Many Canadians worry that they will never obtain credit again if they file for bankruptcy, but this is not true.
Although bankruptcy damages your credit, it will benefit your credit in the long run once you’ve eliminated your debt burden.
In this guide, we examine the impact of bankruptcy on credit scores and how long bankruptcy stays on a credit report in Canada.
How does bankruptcy appear on your credit report?
When you declare bankruptcy, the Office of the Superintendent of Bankruptcy will report your bankruptcy information to the credit bureaus.
A record of your bankruptcy appears in the public records section of your credit report alongside the date it was filed.
Every credit account is assigned a rating code from 1 (best) to 9 (worst).
Each creditor will update the rating code on the credit account to a 9 with a rating code description stating that the account was included in bankruptcy.
Revolving credit accounts (e.g. credit cards) are reported as R9, and installment credit accounts (e.g. loans) are reported as I9.
When a creditor sees that you filed for bankruptcy, they consider you a higher risk and are less likely to approve new credit. But if you’ve missed payments, you may have fallen into this category already.
How long does bankruptcy stay on your credit report?
A first bankruptcy appears on your credit report for 6-7 years after discharge.
A second bankruptcy reactivates the old one, and both remain on your credit report for 14 years each.
| First-time bankruptcy | Second-time bankruptcy |
|---|---|
| 6-7 years, depending on the credit bureau. | 14 years for both bankruptcies. |
Equifax credit reports
Your bankruptcy appears on Equifax credit reports for six years after the discharge date or seven years after the date filed without a discharge date. If you file another bankruptcy, the first re-appears on your credit report, and both bankruptcies appear for 14 years after the discharge dates.
TransUnion credit reports
On TransUnion credit reports, your bankruptcy will appear for six to seven years from the date of discharge.
| 6 years | 7 years |
|---|---|
|
|
Each second bankruptcy remains on your credit report for fourteen years from the date of discharge of each bankruptcy. After these periods, any credit accounts included in your bankruptcy will be removed from your credit report.
What happens to your credit score after bankruptcy?
Your credit score will drop when you file bankruptcy, and your creditworthiness will take a hit. There’s no exact science to credit scores; your number depends on many factors, such as your credit score before bankruptcy, debt level and credit utilization ratio afterwards.
If you are faced with mounting 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 can start rebuilding your credit score. Because you will know when you will be released from bankruptcy, you can plan accordingly.
It doesn’t help to have massive debts, even with a good credit score. Lenders want to see a good debt-to-income ratio before they lend you money. 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.
A good credit score is worthless if you cannot afford to repay the debt.
Will my credit score go up after bankruptcy falls off?
After a bankruptcy falls off your credit report, your credit score will increase.
How to improve your credit after bankruptcy
To improve your credit score after bankruptcy, you must prove that you can borrow money responsibly. Here are some tips:
Apply for a secured credit card
Use a secured credit card to make small, manageable purchases. 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.
Pay your bills on time
Paying all your bills on time is crucial to establish a positive payment history. Making payments on time has the greatest impact on your credit score.
Save money
Saving money ensures you have a larger down payment when seeking finance, allowing you to benefit from better interest rates.
Monitor your credit report
Check your credit report regularly and ensure it’s correct. Ask credit bureaus to rectify any mistakes if they appear.
What’s the best way to improve your credit score after bankruptcy?
The best way to improve your credit score after bankruptcy is to make payments on time.
According to Equifax, payment history is the most significant 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. If you don’t make a payment within 30 days of a bill being issued, 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.
Wrapping up
Although bankruptcy lowers your credit score, you can build your credit faster once you’ve eliminated your debt burden.
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.
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