Here’s a 10-letter word that no one wants to associate themselves with: BANKRUPTCY.
Despite what you and the general public may think, going bankrupt isn’t actually the end of the world. A hit to your pride, sure but it’s certainly something that doesn’t have to define you or your entire financial future.
If you take the necessary steps, you can come out strong and savvier than ever — especially when it comes to personal finance. If you work hard enough, you’ll be able to build your credit again and do things like buy a home or apply for a bad credit car loan.
So don’t fret, let’s help you get there. But before we do, lets understand what bankruptcy is, the process of it and how to come out of it.
What Is Bankruptcy?
Contrary to popular belief, bankruptcy is actually a tool that helps those in massive debt get their heads back above water again. While the word itself incites a lot of gloom and doom, the stigma that surrounds it is what prevents people to face their finances and get the support they need which sometimes drives them to bankruptcy in the first place.
When you officially declare bankruptcy, it’s a federal legal process that’s designed to give individuals or companies a clean slate so they can get back on their feet again. When someone files for personal bankruptcy, it’s done under the Bankruptcy and Insolvency Act, which makes you surrender what you own to an Insolvency Trustee in exchange for the elimination of your debts. What you are required to surrender depends on the province, and within that there are also exemptions to the stipulations as well. The government will not take away necessities that prevent you from living or earning a proper income. So if your biggest fear is winding up on the street, rest assured that won’t happen. Typically assets such as investments and RESPs are the things to go first.
While bankruptcy does have the power to discharge you from a lot of your debt, some debts are not erased and still fall under your responsibility. Bankruptcy only deals with unsecured debts like credit cards, income taxes and personal loans — not bad credit car loans or mortgages.
How Do I File For Bankruptcy?
If you think you’re ready to file for bankruptcy, you must do so through a licensed Insolvency Trustee. They are regulated and federally licensed to help ensure they have your best interest at heart.
In order to file for bankruptcy, you must owe at least $1,000 and be unable to meet your current and upcoming payments. You also must have lived in Canada for the last year to qualify.
How Long Does Bankruptcy Last?
Bankruptcy ends as soon as you’re discharged. If this is your first bankruptcy, you’re eligible to be discharged after nine months unless you prove otherwise. Discharge is typically granted if you’ve earning enough income to support yourself and/or any dependents you may have. You must also provide proof that you’ve received credit counselling in order to qualify.
Your assigned Trustee will be able to guide you through this process as well as provide you with a loose timeline of how long your bankruptcy is expected to last. The role of the Trustee is to make this term as short as possible. So rest assured that if you listen to their advice, you won’t be bankrupt for long.
How Does It Affect My Credit Score?
Your credit score is a ranking based on your credit report. Once a month, all financial institutions send information on borrowers (such as yourself!) to credit bureaus. In addition to this, the Superintendent of Bankruptcy sends over a similar report of everyone who has filed for bankruptcy. Based on this information, credit bureaus come up with a credit report that breakdowns everyone’s individual borrowing profile. Based on these findings, a credit score is produced, which is a rank from 300-900. The ranking is as follows:
- Poor – 300 to 599 points
- Fair – 600 to 649 points
- Good – 650 to 719 points
- Very Good – 720 to 799 points
- Excellent – 800 to 900 points
The algorithm that determines your score weighs a variety of factors including your ability to pay bills on time, credit diversity, credit history, credit usage and more. So it’s no surprise that if you file for bankruptcy, not only will it show up on your credit report but it will also negatively impact your credit score as well.
How Long Does It Take For My Credit Score To Recover?
Once you’ve declared bankruptcy, it stays on your credit report for quite some time — which will consequently affect your overall credit score. According to Equifax, Canada’s largest credit bureau, bankruptcy stays on your record for six years if it happens the first time, and 14 years if your declare a second time.
Other Options To Consider Before Filing For Bankruptcy
If you’re not too keen on the idea of filing for bankruptcy just yet, here are some other options to consider before you hit that stage.
Debt Consolidation Loan
When you put all your payments and debts side by side, it can easily overwhelm you and make you feel as if there’s no hope in paying off your debts on time. Debt consolidation may be an effective option which combines several high-interest loans or debts into one combined debt with a lower interest rate.
Debt consolidation loans are really there to help simply the lives of people who have debt and reduce the chances of you accidentally missing a payment to a certain creditor. For example, if you’re managing six credit cards, this process can allow you to pay them all in one payment instead of six. A great benefit of debt consolidation loans is that they typically charge lower interest rates than those of creditors, which over time can help you pay off debts quicker while also keeping more money in your pocket.
Often times longer repayment periods are also offered which will help lower monthly payments, making the overall repayment plan much more manageable as well. While this may be a great option, it’s important to note that not all debt can be consolidated, such as mortgages.
Debt Management Plan
Much like the name suggests, this is a voluntary program placement that will help you repay and manage your debts. This is often a service that’s offered as part of a credit counselling service.
A part of the process is meeting with a counselor who will go through all your personal finances with you and help you come up with a budget and repayment plan. Counselors can help you waive most of your interest, combine all your payments into one and overall give you the tips and tools you need to pay your debts faster. Unfortunately, since this is a voluntary program, you don’t get any protection from collections or creditors from calling you in an attempt to recoup money.
A consumer proposal is a debt settlement program administered by the federal government which protects consumers from creditors while they pay off a portion of their debts. With consumer reports, you only pay back what you can afford. How does that work? Your counsellor will negotiate an offer with creditors offering a sum of money that you can actually pay back over a fixed period of time. For this, you only pay back what you can afford. In this scenario, creditors will typically get more than what they would with a bankrupt client so they typically accept it — effectively becoming a win-win scenario for everyone.
Look To Your Friends and Family
If you find yourself in financial trouble, before looking to outside sources, try and enlist the help of your inner circle — your friends and family. Reach out to loved ones and see if they’d be able to assist you in this time of financial need. Not only can they help you from declaring bankruptcy, they can help you get back on your two feet again.
Typically when a friend or family member lends you money, they don’t do it without the intention of charging any interest. If that’s the case, you’re already saving money than you would if you were take out a loan. With that said, never take their kindness and willing to help to your advantage. When presenting your request to them, also present a repayment plan on how much you’re planning to pay monthly as well as an approximate timeline around when you expect to pay them back in full. This is important as it will show them that you’re serious at repaying them back and simply aren’t taking advantage of their kindness.
How To Recover From Bankruptcy
While many people may feel like going bankrupt can be a very humiliating experience, it doesn’t have to be. Frankly, that’s just the stigma talking. But even if that still has you down — just think, you can only go up from here! Here are some ways to bounce back and repair your credit score:
Check Your Credit Score
This is always a good place to start, firstly because it tells you how much work you need to get done to improve it. If your score is lower than you anticipated, don’t stress! If you whip your financial habits into shape, major improvements can be made seen with 6 – 12 months. Another important reason to check your score is to make sure all your debts have been discharged. If they haven’t, your former bankruptcy status could still be impacting your score.
Pay Bills On Time
Take the oldest trick in the hat and apply it to your everyday life — pay your bills on time. Whether it’s your phone bill, credit card bill or personal loan, they’re all equally important so make sure you pay them all ahead of their deadlines.
Get A Bad Credit Car Loan
Getting a bad credit car loan is possibly one of the best ways to boost your credit score. Not only does it diversify your account, which credit bureaus love, they’re relatively easy to get! If you were thinking about getting a car, this option is truly a no-brainer!
Think your history of bankruptcy is going to prevent you from getting approved? Not with London Bad Credit Car Loans! Unlike other lenders, they believe everyone deserves the opportunity to own a car no matter what their financial history is, so they’ll work with you and your current financial standing to help you get approved. They’ll work within your budget to help you score a car loan that works best for you. Contact them today to see how they can help you!
Don’t Take On More Than You Can Manage
Diversifying your account will undoubtedly boost your score, so don’t be afraid to open new credit accounts once you’re on the mend. With that said, don’t take on anymore than you can manage. If you bite off a little more than you can chew, you might find yourself in the same predicament again. Because of that, only take on what your personal budget allows post-bankruptcy. If you follow these tips, you’re sure to have a brighter future ahead! Good luck!