We at Credit360 understand that declaring bankruptcy is a last resort for people who are knees deep in debt and struggling to pay it off. And that’s okay because declaring bankruptcy can happen to anyone for several good reasons. Bankruptcy is a legal process that people with outstanding debt undergo to relieve some or all debts. You are given a second chance by the courts to bring your finances together for a fresh start with your debts by declaring bankruptcy. However, there are consequences to filing bankruptcy, and the most significant impact is your credit score.
Contents
- What Happens When Declaring Bankruptcy?
- Pros and Cons of Filing for Bankruptcy
- Effects on Your Credit Score
- How Long Does Bankruptcy Stay on Credit Reports?
- How to Build Credit After Bankruptcy
What Happens When Declaring Bankruptcy?
Bankruptcy gives you a second opportunity to pay your debts in portions or have the entire debt eliminated. Meaning creditors can’t take money from your bank account, withhold money from your paycheques, or go after your assets.
Pros and Cons of Filing for Bankruptcy
Before discussing the effects of bankruptcy on your credit score it’s just as important to discuss the pros and cons before filing:
Pros
There’s a good chance that you are receiving collection calls daily, affecting your day-to-day life. So while already feeling the immense financial pressure of overwhelming debt, receiving collections calls on top of that pressure can indeed take a toll on your mental health. When declaring bankruptcy, you receive a break from the constant calls from creditors reminding you about payments that you can’t make, which allows you to feel a sense of relief. At the same time, declaring bankruptcy gives you peace of mind knowing that you don’t have outstanding payments hanging over your head.
Declaring bankruptcy will ultimately erase your debts, including credit and debit loans, payday loans, and external debts owed to the government, such as your taxes, while giving you a sense of relief.
Cons
According to Equifax, “bankruptcy stays on your credit report for 6 years after the discharge date or 7 years after the date filed without a discharge date.” Additionally, filing for bankruptcy will cause credit lenders to view you as a high-risk borrower, making it extremely difficult to purchase things like a house, especially when receiving bank approvals. While you can still build your credit after bankruptcy, you have to face seven years of disapproval from certain credit companies and high-interest fees from approved credit companies.
Effects on Your Credit Score
Declaring bankruptcy indicates that you cannot pay your debts as initially agreed upon, significantly impacting your credit history. Meaning credit companies will see you as a liability making it difficult to receive approval for new credit. Even if institutions approve you for new credit, it will come with unfavourable terms like higher interest rates because lenders will see you as a riskier borrower.
Not only is your credit history impacted, and lenders see you as a liability, but your credit rating drops significantly. A low credit score prevents you from being approved for various financial products like credit cards, lines of credit, personal loans, car loans, and most importantly, mortgages which are essential when purchasing a home.
It’s still possible to receive a mortgage with bad credit, but lenders will view you as high risk. As a result, acquiring a mortgage with low credit comes with higher interest rates, a lowered loan limit to borrow, and a need for a larger deposit.
How Long Does Bankruptcy Stay on Credit Reports?
Bankruptcy will stay on your credit report for up to seven years. There are two main credit bureaus in Canada, Equifax and TransUnion, and they both calculate, collect, and generate credit scores and credit reports. Equifax removes bankruptcy from your credit report six years after declaration. Whereas TransUnion will remove bankruptcy from your credit report seven years after filing. However, if you’ve declared bankruptcy more than once, it will remain on your credit report for 14 years.
How To Build Credit After Bankruptcy
While bankruptcy stays on your credit report for up to seven years, not all hope is lost. You can still start to rebuild your credit score right away, and that begins with staying on top of your finances – like paying bills on time, regularly monitoring your credit scores, and seeking certified credit consultants for help to repair credit.
While bankruptcy is a last resort, Credit360 should be your first choice when recovering! Our credit repair consultants at Credit 360 will help you rebuild your credit back to good standing, putting you back on the right track to building the life you deserve!
Written By: Indojaa Sathiyaseelan
