You want to know the truth? Debt problems are coming. It is important to remember, when building your finances, assets and credit, that saving enough money to avoid serious debt problems should be considered a top priority. Here again, sometimes situations push people to the steep slope of bankruptcy. Their debts become too important to be managed and they have exhausted all the other options (consumer proposal, debt consolidation loan, debt management program, etc.). Thus, they call on a licensed insolvency trustee and begin a long and expensive trip to rebuilding their credit. So, how to rebuild your credit after being released from bankruptcy?
What is bankruptcy?
In Canada, personal bankruptcy is a legally binding process, governed by a federal law known as the Bankruptcy and Insolvency Act. This law was put in place in 1992 by the federal government as a relief for both heavily indebted individuals and their creditors. To be eligible for personal bankruptcy, a debtor must have lived or worked in Canada for at least one year, owe at least $ 1,000 and be deemed “insolvent” (not be able to repay debts in a timely manner). It should be noted here that only unsecured debts (credit card debts, personal loans, income taxes, etc.) will be covered by personal bankruptcy. Guaranteed debts, such as mortgage payments and car loans, will not be covered either.
As mentioned in some of our previous articles, bankruptcy should only be used as a last resort, because of the damage it can cause to someone’s finances and credit. However, once a debtor has gone through all the other possibilities and decides that personal bankruptcy is the only option, here is how it works.
How does bankruptcy work?
The process begins with the hiring of an insolvency trustee by the debtor. This is a professional trained to file consumer proposals and bankruptcies. Any first consultation that the debtor must make when selecting an insolvency trustee should be free. However, this debtor must be aware that a bankruptcy eliminates unsecured debts, but that the process is certainly not free. He must ensure that he has enough money to pay the insolvency trustee for his services, as well as any other legal fees that may arise. Then, once the trustee has been hired, and both parties have determined that bankruptcy is the only plausible choice, the process can be initiated. First, the unsecured lenders will be contacted and any actions brought against the debtor, such as the payroll seizure, will cease. The trustee will provide these lenders with all required information and legal documents and will file any outstanding income tax returns that the debtor may also hold until the date on which the bankruptcy is declared.
During this period, some of the debtor’s secured assets, including his house, car and RRSP (except in Alberta), etc. can be seized as collateral to satisfy the creditors, according to what is due. If this is the first bankruptcy of the debtor and he has no surplus income (if the household income of a debtor exceeds the limit of the government), his file should be released after nine months. However, if his surplus income is sufficient, the court may decide to extend the bankruptcy to 21 months. If it is a second bankruptcy, the release could even be extended to 24 months (36 months if the debtor has surplus income). If the debtor fails to discharge his or her bankruptcy obligations by not paying legal fees, not surrendering property or omitting the two required counseling sessions, etc., he or she will not be eligible for release. on time.
Rebuild your credit after bankruptcy
Keep in mind that your finances and assets are not the only things that will be affected after a personal bankruptcy declaration. Your credit will also be damaged. If this is your first bankruptcy, the information will remain in your credit file for a minimum of 6 years after the date of your release. If it’s your second or third bankruptcy, it can take up to 14 years, but the delays may vary depending on the province or territory where you live. Once your credit reaches this threshold, whenever lenders will review your credit report, they will be able to see the bankruptcy notice, which is a warning sign that you have trouble managing your money. . This can lead lenders to reject your requests for new credits. However, there are private lenders who will work with bad credit borrowers. Their interest costs will be much higher than those of a traditional lender such as a bank.
So, once your bankruptcy is fully discharged, you can start working to rebuild your credit and gradually improve your damaged credit rating. It will take time and effort, but it is possible.
Pay all your bills on time and in full – This is a point we can not emphasize enough, not only for those facing bankruptcy, but to prevent bankruptcy. It is very important to process your bills in a timely manner, paying them in full whenever possible. This means all utility bills, cell phone bills, cable bills, etc. With credit card bills, make at least the minimum monthly payment. Although most service bills do not appear in your credit report, some cell phone companies report your payments to Canada’s two credit bureaus, so responsible bill payments will always be in your favor. However, if you do not pay your utility bills for months and the business you are dealing with engages a collection agent, the credit bureaus may be notified and your credit may be damaged.
Get a copy of your credit report- Again, this is something you should do at least once a year, regardless of your financial situation. You can request a free copy of your credit report from any of Canada’s credit bureaus, Equifax or TransUnion. Once you have it, review the errors, dispute them and make sure all other information is accurate and up-to-date.
Ask for a credit card guarantee- Nowadays, credit cards may be needed. However, bankruptcy and bad credit will certainly impact your ability to retain your current unsecured credit cards and be approved for new cards. So, consider getting a secured credit card. These cards are often advertised for people with bad credit and will require a deposit of $ 200-500, in the event that the borrower is in default. Once you start managing your collateral card responsibly, your credit rating should improve little by little. Keep in mind, once you have it, that it’s best to stick to one card warranty. Do not apply to too many cards at once and do not exceed your credit limit.
Save more, spend less – Budgeting is an important part of everyone’s financial future and a practice you should undertake immediately after going bankrupt. Start not reduce unnecessary expenses. Get a cheaper cell phone plan, cancel subscriptions and gym memberships as needed, all you can do to reduce overall expenses. Then, it is good to set up an automatic transfer to a separate savings account, adding an amount of each pay, specifically to deal with the remaining expenses of your bankruptcy and other financial emergencies.
Contribute to an RRSP – Since your RRSP (Registered Retirement Savings Plan) can be considered an asset, you may have had one prior to going bankrupt and the funds seized to pay your creditors. However, once your bankruptcy period is over, you can start contributing again. If you do not have an RRSP account, open one with your bank and start putting money into it regularly. The more you contribute, the better your tax return will be.
Do not ask for too much credit at a time – While a bankruptcy will certainly have an impact on your ability to get approval for credit products, it’s still possible to have one again. Just be aware that when a lender does an investigation on your credit, a “thorough request” will be placed in your file. Serious requests will slightly lower your credit rating and may appear in your file for 3-6 years. So, not only will you have a bankruptcy notice within your credit report, but asking for too much credit products is also a sign of financial distress, signaling creditors that you are being rejected multiple times.
Beware of credit repair crooks- Unfortunately, there are scammers in this field who are trying to take advantage of those who are desperate to reestablish their bad credit and gain credit again. Keep in mind that information about your credit report will stay there until it is legally possible to withdraw it through the credit bureaus. So, under no circumstances, give any information or money to anyone claiming to be able to erase a bankruptcy notice from your credit report for a fee. For this reason, be extremely cautious about any organization that claims to be able to repair your bad credit with very little effort on your part, as it is probably a scam. Nobody can improve your credit except you.
Always stay in touch with a professional
If you’ve recently gone bankrupt, one of the most important things to do is stay in touch with your licensed insolvency trustee and make sure everything goes as planned. Keep in mind all that professionals say and fulfill all your bankruptcy duties, so that it goes smoothly and ends as quickly as possible. Once you’ve done all this, you can talk to a financial advisor about the different ways you can improve your finances and credit. Be smart, have patience, and slowly, you’ll be able to get back on track.