A major reason why debtors are hesitant to file bankruptcy is the effect it will have on their financial future. It’s a fact that filing bankruptcy will have a negative effect on your financial future, but not doing anything about your debt can have even larger consequences.
When you want to apply for a mortgage, credit card, or any type of loan, a prospective lender will review your credit report. And when you file for bankruptcy, a note to that effect appears on that credit report.
So what does a bankruptcy mean to your overall credit score?
Bankruptcy is reflected with an R9 rating, which is the lowest rating a person can receive. It’s essentially the hardest hit your credit score can take.
In Manitoba, that notation will remain on your credit report for six years after discharge if it’s your first bankruptcy (and 14 years if it’s your second bankruptcy). There are several components that make up your credit score, the biggest one being your payment history.
Chances are, if you’re considering bankruptcy, you may not have been paying your bills on time – if at all. Negative credit information such as late or missed payments and debts that have gone to collections stay on your credit report for the same amount of time as a bankruptcy. So if you’ve been having financial difficulties, it’s likely that your credit rating has already taken a beating.
One major difference is that bankruptcy is a way for you to get the debt relief you need to start fresh so you can begin to rebuild your financial credit – and future. If you do file for bankruptcy, you can improve your credit rating to make yourself eligible for credit in the future.
Your ability to borrow is based on more than just one item on your credit report. A prospective lender will also look at your income, work history, and any other credit you are able to reestablish.
Here are a few tips to help you succeed in rebuilding your credit after a bankruptcy:
Complete your bankruptcy as quickly as you can.
By fulfilling your bankruptcy obligations (making monthly payments and reports to your trustee, and attending credit counselling sessions), you will complete your bankruptcy without delay. The sooner you do, the sooner you start – and run – the six-year period it stays on your credit report.
Make your regular payments on time, every time.
As indicated above, your payment history is one big component to your credit score. So consistently stay on top of your bills, and pay them as they come due.
Save!
Not only can what you save be used as a down payment if you wish to buy a home, you can also use your savings as a security deposit to obtain what will likely be your first credit card after bankruptcy – a secured credit card.
Stay on top of your finances.
Bankruptcy includes mandatory credit counseling sessions to help understand how you ended up in bankruptcy in the first place. Taking these sessions to heart will help you avoid financial pitfalls in the future.
Also, after you’ve completed your bankruptcy, debts included in it should fall off your credit report. You’ll want to request a copy of your credit report to verify its accuracy. If there are errors, contact the credit rating agency immediately to have it corrected.
Re-establish credit.
The easiest credit to obtain post-bankruptcy is a secured credit card. You can use any savings you have accumulated as a deposit on such a card. The great news is this will show up as a normal credit card on your credit report. Keep in mind that it may take you two years or more to qualify for a larger loan, such as a mortgage.
If you’re struggling with debt and are looking for a way out, contact our office today for a free, no-obligation consultation.
