So, you’ve declared bankruptcy – what happens next? Bankruptcy is a legal way to get rid of some of your debts (with certain requirements and responsibilities) so you can work toward rebuilding and improving your financial situation. Filing for bankruptcy lowers your credit score, and stays as a negative mark on your credit report for six years. The good news is there’s life after bankruptcy, and there are several steps you can start taking to rehabilitate your credit score build a positive credit history.
Understanding the Impact of Bankruptcy on Credit History
You might have heard the terms Chapter 7 or Chapter 13 bankruptcy thrown around before, but those types of bankruptcies only exist in the United States. In Canada, there are two general types of bankruptcy: personal bankruptcy and business bankruptcy (small business or corporate).
Personal bankruptcy is an option for individuals who have more than $1,000 in unsecured debt, can’t meet their repayment obligations, and have more debt than assets. Filing for bankruptcy is a whole legal process that varies by province, and must be done through a licensed insolvency trustee.
After you declare bankruptcy, you’ll be assigned “the lowest possible” credit score, according to the Office of the Superintendent of Bankruptcy. That’s around 300 points, at the very bottom of the “poor” range. Your first bankruptcy stays on your credit report for six years, and will be visible to landlords, lenders, employers or anyone who you authorize to run a credit check. Any subsequent bankruptcies will stay on your credit report for 14 years.
Laying the Foundation: Creating a Solid Financial Plan
The first step toward rebuilding your credit is creating a financial plan that encompasses taking stock of income, spending, bills and saving, setting realistic financial goals, then creating a budget to keep you on track to meeting those goals.
Having a budget keeps you accountable and takes the anxiety and guesswork out of not knowing where your money is going and whether or not you’re overspending. It doesn’t have to be intimidating – learn how to build the ultimate budget template that fits around your habits and makes you feel secure about your financial situation.
To help cushion your bank account against unexpected expenses like car repairs, veterinarian bills, medical bills, illness or job loss, start setting aside money in an emergency fund. Your contributions don’t have to be large – whatever you can afford to contribute at the time is a good start. The idea is to not touch the money and let it grow into a safety net to save you from future financial setbacks, so you don’t go into debt again.
Checking Your Credit Report for Accuracy
Throughout your credit improvement journey, remember to regularly check your credit report to make sure there aren’t any mistakes. This includes identity information such as your name, birthdate and contact information, but also errors that can ding your credit score, such as accounts that aren’t yours and that you didn’t open (which could be a sign of identity theft), accounts with the wrong balance or credit limit, payments marked as late when you paid on time, or closed accounts marked as open (or vice versa).
Learning how to dispute inaccuracies is a valuable tool to know about. If you spot incorrect information on your credit report, you should immediately start the dispute process with one or both of Canada’s two credit reporting bureaus, Equifax and TransUnion. See the Equifax dispute process and TransUnion dispute process for how it works and the information you need to file a dispute.
Secured Credit Cards: A Stepping Stone to Rebuilding Credit
One of the ways to rebuild credit after bankruptcy is through secured credit cards. A secured credit card is backed by a cash deposit you make upfront, with the deposit amount acting as your credit limit and as collateral. You can use a secured credit card like any other credit card, and must make at least the minimum payment each month on your balance. Your deposit is returned to you when you close the card, as long as your balance is paid off.
As long as you make your payments on time and keep your balance low or paid off in full, a secured credit card is an easy everyday way to start boosting your credit score. If you use it responsibly and form good habits, eventually you may be able to upgrade to an unsecured credit card with a higher credit limit and more perks or rewards.
The right secured credit card for you depends on the interest rate, annual fee and minimum deposit required upfront (between $50-$500, depending on the card). Make sure you understand the terms and conditions and can afford to make repayments on time.
Making Timely Payments: The Cornerstone of Credit Recovery
Improving your credit score significantly relies on making your payments on time, every time. Consistently making on-time payments is the most basic way to build and maintain a good credit score, and accounts for about 35% of how your credit score is calculated. A late payment can seriously set back your credit score, especially soon after bankruptcy. To avoid this, consider setting up reminders or automatic payments for things like credit card bills, utility bills, cell phone and cable bills, subscriptions, student loans and car payments.
Strategies for Paying Off Debt
Addressing any remaining or new debt is crucial to mitigate the impact of bankruptcy on your credit score. When it comes to debt repayment plans, there are three basic approaches:
Debt snowball: Paying off smaller debts first, creating momentum (and a motivational boost) as you work toward paying off larger debts.
Debt avalanche: Making the minimum payment on all debts, putting extra money toward the debt with the highest interest rate, which will help cut down the amount of interest you pay in the long run.
Debt consolidation: The goal of debt consolidation is to fold multiple debts from different lenders into one loan with a lower interest rate and a single monthly payment. Debt consolidation options include taking out a debt consolidation loan, a home equity loan, or transferring your debts onto a balance transfer credit card.
Diversifying Your Credit Portfolio: Adding Different Types of Credit
One smaller component the credit bureaus consider is how you handle a mix of different types of credit over time, such as revolving credit (credit cards or line of credit) and installment loans (mortgage, auto loan, student loan). However, you shouldn’t take on too much credit too soon – applying for multiple new credit lines at once will lower your credit score, and you don’t want to dig yourself into more debt.
Avoiding Common Credit Rebuilding Mistakes
Besides not paying bills on time and not monitoring your credit report, there are a few other common credit score mistakes to be aware of:
Closing oldest accounts: How long you’ve had credit accounts open for also factors into your credit score, so closing an old credit account could shorten your active credit history and temporarily affect your credit score. It could also increase your credit utilization ratio (the amount of debt you’re carrying as a percentage of your overall available credit limit), which may hurt your credit score if you’re already carrying a lot of debt.
Applying for multiple new credit lines too quickly: Multiple inquiries for new types of credit will lower your credit score. And if you already tanked your credit score due to bankruptcy, you might not get approved anyway.
Carrying a balance: Carrying a balance from month to month and only making the minimum payment can affect your credit score if your balance is a large percentage of your total credit limit. In general, you should aim to keep your credit utilization rate across all accounts under 30% of your available limit.
Work With the Pros to Make Credit Building Easier
Rebuilding credit can feel overwhelming but remember, you don't have to do it alone. Consider seeking help from professional services like KOHO, which offers credit building tools, with three ways to build your credit history:
A KOHO line of credit: Take out a line of credit with KOHO dedicated to credit building, and choose a small amount that is set aside and reported as a monthly payment. Pay a monthly fee, and each month that small amount is reported to Equifax as a repayment and contributes to building and maintaining a higher credit score.
A flexible line of credit: Like a secured credit card, use your own money to put down a deposit (between $30 to $500), then make withdrawals and repayments. Each monthly on-time payment is reported to Equifax.
Subscribing to one or both of KOHO’s credit builder tools also gives you access to a financial coach, and you can use the KOHO mobile app to track changes to your credit score. Participating in a credit building service like KOHO’s can make the journey to improving your credit score after bankruptcy much smoother.
The bottom line
Remember, bankruptcy doesn’t mean you’ll never have a sterling financial profile again. With the right plan, consistent good habits and professional support, you can rebuild your credit profile and continue on the path to achieving your financial goals.
Jane Switzer is a writer and editor with more than a decade of experience producing content for major Canadian newspapers, magazines, fintech companies and banks. Jane got her start working in journalism as a reporter and copy editor before transitioning to content writing, editing and SEO.