So, you have come to the end of your bankruptcy. You’ve made your payments and fulfilled your obligations as requested by your trustee.
But what happens after bankruptcy, and how do you rebuild your credit?
Bankruptcy is often negatively perceived, but it shouldn’t be.
Thousands of Canadians recover from financial hardship by filing bankruptcy, giving them the chance to reset their finances and allowing them to live happier lives.
There is light at the end of the tunnel, and you can repair your credit by adopting good financial habits.
Let’s look at ways to rebuild your credit after bankruptcy so that you can return to optimum financial health.
Before we begin, let’s look at some of the basics of bankruptcy that you need to be aware of when you’re looking to improve your credit.
Financial counselling sessions
Firstly, you should pick up some invaluable knowledge from the financial counselling sessions you must attend during your bankruptcy.
You’ll learn how to maintain good financial health, so you don’t get into trouble with debts in the future.
When your bankruptcy is complete, you receive a discharge certificate from your trustee, absolving you of all your debts. Being discharged means you are no longer liable for the debts included in your bankruptcy.
If you have joint debts, you are no longer owe them after bankruptcy, but the other person still needs to pay.
You are discharged after completing your payment schedule alongside your other bankruptcy duties.
See also: Bankruptcy duties and discharge
Your credit score after bankruptcy
There’s no doubt that bankruptcy will make it more difficult to obtain credit. You can apply for credit cards and loans, but be prepared for rejections due to your bankruptcy.
Though it may be difficult in the short term, this won’t be forever because you will build trust through sensible money management.
Your bankruptcy will appear on your credit report for six to seven years after discharge. For a second bankruptcy, it will be fourteen years.
After this time, any mention of bankruptcy will be removed entirely from your credit report.
But you don’t need to wait years for the note to disappear; you can start rebuilding your credit immediately.
Beware: credit repair companies cannot remove a bankruptcy from your credit report.
9 ways to rebuild your credit after bankruptcy
After bankruptcy, you’ll start with a clean slate, which is better than having outstanding debts on your credit report.
You have to rebuild your credit score by showing your creditors that you can responsibly borrow money and pay it back when due.
1. Check your credit report regularly
After your bankruptcy, it is crucial to monitor your credit report to ensure there are no mistakes. Your discharged debts should no longer be active.
If any appear, notify the credit bureau immediately. Your Licensed Insolvency Trustee sends a discharge certificate to confirm the completion of your bankruptcy, which you can send to the credit bureaus so they can update your records.
Your credit report should display no balances for the debts in your bankruptcy.
See also: How to read a credit report
2. Open a new bank account
Your Licensed Insolvency Trustee will recommend that you open a new bank account, especially if you owe your bank a debt included in your bankruptcy.
Once you file for bankruptcy, your bank can take funds in your bank account and apply them to another unsecured debt owed, such as a credit card, overdraft or loan.
The bank has the right to take these funds to pay back any money owed.
If you haven’t filed for bankruptcy yet, you must choose a bank that understands that you are filing for bankruptcy and allows you to bank with them while bankrupt.
Some tips when choosing a bank account:
- Try to open a basic bank account with low fees and simple features such as withdrawing cash and paying bills.
- Most banks offer a basic account (simple accounts with a debit card for typical banking tasks).
- You should have no debt with the new bank.
- You are not allowed to have overdraft protection on your new bank account.
This new bank account provides you with a solid base from which to rebuild your credit. You could also take advantage of a savings account that allows you to earn higher interest.
3. Get a secured credit card
When rebuilding your credit after bankruptcy, utilizing a credit card is the fastest way.
In most cases, it will be challenging to get a regular credit card straight after bankruptcy, so apply for a secured credit card instead.
To receive a secured credit card, you must put down a cash deposit when you open the account. The deposit will usually determine your credit limit, so if you deposit $250, you’ll have a limit of $250.
Because you are paying a deposit, there is less risk to the credit card issuer, making them ideal for people with bad credit or no credit.
Use it to make small, sensible purchases and pay the balance on time.
4. Convert to an unsecured credit card
When you become eligible and your credit score has improved enough, you can upgrade your secured credit card to a regular, unsecured credit card.
When you upgrade to an unsecured card, the issuer will refund the initial deposit you paid.
By paying the balance early, you’ll start to build up a pattern of responsible borrowing, which will improve your credit score.
A trusted friend or family member may be kind enough to add you to their credit card account as an authorized user.
As an authorized user, you enjoy all the primary cardholders’ benefits, although some card issuers allow the owner to set limits for additional cardholders.
Doing so helps boost your credit score because of the primary cardholder’s responsible behaviour. What’s more, your poor credit history will not damage theirs, so everyone wins.
The primary cardholder has to trust you enough to do this, as they are liable for the debt. So don’t abuse this person’s trust by using the card recklessly or without permission.
In this scenario, consider a written agreement on the use of the card, so everyone is aware of their responsibilities.
It’s worth noting that some credit card companies will charge a fee for an extra account, so get more information from your card issuer.
6. Ask someone to be a co-signer
If you’re struggling to obtain new credit, you could ask a friend or family member to co-sign with you. It involves a great deal of trust between you and the person willing to help you.
Just ensure that you keep payments up to date. If you don’t, this will damage this person’s credit along with yours.
7. Cautiously obtain new credit
Obtaining new credit is an essential step to rebuilding your credit but consider the following advice before you do so:
- If you apply for a credit card, look for one that has the lowest interest rate possible. Just remember that this will be difficult due to your bankruptcy.
- Don’t take on additional credit that you cannot afford.
- Apply for credit sparingly because your credit score is negatively affected if you make multiple applications at once.
- If your application is refused, wait a while and try again.
8. Pay your bills on time
Without a doubt, the best way to improve your credit score is to pay your bills on time.
Payment history accounts for 35% of your total credit score calculation.
By making payments to your credit accounts on time, you show prospective lenders that you can borrow money and pay it back as agreed.
If you miss a payment or make a late payment (over 30 days old or longer), it’s reported from the lender to the credit bureau through a series of codes called credit ratings, which severely damages your credit.
Some additional tips:
- Take advantage of automatic bill payments to help you keep track of what’s coming out of your bank account.
- Avoid bank overdrafts.
- Save when possible, as paying a cash deposit can sometimes help you obtain credit.
9. Open an RRSP
Consider opening an RRSP (Registered Retirement Saving Plan) to benefit from tax savings at the end of the year.
An RRSP is one of the best ways to save money. Contributions are deducted from your income, meaning you pay less income tax. If you have an existing RRSP, continue to use it to your benefit.
In time, you could also consider an RRSP loan to maximize your contributions. You borrow money to be deposited into your RRSP, meaning you receive a higher tax deduction. Doing so results in a bigger tax refund or reduces the amount owed.
See also: How to improve your credit score
Car finance after bankruptcy
Bankruptcy can make it harder to obtain a car loan, but some companies offer finance with a poor credit score.
However, ensure that the costs are affordable and be aware that some of these companies will look to take advantage of your situation.
Getting a mortgage after bankruptcy
While most banks are unwilling to take the risk straight away, obtaining a mortgage after bankruptcy is achievable after you have built up your credit again.
The first step is to check your credit report and ensure there are no errors, as this is the first thing a lender will look at.
Although you will have a clean bill of health on your credit report, your bankruptcy will be noted for at least six years if you are a first-time bankrupt.
If you apply immediately, a mortgage lender is likely to refuse your application outright.
But further down the line, when you’ve demonstrated good financial habits that benefit your credit, they may be able to offer you a mortgage even though bankruptcy remains on your file.
To qualify for a mortgage, you must prove to your lender that you can afford the loan amount. Offering a larger deposit could help you gain a better interest rate.
As part of the decision process, lenders will calculate your estimated monthly property costs. They’ll also review your income, expenses, debts, and your credit score to determine if you can afford the mortgage.
What are debt service ratios?
Your lender will use some calculations called debt service ratios to determine the maximum amount they will loan you:
- Gross debt service ratio (GDS)
- Total debt service ratio (TDS)
When calculating your GDS, your total monthly household costs shouldn’t exceed 32% of your gross household income.
Calculating your TDS is the same as a GDS calculation, but the lender will estimate your other monthly payments, such as debt repayments. In this calculation, your total monthly household costs shouldn’t exceed 40% of your gross household income.
When your monthly household costs are too high, your mortgage application is likely to be refused.
Thousands of Canadians file bankruptcy each year to transition from a poor credit score to a good one. They do this by wiping the slate clean and adopting good financial habits to rebuild their credit again.
Upon completing your bankruptcy, you will have no debts and the chance to start again.
Lenders will be wary about lending you money because of your previous bankruptcy, but you can win them over if you implement some of these good habits.
To rebuild your credit after bankruptcy, you must show your creditors that you can responsibly borrow money and pay it back when due.
Start with a secured credit card and upgrade to an unsecured credit card when you are eligible.
Crucially, you must pay your bills on time to avoid getting back into debt and improve your credit score.
Not filed for bankruptcy yet?
If you haven’t filed yet, learning to rebuild your credit after bankruptcy might give you peace of mind before taking the next step.
You must be patient and take it slow. Bankruptcy won’t damage your credit forever, and eventually, you will repair it and get your finances back on track.
Whatever you decide to do, we wish you the best of luck.
If you have questions about bankruptcy, connect with a Licensed Insolvency Trustee in your area today. It’s free, confidential, and there is no obligation.
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