Rebuilding Credit after a Bankruptcy
Many creditors and collection agencies try to scare people with horror stories about what filing for bankruptcy will do to their credit rating. This leads many people to believe that their credit rating will be destroyed forever and that the impact of filing for bankruptcy in Ontario or anywhere else in the country is irreparable. This isn’t true.
When you file for bankruptcy, your credit rating is shown as R9. This is the lowest possible rating. This remains for the duration of the bankruptcy period, which is typically between nine and 21 months if it is your first time filing for bankruptcy. The period is longer if you have filed for bankruptcy in the past. When you are discharged from bankruptcy, the fact that you filed for bankruptcy remains on your credit report for six years (if it is the first time you have filed for bankruptcy.)
However, once you have been discharged from bankruptcy, you can begin to rebuild your credit rating.
While it is true that filing for bankruptcy in Ontario or anywhere in Canada hurts your credit rating, it’s important to remember that there is a very good chance that your credit rating has already been hurt by your financial history. If you are in a position where filing for bankruptcy makes financial sense for you, you have likely already missed debt payments or paid your bills late. This behaviour negatively affects your credit rating. One of the most important aspects that the credit bureaus use to determine your credit rating is if you pay your bills on time. Therefore, whether you file for bankruptcy or not, being in a high amount of debt and missing payments will hurt your credit and make it more difficult for you to get a loan in the future.
However, filing for bankruptcy can actually improve your financial situation in the long term. The bankruptcy process will free you from being hounded by debt collectors and eliminate most (if not all) of your debts. This puts you in a position where you can begin to rebuild your credit rating and improve your financial situation. Doing nothing and continuing to miss payments and make payments late can not only hurt your credit rating, but it can also open you up to legal action from your creditors. Filing for bankruptcy in Ontario or anywhere else in the country protects you from such legal action.
All About Credit Scores and Credit Ratings
In order to understand what needs to be done to rebuild your credit following a bankruptcy, it helps to learn more about credit scores, credit ratings and how they are calculated and recorded.
Everyone who has ever borrowed money in Canada has a credit report. The two major credit bureaus in Canada that prepare these reports are TransUnion Canada and Equifax Canada. Every loan that you have taken out in the last six years is listed on your credit report. Your credit report also includes information on how often you pay your bills, how much you owe and your limit on each account as well as information on which credit grantors have accessed your report.
The credit bureaus use the details in your credit report to calculate your credit score. Your credit score is a three-digit number that represents this information. Credit score numbers range between 300 and 900, and the higher the number the better. The exact formula that the credit bureaus use to calculate your credit score is kept secret. However, the factors that impact a credit score are known.
Your payment history is generally considered one of the most important factors. Paying bills on time is a very important part of a good credit score.
Repairing your Credit Score after Bankruptcy in Ontario
Since paying bills on time is an important factor used to calculate your credit score, it makes sense that you need to borrow money and repay it on time in order to improve your credit score.
You may be concerned that no one will lend you money after you’ve filed for bankruptcy. While it may be more difficult to get loans when you have a bad credit rating (either due to bankruptcy or due to not paying your bills on time) there are options.
One option is a secured credit card. With a secured credit card, you put down a deposit that becomes the credit limit for the card. You can then use this card when you make purchases and the lender holds your deposit for as long as you have the card. Using the card and paying the bill as it becomes due can help you rebuild your credit rating. However, prepaid cards where you can only use the card until the amount on the card is exhausted do not affect your credit rating.
In addition, when you file for bankruptcy in Ontario, one of your duties is to take two financial counselling classes. These classes won’t just teach you budgeting and money management. They also teach you other ways to rebuild your credit following bankruptcy. Following good credit practices will help you rebuild and repair your credit rating.