Many people worry that they will never obtain credit ever again if they file for bankruptcy, but that isn’t true.

In this column, we’ll discuss how bankruptcy impacts your credit score and how this can benefit you in the long run.

Does bankruptcy affect your credit score?

Although bankruptcy can lower your credit score, once you’ve eliminated your debt burden, you can start to build credit faster. Let’s look at what will happen.

When you file for bankruptcy, the Office of the Superintendent of Bankruptcy will report your bankruptcy information to the credit bureaus.

As a result, a record of your bankruptcy appears in the public reports section of your credit report.

On Canadian credit reports (Equifax and TransUnion), every credit account is assigned a credit rating on a scale from 1 (the best) to 9 (the worst). When you file for bankruptcy, any credit accounts included will be given a 9 rating, which affects your credit score.

For example, if a revolving credit account, such as a credit card, is included in your bankruptcy, it’s reported on your credit report as an R9 credit rating.

Similarly, if an installment credit account like a loan is included in your bankruptcy, then an I9 credit rating will be recorded on your credit report for this account.

9 credit rating for credit accounts in a bankruptcy

Of course, if you were already missing payments or making them late, your credit score has already been damaged.

So while it’s true that bankruptcy applies the worst credit rating possible to credit accounts included in a bankruptcy, if any of these accounts are in collections, they probably already have this rating.

If this applies to you, you are likely to be refused credit as it stands, but you’ll find that bankruptcy doesn’t cause any significant further damage.

Not only that, filing for bankruptcy eliminates your old debts, enabling you to improve your credit at a faster pace than you are currently able to.

It doesn’t help to have massive debts, even if you have a good credit score. Lenders want to see a good debt-to-income ratio before they lend you money. If you cannot afford to repay the debt, a good credit score is worthless.

As Farber’s article about credit rating myths eloquently puts it, “it is far better to have a negative credit rating with savings in the bank than a good credit rating with no savings in the bank.”

Simply put, a good credit score won’t pay your bills.

In addition to a credit check, you’ll also find that lenders look at your employment status, expenses and a growing number of alternative data sources to assess a person’s creditworthiness.

How long will my bankruptcy appear on my credit report?

If it’s your first bankruptcy, it will appear on your Equifax or TransUnion credit report for at least six years from the date you are discharged.

On TransUnion credit reports, your bankruptcy will appear for seven years from the discharge date in the following provinces:

  • New Brunswick
  • Newfoundland and Labrador
  • Ontario
  • Prince Edward Island
  • Quebec

If you’re not discharged from your bankruptcy, it will remain on your Equifax credit report for a maximum of seven years from the filing date. With TransUnion, there’s no time limit for bankruptcy that hasn’t been discharged.

Subsequent bankruptcies remain on your credit report for fourteen years from the date of discharge.

First-time bankruptcy Second-time bankruptcy
6-7 years, depending on the credit bureau. 14 years.

After this period, any debts included in your bankruptcy will be removed from your credit report.

This may sound like a long time, but the flip side is that you can put your financial worries behind you, and you’re still able to start rebuilding your credit immediately.

See also: How long does a bankruptcy last?

What will my credit score be after bankruptcy?

The truth is, there’s no exact science to credit scores, and your number will vary depending on many factors, such as your credit score prior to bankruptcy and your debt level and credit utilization ratio after bankruptcy (because some debts aren’t eliminated).

According to Equifax, credit scores from 660 are considered good, so aim for this number as a starting point.

In any case, bankruptcy allows you to eliminate your debts. Doing nothing will only damage your credit score further, so bankruptcy is the first step to putting things right.

Once you are discharged from bankruptcy, you are debt-free, and you can start rebuilding your credit score. Because you will know when you will be released from bankruptcy, you can plan accordingly.

See also: Improve your credit score

Will my credit score go up after bankruptcy falls off?

After a bankruptcy falls off your credit report, your credit score will increase. However, there is not an exact number because it depends on the information on your credit report.

How can I improve my credit score after bankruptcy?

To improve your credit score after bankruptcy, you must prove that you can borrow money responsibly.

Here are some tips for rebuilding your credit score after bankruptcy:

1. Apply for a secured credit card

Use a secured credit card to make small, manageable purchases that you can pay as they’re due. Responsible use of the card will be reported to the credit bureaus, helping to improve your credit score.

When eligible and your credit rating has improved, convert to a regular credit card and continue to use it responsibly.

2. Pay your bills on time

It’s crucial to pay all your bills on time to establish a positive payment history. Making payments on time has the greatest impact on your credit score.

3. Save money

Saving money ensures that you have a larger down payment when seeking finance, allowing you to benefit from decent interest rates.

4. Monitor your credit report

Check your credit report regularly and ensure it’s correct. Ask credit bureaus to rectify any mistakes if they appear.

See also: How to rebuild your credit after bankruptcy

What’s the best way to improve your credit score after bankruptcy?

Without a doubt, the best way to improve your credit score after bankruptcy is to make payments on time.

According to Equifax, payment history is the single biggest factor affecting your credit score, making up 35% of your total credit score.

Making payments on time shows lenders that you can manage your money well. When you don’t make a payment after 30 days, it’s reported as late, and this information appears on your credit report.

Missed payments cause your credit score to drop, and the creditor may charge you a late fee.

Is bankruptcy right for me?

All debt solutions will affect your credit score, and it is something that you’ll have to accept if you want to take back control of your finances through bankruptcy.

If you have no way out of debt, cannot meet your payment obligations, have a low income, and your assets are worth less than your debts, bankruptcy is sometimes the best way to resolve the situation.

Although bankruptcy does affect your credit, the benefit is that you have dealt with all of your debts. You have a plan in place to deal with your creditors, and you are no longer worried about wage garnishments, debts in collections and legal action.

Plus, bankruptcy usually allows you to improve your credit faster than the path you were on before.

Related: Do I qualify for bankruptcy?

The benefits of bankruptcy

  • Eliminate most of your unsecured debt.
  • Collection actions will stop.
  • Wage garnishments will stop.
  • Creditors cannot take legal action once the process has begun.
  • Be debt-free in as little as nine months.
  • If you have no assets or surplus income, bankruptcy can cost less than other debt solutions.
  • A Licensed Insolvency Trustee will liaise with your creditors.
  • Financial counselling sessions to aid your financial recovery.

See also: The advantages and disadvantages of bankruptcy

Conclusion

Bankruptcy will damage your credit score, but if you are considering filing for bankruptcy in the first place, your credit score is probably already damaged because of late or missed payments.

From my own experience, bankruptcy gives you a fresh start when you need urgent help to resolve long overdue debts.

If you are interested in filing for bankruptcy, get free impartial advice from a Licensed Insolvency Trustee who will explain your options and help you find an affordable solution.

Let us connect you with a trustee in your area. All consultations are free, and there is no obligation.

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