment of 15% 
• A minimum LTV ratio of 80%
• No maximum TDS ratio
• To potentially pay a “commitment fee” (about 1% of your mortgage value) 
• To get your home appraised to determine its real estate value

As you can see, traditional mortgages come with more approval requirements, so it can be hard to qualify if you’ve only recently been discharged from bankruptcy. Fortunately, plenty of subprime and private mortgage lenders are willing to accept clients who have bad credit, low incomes and prior debt problems.

Things to know about subprime and private mortgages:

• High-interest rates and fees can apply to smaller, stricter mortgages
• You may need good collateral or a strong cosigner/joint borrower
• Defaulting on your mortgage may result in your home being foreclosed and resold

Credit Cards

Credit cards are normally easy to get, even if you don’t have a great income. However, you may have trouble finding lenders that will approve you if your credit score is still low and your bankruptcy hasn’t been removed from your credit report. That’s why secured credit cards can be incredibly useful. 

You may also be able to get a prepaid credit card, which you’ll have to consistently load money onto in order to use. This can help you control your spending while earning similar benefits to regular credit cards, like bonus points and cash back rewards.   

It can take about 1 – 2 years of responsible payments to start truly recovering from bankruptcy. Once your credit has improved and you’re considered a less risky client again, you may be able to convert your secured card to an unsecured one. As mentioned, your deposit should be returned as soon as you’ve dealt with any unpaid balances. 

Check out what credit score you need to get a credit card. 

Things to know about secured and prepaid credit cards:

• Too many missed payments can lead to the loss of your deposit
• Credit limits may not be as high as some unsecured credit cards
• Prepaid credit cards do not affect your credit report or credit score

What Should You do When Applying For a Loan After a Bankruptcy Discharge?

Remember, the longer you wait to apply for new credit following your bankruptcy, the better because it gives you time to repair your finances and credit. Here are a few other things you should do before applying for a loan after a bankruptcy discharge:

• Improve Your Payment History – Although it can take a lot of time and effort, reestablishing a good credit history should be a top priority. You can do so by making as many timely payments as you can using one of the products above. 

• Monitor Your Credit Report – Get a free yearly copy of your credit report from Equifax and TransUnion. This way, you can monitor your progress and check both copies for errors or signs of identity fraud (which can also harm your credit).

• Save and Budget – Reduce your unnecessary expenses and tally up your important ones so that you don’t make the same mistakes twice. Also, be sure to build an emergency fund to cover any payments that your income can’t support.

• Compare Loan Offers – Don’t apply with the first lender that claims to approve recently bankrupt borrowers. Compare interest rates, fees and payment terms so you end up with a loan that will truly benefit your finances. 

• Be Patient – Bankruptcy comes with hefty financial consequences that can be hard to recover from. However, if you can’t afford to take on another high-interest debt, it’s probably safer to wait until your bank account and credit have improved.

Watch For These Factors When Applying For a Loan After Bankruptcy

Don’t forget, you’ll have limited options when you apply for new credit after bankruptcy. Since you’ve had trouble paying your debts in the past, many lenders will claim that you’re a riskier borrower. As such, you may have to look out for:

• Higher Interest Rates – Some subprime lenders charge 300% – 500% APR for small loans with short, restrictive payment plans. Generally, the worse your financial health and credit are, the higher your rate will be if you’re approved.

• Fees – Although your interest rate may seem reasonable, the lender might compensate by charging lots of administrative and service fees for their loans. They may also charge penalty fees for late-payments and prepayments. 

• Payday Lenders – These businesses usually offer loans of $100 – $1,500 with very easy approval restrictions. Unfortunately, they also charge extremely high-interest rates/fees and offer short repayment terms of 14 days maximum.  

Additional Reading

The Difference Between Personal, Private, And Payday Loans In Canada

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Personal Loan Eligibility Requirments For Bad Credit Lenders

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The Cost Of Filing For Bankruptcy A Second Time In Canada

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Bottom Line

There are still many things you can do to get out of bankruptcy quickly and begin re-establishing your credit. Be sure to consult with a financial advisor if you begin to feel like you’re losing a handle on your financial situation. The earlier you go the easier it will be to get you back on track with your financial goals. Remember, bankruptcy is not the end of the world, it is a debt relief program, in some ways, it’s a second chance at life.