The Facts About Bankruptcy and Your Credit Score

  • By Jillian Taylor-Mancusi

Beyond asset loss, the biggest fear all Canadians worry about is what personal bankruptcy will do to their credit rating.  Let’s take a moment to separate the fact from the fiction when it comes to your credit history and personal bankruptcy.

Fact or Fiction:  Filing for bankruptcy is the only thing that will ruin your credit.

FACT—Many Canadians who are deep in debt fail to realize their overall credit score and the credit rating on each of their accounts may already be very low before they file for personal bankruptcy. Chances are, if you’re considering a bankruptcy filing, you’ve been struggling financially and your pre-bankruptcy score is likely already too low to qualify for new credit.

Fact or Fiction:  Personal bankruptcy destroys your credit score forever.

FICTION – While you are in formal bankruptcy, your credit score is definitely negatively affected in the sense you cannot apply for new credit.  However, all Canadians successfully discharged from bankruptcy can begin to rebuild their credit ratings immediately.  By employing a few tactics for credit rebuilding, such as opening a secured credit card, it is possible to improve your credit history in as little as twelve to eighteen months.

Fact or Fiction:  You cannot begin to apply for new credit for six years after a bankruptcy discharge.

FICTION –  This is another myth.  A debt collector phone call is sure to include the statement that bankruptcy will destroy your credit rating and forget to mention the destruction is temporary.  A notation of bankruptcy will remain on your credit report for six to seven years, but you can actually begin rebuilding your credit immediately upon discharge.

Fact or Fiction:  Personal bankruptcy is harder on your credit score than non-bankruptcy options.

PART FACT/PART FICTION – When you declare personal bankruptcy each of your credit accounts gets an R9 rating, the worst there is.  With non-bankruptcy options like debt management plans and debt settlement plans, your accounts get an R7 rating.  While it is true that an R9 is worse than an R7, the practical impact of both is the same – you cannot get credit until you successfully complete whatever program you are in.

Most bankruptcy filers are discharged in as little as nine months and no longer than twenty-one months, which is quicker than any non-bankruptcy option.  What that means is bankruptcy is actually a better option for starting the time when you can begin to rebuild your credit.  Most non-bankruptcy options take from three to five years to complete.

Fact or Fiction:  Staying debt-free after filing personal bankruptcy improves your credit score.

FICTION:  There is a common misunderstanding among many Canadians that you can improve your credit score by not using credit.  The exact opposite is true.  Once you are discharged from personal bankruptcy, your prior credit history is essentially wiped out.  In some ways, you become like the recent college graduate who has never borrowed a dime.

When you emerge from bankruptcy, you will be debt-free.  If you choose not to try to get new credit, your credit score will not improve.  The only way to improve the score is to get credit and establish a history of on-time repayment.

If you are thinking about declaring personal bankruptcy in Canada, you need to know the facts about what will happen to your credit score.  First, you should get a copy of your credit report and see what your current score is.  For many Canadians, their current situation has driven their scores so low, getting out of debt as quickly as possible and starting over is their best chance at rebuilding their ability to get credit.

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