Rebuilding Credit After Filing for Bankruptcy or a Consumer Proposal
Filing bankruptcy or, filing a Consumer Proposal are, understandably, difficult decisions. And while either option can often be the best way to find relief in the face of severe financial hardship, it’s important to consider, or at least have an understanding of, how your credit score/rating will be affected before you proceed.
What Is a Low Credit Score and What Does It Mean for Me?
Your credit rating is determined by a variety of factors, depending on the information contained in your credit report. Your credit report—which is maintained by one, or both, of Canada’s major credit bureaus, Equifax and Trans Union—has information about your open and closed accounts, credit balances, limits, payment history, the age of accounts, and even personal details such as your occupation and employment history.
Payment history is recorded on a scale of R1 to R9. Payment history is recorded each month, for each credit account, up to 84 months. Payments made within a month are noted as R1. Payments made over 1 month, but less than 2 months, are noted as R2. This continues up to payments made in the 5th month, which are recorded as R5. Other account ratings include R7 for a Consumer Proposal filing, R8 for a repossession, and R9 for a bankruptcy or account write-off. Credit report data is summarized and then “scored” by the credit bureaus.
Credit scores range from a very poor 300, to the best score of 900. A score of 650 is considered the midway point between good and bad credit and is referred to as a “fair” credit score. Interestingly, the average Canadian has a score of about 650.
So why would you have low credit? Besides filing for bankruptcy, or a Consumer Proposal, your credit score can decrease due to missed and late payments, maxed-out credit cards, a tax lien from Canada Revenue Agency, applying for too many credit cards within a short period of time, defaulting on loans, and a debt being sent to collection with a lawyer or collection agent.
Your credit score is important, as lenders and others consider it a critical factor in determining how stable your employment and residence history have been and, to assess if you are worthy of credit.
Therefore, the lower your credit score, the less likely you are to obtain credit and the higher interest rates you will have to pay.
A low credit score can also hurt your ability to rent an apartment, or get hired at a new job, if your potential landlord or employer asks for a credit check.
How Personal Bankruptcy and Consumer Proposals Appear on Your Credit Reports
When you file for bankruptcy, it is added to your credit report. The date of filing, the name of the Trustee, and the debts declared in the filing are noted. For a first time bankruptcy, this information will remain on your credit report for 6 years after your date of discharge. If it is your second time filing for bankruptcy, it will remain on your credit report for 14 years post discharge.
This means that if it takes 9 months for you to be discharged after you initially filed for bankruptcy, your bankruptcy will appear on your credit report for nine months plus 6 or 14 years. If you are in bankruptcy for 21 months, the bankruptcy will be on your report for the 21 months plus the applicable 6 or 14 years.
If you file a Consumer Proposal, details of it will appear on your credit report for the term of the Consumer Proposal (the length of time you are making payments to the Trustee of the Consumer Proposal), plus 3 years.
The Office of the Superintendent of Bankruptcy reports all Consumer Proposals, bankruptcy filings, and bankruptcy discharges\Consumer Proposal completions, each month to the credit bureaus.
How Personal Bankruptcy and Consumer Proposals Affect Your Credit
Filing for bankruptcy or a Consumer Proposal are serious steps to take and should not be taken lightly due to the consequences that come with it. Here are a few examples of how your credit can be affected due to bankruptcy or a Consumer Proposal.
Lower Credit Score
Declaring bankruptcy, or filing a Consumer Proposal, both reduce your credit rating to the lowest possible level.
This will make it more difficult to obtain credit. However, your credit score will begin to improve over time if you take steps to re-build your credit and, as noted above, once the bankruptcy or Consumer Proposal is struck from your report.
Negative Impact Diminishes Over Time
When attempting to rebuild your credit after a bankruptcy, or Consumer Proposal, try to be patient and remember that either option’s impact on your credit score will lessen over time.
In fact, you may even see an improvement in your credit score during bankruptcy or a Consumer Proposal if you maintain mortgage or secured loan payments.
And the good news is, that once the bankruptcy or Consumer Proposal information is gone from your credit report, it will no longer affect your credit score.
How to Rebuild Your Credit After Personal Bankruptcy and Consumer Proposals
While it may seem counterproductive, the only way to improve your credit score is to borrow more money. Be careful though, to avoid new credit problems from arising.
Be sure not to overextend yourself, and make sure you make all payments as required, as this is key to rebuilding your credit.
Here are some additional tips to help rebuild your credit after bankruptcy or a Consumer Proposal.
Set A Budget – And Stick with It
After filing for bankruptcy or a Consumer Proposal, it’s not only important to rebuild your credit, but your personal finances as well. This means it’s time to start budgeting, as it will be highly important to know exactly how much you are earning and spending to stay on track.
When filing for bankruptcy, or a Consumer Proposal, your Licensed Insolvency Trustee will draw up an income and expense statement/budget with you and will then encourage and coach you on, budgeting, money management, and re-building your credit.
A key to staying on budget is to set aside enough money to cover your monthly fixed and variable expenses. Also try to set aside at least $1,000 for emergencies. After you have your budget in place and enough money tucked away, you can start working towards rebuilding your credit.
Establish Two or More New Lines of Credit
If possible, open one or two credit accounts to begin to rebuild your credit rating after bankruptcy or a Consumer Proposal. You may need a co-borrower to get started. Secured credit cards can also be helpful.
To build your credit score, be sure to make all minimum required payments, try not to borrow over 40% of approved credit limits, and do not cancel older accounts. Over time, as you grow your credit capacity and credit score, look to have different types of debt, as this will also improve your credit score.
There are two main types of credit available to consumers. They are revolving credit and installment credit.
Revolving credit may be used, or drawn on up to the approved credit limit. This type of debt includes credit cards, lines of credit, and store credit cards.
Installment credit is a loan paid over time with fixed, usually monthly, payments. Examples include mortgages, car loans, and RRSP loans.
When you find yourself overwhelmed with debt and are starting to consider debt relief options such as bankruptcy or a Consumer Proposal, it’s important to understand how your credit will be affected.
Whether you choose bankruptcy or a Consumer Proposal, a Licensed Insolvency Trustee can help make sure you understand all of the ins and outs of the process and the impact on your credit. They will be by your side throughout the whole process.
Baker Tilly Ottawa Ltd. is a professional debt management firm and Licensed Insolvency Trustee. Since 2002, we have assisted thousands of individuals and couples find relief from financial stress. Our mission – our passion – is your health and well-being!