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How Does a Bankruptcy Affect Your Credit Score?

Jordann Brown

Aug 23, 2021 8 min read

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How Does Bankruptcy Affect Your Credit Score?
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    If you’ve found yourself with an unmanageable debt load, there are some drastic steps you can take to liquidate your assets, clear your debts, and get some relief from creditors and collections agencies. One of these steps is to declare bankruptcy, but this step has a significant impact on your credit score and ability to use financial tools, so it’s crucial to understand how it will impact your credit score.

    Bankruptcy filing can have a massive impact on your credit rating and could cause your credit score to drop a minimum of 200 points overnight. It doesn’t matter if you previously had good credit. Your credit score will be dramatically impacted if you file for bankruptcy with no exceptions.

    How Long Does a Bankruptcy Stay on Your Credit Report?

    While there are many misconceptions about how long a declaration of bankruptcy will stay on your credit report, the fact is that bankruptcy will remain on your credit report for up to seven years. There are two credit reporting bureaus in Canada (Equifax and TransUnion) and they each calculate, compile, and generate consumer credit scores and credit reports.

    Equifax will remove a bankruptcy from your credit report six years after you’ve been discharged. TransUnion removes a bankruptcy from your credit report seven years after you’ve been discharged. If you’ve declared bankruptcy more than once, it will appear on your credit report for 14 years.

    It’s not just bankruptcies that will stay on your credit report, but also judgments and tax liens. Information remains on your credit report for a specific amount of time, often seven years.

    What Impact Does a Poor Credit Score Have on Me?

    Having a low credit rating impacts more aspects of your life than you might think. To start, a low credit score may prevent you from being approved for many types of financial products, including credit cards, lines of credit, personal loans, car loans, and mortgages. Even if you do qualify for one of these products, your lender may charge you a higher interest rate because your bankruptcy makes you a riskier borrower.

    Beyond applying for credit products, a low credit score can prevent you from opening utility accounts that require credit check. For example, your local power company may require a credit check to open a utility account for you. If your credit score is poor, the utility provider may require a refundable deposit from you instead.

    Obtaining an apartment or job could also become trickier with a poor credit score, as many landlords and employers will check your credit score during the process of verifying your application. 

    Can I Get a Credit Card or Loan After Bankruptcy?

    Bankruptcy will cause your credit rating to drop dramatically, which will limit your options when it comes to applying for a credit card or loan. If you’re looking to apply for a credit card after bankruptcy, you should consider a secured credit card.

    A secured credit card doesn’t require a high credit score, but it does require you to put down a cash deposit equal to the credit limit on the card. For example, if you applied for a secured credit card with a $1,000 limit, you need to give the lender a $1,000 deposit. You can use a secured credit card just as you would a regular credit card, and by making your monthly payments regularly, you can use a secured credit card to improve your credit score.

    Another option is a credit builder loan, which is a loan specifically designed for those with bad credit. A credit builder loan has a high interest rate, but you can still qualify with bad credit. In addition, credit builder loans require you to make regular monthly payments, and those payments are reported to Canada’s credit bureaus, which will help you increase your credit rating after bankruptcy.

    What Are The Types of Bankruptcy in Canada?

    There can sometimes be confusion between the types of bankruptcy in Canada and the US. There are two types of bankruptcy in Canada. They both require you to work with a Licensed Insolvency Trustee (LIC), also sometimes called a bankruptcy attorney, to evaluate your financial situation and recommend which type of bankruptcy is right for you.

    Consumer Proposal

    A consumer proposal is a legally binding process that you’ll work through with a LIC to prepare a proposal to your creditors to pay a percentage of what is owed to them, extend the amount of time to pay off your debts, or both. The length of time you’ll be in consumer proposal won’t be longer than five years. If your creditors accept your proposal, you’ll make payments to your LIC, who will make payments to your creditors.

    Personal Bankruptcy

    If you choose to file personal bankruptcy, your LIC will deal directly with creditors on your behalf. You’ll stop making payments on your debts, and any garnishment of your wages will stop. Any lawsuits against you by your creditors will also stop. You’ll be declared bankrupt, and your LIC will sell your assets and distribute the money to your creditors.

    Once the bankruptcy process is over, you are considered “discharged” from bankruptcy. Discharging officially releases you from any further obligations to pay your creditors. The process can take between nine and 21 months. After bankruptcy discharge, you’ll have a very low credit score, and the details of your bankruptcy discharge will appear on your credit report.

    How Do I Rebuild My Creditworthiness?

    While your bankruptcy will stay on your credit report for up to seven years, you can start rebuilding your credit score right away, and that begins with healthy financial habits. As part of your consumer proposal or bankruptcy, you’ll be required to attend two financial counseling sessions, but here are some extra steps you can take to begin rebuilding your creditworthiness.

    Get a Secured Credit Card

    As we mentioned above, several debt products are available that are intended for Canadians with bad credit scores or a history of bankruptcy. One of these products is a secured credit card, which will help you establish a history of making regular monthly payments on a debt product. You’ll need between a few hundred dollars and $1,000 to apply for a secured credit card, but once your credit score improves enough that you can switch to an unsecured credit card, you’ll receive that deposit back.

    Check Your Credit Score and Report Regularly

    Regularly monitoring your credit score and report can help you determine whether your actions positively impact your credit score. For example, if you are approved for a secured credit card or credit builder loan, you’ll be able to watch your credit score grow as you make regular monthly payments on both debts. In addition, regularly checking your credit report will help you see any errors or omissions early and let you address them proactively.

    Pay All Bills on Time, Every Time

    It’s not just your credit cards and debts that impact your credit score. Other bills like your cell phone bill or utility bills are also reported to Canada’s credit bureaus. That means to rebuild your credit score, you must make every monthly payment on every account, with no exceptions.

    Stick to a Budget to Prevent Debt

    Finally, it’s essential to consider the financial habits that got you into debt in the first place. For example, why did you file for bankruptcy? Is it because of an unforeseeable financial catastrophe, or did you slowly sink into debt over many years? Whatever the problem was, it’s vital to solve the root issue. Otherwise, you may find yourself in debt again in the future.

    A great way to ensure you aren’t overspending is to make a budget and stick to it. Budgeting will help you track where your money is going every month, and you’ll be able to identify and fix your overspending habits to ensure you don’t end up in debt again.

    What Other Options Do I Have to Get Out of Debt Without Filing Bankruptcy?

    Bankruptcy is one way to deal with your debt, but the consequences of bankruptcy are severe, so if you can avoid it by using other methods to get out of debt, you should. Here are some bankruptcy alternatives.

    Debt Consolidation

    If you have many different debts, or several high-interest debts, such as credit card debt or payday loans, a debt consolidation loan can help you move all of that debt into a single lower interest loan. The benefit of a consolidation loan is that you will lower your interest, which will help you pay off your debt faster, and you’ll only have a single monthly payment, which will help if you have an issue with late payments.

    Debt Management Plans

    A credit counseling service offers debt management plans and works by consolidating your debts into a single payment. You make payments to the credit counselling service who will distribute that payment to your creditors on your behalf. A debt management plan aims to get out of debt in five years. It is not legally binding like a consumer proposal but doesn’t negatively impact your credit score.

    Debt Settlement

    A debt settlement is similar to a consumer proposal but is more informal. A debt settlement is a voluntary agreement that either you or your credit counselling service will negotiate with your creditors. You or your credit counsellor will need to call your creditors directly and negotiate lower interest rates or a more lenient payment schedule. Your credit counsellor may also be able to convince your lenders to lower the total amount of debt that you owe.

    Jordann Brown
    Jordann Brown
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    Jordann Brown is a personal finance expert who writes on topics such as debt management, homeownership and budgeting. She is based in Halifax and has written for publications including The Globe and Mail, Toronto Star, and CBC. Jordann is the founder of the popular personal finance blog, My Alternate Life.

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