How Bankruptcy Can Help You Anyway
If you find yourself in a position where you must file bankruptcy, then your credit score is not as important as the reasons for having to file bankruptcy. Getting a new loan or credit card is not as pressing as, for instance, a pending wage garnishment or mortgage foreclosure. Nevertheless, after you have obtained bankruptcy relief, you may find that the bankruptcy may actually help your credit. This is so even though the bankruptcy will remain on your credit report for up to ten years.
Bankruptcy Information Can Be Wrong
You may want to hire a credit repair attorney if your record shows inaccurate financial or bankruptcy information. They can speak with credit reporting agencies, credit card companies, or credit card issuers if you are having personal finance trouble. An attorney can also step in if a company does not discharge your debt correctly or you fall into a credit counseling scam.
Remember: A bankruptcy discharge legally stops creditors from harassing you. You have rights if a company is not following the process or respecting your bankruptcy filing.
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Keep Your Credit Utilization Ratio Low
Another key credit score factor is your it accounts for 30% of your FICO Score. Your credit utilization ratio measures how much of your credit you use versus how much you have available. For example, if your available credit is $10,000 and you use $2,000, your credit ratio is 20% .
Although its often recommended that you keep your ratio below 30%, you may be able to rebuild your credit faster by keeping it closer to 0%.
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Talk To A Bankruptcy Lawyer
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What Is A Credit Rating
Your credit rating is derived from your credit file, which contains information about your credit balances, limits, and payment history , as well as personal details such as your occupation and employment history.
Canada’s largest credit bureau, Equifax, uses a simplified scale of R1 to R9R1 being a perfect scorewhile TransUnion measures credit scores on a scale of 300 to 900, with 650 generally considered to be the dividing line between good credit and poor credit. Declaring bankruptcy will likely reduce your credit rating to the lowest level.
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Tips For Credit Rebuilding
Ironically, the only way to fix your credit score is to start borrowing money again. If you are in a consumer proposal, think carefully about the purpose of this process, and how to avoid new problems with your credit. Even though it feels good to be offered new credit, or be accepted for a new card, be sure not to overextend your ability to make regular payments. Go slowly. You do not need to borrow large amounts to rebuild your credit. Making all your payments on time is the key.; In addition, pay attention to the interest rates and fees charged on credit products you apply for as there are some lenders who may not have your best interests in mind.
Here are some tips for rebuilding your credit.
How Can I Rebuild My Credit File After Bankruptcy
The good news is that bankruptcy isn’t the end of the road financially. Here are some steps you can take in the short term:
- Order a copy of your statutory credit report to ensure your credit details are correct
- Add a short statement to your report explaining why you got into debt
- Register for the electoral roll at your current address
- Update all personal details on your credit profile
In the long term, it’s important to show lenders that you can borrow money responsibly. You can do this by using and repaying credit. But before you do so, you need to be 100% sure you can afford and meet the repayments.
- Consider credit designed for people with low credit ratings. This usually means low limits and high interest rates. You may be able to improve your rating by using this type of credit for small purchases and repaying the money in full and on time.
- Space out your applications. Each application for credit will leave a mark on your credit report, so aim to apply no more than once every three months.
- Check your eligibility before you apply for credit. Doing this can help you reduce your chances of being rejected and having to make multiple applications. You can see your eligibility for credit cards and personal loans when you create a free Experian account.
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Applying For Credit After Bankruptcy
As it can be difficult to get credit after filing bankruptcy, your personal relationship with a lender can be crucial. Having employees or management at a bank, a , or an auto lender who know, trust, and like you makes it easier to get an application accepted.
You rebuild credit after bankruptcy the same way that you build credit before one: with time and a consistent repayment history. If you believe you can continue to repay a preexisting debt during and after bankruptcy, consider a reaffirmation agreement with one of your creditors to help the process of rebuilding your credit score.
How Can Bankruptcy Happen
You can be made bankrupt in two ways:
If you’re thinking of applying for bankruptcy, you should first speak to a free, independent debt adviser or a reputable solicitor, accountant, insolvency practitioner or financial adviser.
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What Bankruptcy Will Affect While On Your Credit Score
Your payment history, on-time payments, and recent credit reporting can all affect how lenders work with you.
Once you file bankruptcy and businesses see your credit report’s negative information, you may have concerns about:
- Getting a car loan
- Getting loans without a qualified co-signer
- Adding authorized users to some credit cards
- Security deposits and returns of safety deposits
You have options regarding all these concerns if you are having credit or debt issues. There are ways to address each concern by yourself or with professional help. Getting a fresh start is possible, especially after filing bankruptcy.
Dont Apply For Numerous Accounts
About 10% of your credit score is determined by whether you have applied for new accounts recently. While you will need to apply for new credit to begin rebuilding your score, keep the accounts to a minimum and spread out your applications over time.
This is especially true if you apply for a large loan like a mortgage or car loan. Credit rating companies consider it a bad sign if you apply for a lot of new credit all at once. Another reason to limit the number of credit accounts you apply for is so you can manage the ones you have effectively and responsibly.
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What’s A Credit Score
A credit score is a number that supposedly summarizes your credit history and predicts the likelihood that you’ll default on a debt. Lenders use credit scores to decide whether to grant a loan and at what interest rate.
FICO scoresthe most common type of credit scorerange from 300 to 850. A FICO score is based on the information in your credit report, including:
- your debt payment history
- how much debt you currently have
- your different types of credit
- how long you’ve had credit, and
- whether you have new credit.
A high FICO score generally means that you’re good at managing your finances, while a low FICO score usually means that you have been delinquent with credit payments, have high unpaid debt balances, gone through a foreclosure, filed for bankruptcy, or experienced other problems repaying debt.
How Long Does A Consumer Proposal Stay On My Credit Report
The Financial Consumer Agency of Canada states that Transunion and Equifax will remove the notation of a consumer proposal from your credit report three years after the proposal has been completed or six years from the proposal filing date, whichever is earlier.; In other words, the maximum length of time a consumer proposal will affect your credit report is 6 years. So, for example, if your consumer proposal takes you four years to pay off, your score will be affected for 6 years in total . ;In an alternative example, if you were to pay off your proposal in 2 years, your credit rating would be affected for a total of 5 years . As you can see, if you are able to pay off your proposal more quickly, your credit rating will improve in less time.
When you have completed your consumer proposal, your Trustee will mail you a Certificate of Full Performance. It is recommended that you send a copy of this document to TransUnion and Equifax along with a list of your debts included in the proposal, to make sure your credit record is updated as quickly as possible. They will process the new information as soon as they receive it.
Its also necessary to maintain a copy of the Final Statement of Receipts and Disbursements, which includes a list of your creditors alongside the amounts that each received as a part of the debt settlement and key dates.
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Reestablish Credit As Soon As Possible
Depending on whether you file Chapter 7 or Chapter 13, the bankruptcy will fall off your report in ten or seven years. However, if none of your accounts are more than ten years old, a bankruptcy may effectively put you in the same spot as an 18-year old with no credit history.;Otherwise, it could create a virtual hole in your report, or a long time period in which it appears you had no credit at all.
Therefore, its important to apply for credit soon after the bankruptcy is discharged in order to re-establish a credit history and rebuild your score. In spite of a blemished credit report, there are a few ways to begin this process:
Options For Dealing With Debt
If youre struggling with debt, its already reflected in your credit score. Maxing out credit cards and making late payments will lower your score. So will foreclosures and repossessions. However you deal with debt will also affect your score.
The first line of defense when youre struggling with debt is to reach out to your lender. They may be willing to work with you to lower your monthly payments or your interest rate. Those agreements may or may not affect your credit score. Youll have a more manageable monthly payment, but your overall debt load wont change.
You may also seek help through a debt consolidation company. Debt consolidation can either lower or raise your credit, depending on your other finances and the vagaries of the score calculation by each agency. Youll still have your debt, but consolidation may help you catch up on back payments and then stay current, which will improve your score.
If that doesnt work or isnt enough to help you, you may seek a debt settlement. In a debt settlement, you pay one lump sum of less than you owe to your lender in satisfaction of the debt. A debt settlement will cost you 45-65 points if your score was 680 prior to the settlement.
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Keep Your Oldest Accounts Active
Since many people who declare bankruptcy previously had good credit, older items on their report can help their credit scores even if they later declare bankruptcy. The length of credit history factor, which makes up about 15% of your score, is generally not affected by declaring bankruptcy. In other words, keep these older accounts active and in tact whenever possible to maintain the length of your credit history.
Rebuilding Your Credit Score
Your ability to borrow is dependent on more than just one item on your credit report. A past bankruptcy is one factor, but a potential lender will review other factors including your income, work history, living situation, and other credit you have re-established.
If you want to rebuild your credit rating after bankruptcy, it is recommended that you do the following:
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What If I Need A Loan Or Credit Card Immediately After Bankruptcy
Luckily, most mortgage companies provide FHA loans for scores of 560-600. Traditional financing options often require a score of 600 or higher.
There are options for buying high-cost necessities after filing bankruptcy claims. Secured credit cards and loans exist for those facing bankruptcy. You can look into credit builder loans or other financing options specially built for people after bankruptcy.
Bankruptcy And Future Credit Decisions
The bottom line for many, however, is not the effect the bankruptcy will have on the credit score. It’s the effect that filing bankruptcy will have on credit decisions in the future. Even without a credit score, the fact that bankruptcy appears on the credit report at all will drive many credit decisions for as long as the filing appears, which can be for as long as ten years.
There is good news and hope for the future. Many people who file bankruptcy also report that if they’re careful in their efforts to rebuild their credit, don’t take on too much debt too soon, and scrupulously pay their debts on time every time, it takes about two years for their credit scores to rise into the “good” range.;
Next, learn why your credit score is important even after bankruptcy, and the steps you can take to improve your credit score.;;;
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Think About The Long Term
When you need debt relief, it’s natural to focus mostly on what bankruptcy, debt settlement or any other alternative can do for you right now. But because each of these options can affect your credit score and financial situation, it’s crucial that you take the time to research every course of action and consider both the short- and long-term effects of each.
Before you go through with one of them, consider consulting with a credit counselor or bankruptcy attorney to get an objective, expert opinion. Credit counselors generally don’t charge for this service, and many bankruptcy attorneys offer free consultations as well.
Between your own research and expert advice, you’ll have a better chance of choosing the correct path forward.
Saving Your Credit Score Is Only One Reason
An end to collection hell:;Nosals study found that once people fell seriously behind on their debt with at least one account 120 days overdue, for example their financial troubles tended to get worse. Balances in collections and the percentage of people with court judgments grew.
By contrast, people who file for bankruptcy benefit from its automatic stay, which halts almost all collection efforts, including lawsuits and wage garnishment. If the underlying debt is erased, the lawsuits and garnishment end.
Freedom from certain debts:;Chapter 7 bankruptcy wipes out many kinds of debt, including:
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Civil judgments .
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Past-due rent.
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Business debts.
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Some older tax debts.
Some debts, including child support and recent tax debt, cant be erased in bankruptcy. Student loan debt can be, but its very rare. But;if your most troublesome debt cant be discharged, erasing other debts could give you the room you need to repay what remains.
Better access to credit:;It can be difficult to get credit right after a bankruptcy. But Nosals study shows people who have completed bankruptcy are more likely to be granted new credit lines within 18 months than are people who fell 120 days or more overdue at the same time but;didnt file.
Your credit limits after bankruptcy are likely to be low, however, and your access to credit like your credit scores wont recover completely until a Chapter 7 bankruptcy drops off your credit reports after 10 years.
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Bankruptcy Credit Score And Credit Cards
A bankruptcy and low credit score will make it challenging to get approved immediately for new credit cards. It’s not impossible, but you should expect to pay significantly higher interest rates and have lower spending limits.
When you’re applying for a credit card after bankruptcy you’ll have to search for low-credit score cards. Secured credit cards will give you the highest approval odds. A secured credit card requires you to pay a refundable security deposit. This type of card is a good start towards repairing your credit and raising your credit score.
How Does Bankruptcy Affect Your Credit Score
Most types of negative information in your credit report will affect your credit score. If you are slow to pay or skip payments, your score will reflect that. Carrying a large amount of debt compared with the limit on those accounts can also be an issue.
Before reaching the point where you file bankruptcy, you probably found it difficult to pay regularly on your accounts. You might have maxed out most or all of your credit cards. Either circumstance will negatively affect the credit score.
It’s difficult to predict exactly what your credit score will do after you get your bankruptcy discharge. How bad your credit score is when you file doesn’t seem to have much effect on where you end up. If you start low, you’ll come out of bankruptcy low. If you start high, your score will drop a lot. But most people report that they end up at about 550 as they come out of bankruptcy, regardless of whether they start out with a high score or a not-so-high score.;;
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