Will Bankruptcy Ruin My Ability to Get Credit in the Future?

  • By Jillian Taylor-Mancusi

If you are a hard working debtor struggling to make ends meet every month as your debt only grows, you’re not alone. Last year, over 125,000 Canadians filed for insolvency.

But before you make the decision to file for personal bankruptcy, you’re probably wondering what effect it will have on your financial future.

Bankruptcy will adversely affect your credit score.

When you want to apply for a mortgage, credit card, or any type of loan, a prospective lender will review your credit report.

And when you file for bankruptcy, a note to that effect appears on that credit report.

That’s because the Office of the Superintendent of Bankruptcy provides a list of every individual who has gone insolvent to the credit rating agencies in Canada.

So what does a bankruptcy mean to your overall credit score?

Bankruptcy is reflected with an R9 rating, which is the lowest rating a person can receive. It’s essentially the hardest hit your credit score can take.

And in Manitoba, that notation will remain on your credit report for six years after discharge if it’s your first bankruptcy. (Typically, discharge occurs 9 months after filing for bankruptcy.)

If it is your second bankruptcy, it will stay on there for 14 years.

But anxiety about the impact of bankruptcy on your credit score is no reason not to get debt help.

There are several components that make up your credit score, the biggest one being your payment history.

Chances are, if you’re considering bankruptcy, you may not have been paying your bills on time – if at all.  Negative credit information such as late or missed payments and debts that have gone to collections stay on your credit report for the same amount of time as a bankruptcy – six years.

So if you’ve been having financial difficulties, it’s likely that your credit rating has already taken a beating.

One major difference is that bankruptcy is a way for you to get the debt relief you need to start fresh so you can begin to rebuild your financial credit – and future.

Ignoring your debt, on the other hand, just means that credit score of yours will continue to suffer.

Financial life after bankruptcy IS possible.

If you do file for bankruptcy, you can improve your credit rating to make yourself eligible for credit in the future.

Your ability to borrow is based on more than just one item on your credit report.

A prospective lender will also look at your income, work history, and any other credit you are able to reestablish.

It takes time to rebuild your credit after a bankruptcy – but if you work at it, over time, you can become eligible for credit.

Here are five tips to help you succeed in rebuilding your credit after a bankruptcy.

#1. Complete your bankruptcy as quickly as you can.

By fulfilling your bankruptcy obligations (making monthly payments and reports to your trustee, and attending credit counselling sessions), you will complete your bankruptcy without delay. The sooner you do, the sooner you start – and run – the six-year period it stays on your credit report.

#2. Make your regular payments on time, every time.

As indicated above, your payment history is one big component to your credit score. So consistently stay on top of your bills, and pay them as they come due.

#3. Save, save, save.

Not only can what you save be used as a down payment if you wish to buy a home, you can also use your savings as a security deposit to obtain what will likely be your first credit card after bankruptcy – a secured credit card. (See tip #5 below.)

Oh, and one great trick to make saving easier is to make it automatic. For example, remember those monthly payments you were making to the trustee for your bankruptcy? Consider setting up an automatic transfer in the same amount straight from your earned income into a separate savings account you can build on.

#4. Stay on top of your finances.

Bankruptcy includes mandatory credit counseling sessions to help understand how you ended up in bankruptcy in the first place. Taking these sessions to heart will help you avoid financial pitfalls in the future.

Also, after you’ve completed your bankruptcy, debts included in it should fall off your credit report. You’ll want to request a copy of your credit report to verify its accuracy. If there are errors, contact the credit rating agency immediately to have it corrected.

#5. Reestablish credit.

The easiest credit to obtain post-bankruptcy is a secured credit card. You can use any savings you have accumulated as a deposit on such a card. The great news is this will show up as a normal credit card on your credit report. Keep in mind that it may take you two years or more to qualify for a larger loan, such as a mortgage.

Contact a Licensed Insolvency Trustee today.

If you’re having financial difficulties, your first step should be to contact a trustee immediately. These federally-regulated, licensed professionals are not only required by the government to assist you with filing for bankruptcy, but they can offer a wide range of debt relief services to you.

In your initial, free consultation, we’ll review your financial circumstances and advise you on the debt relief options you have available to you. Bankruptcy may not be inevitable. The sooner you get help, the more options you may have.

Remember, doing nothing is not an option that will help you resolve your debt. Take action today so you can get started on the road to better financial health.

Photo by Kyle Broad on Unsplash

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