What I Wish People Understood About Bankruptcy | Will it destroy my credit?

WHAT IMPACT DOES BANKRUPTCY HAVE ON MY CREDIT?

Let’s start out first by acknowledging that, without a doubt, bankruptcy is bad for your credit score. It’s a very negative thing to have disclosed on your credit report, and it stays on for a period of time that typically lasts at least 7 years. So it makes sense that one of the things people worry about when considering bankruptcy is the impact on their credit rating. This is a legitimate concern, and it's definitely something we take into account when helping individuals figure out the best solution for their debt problems, but in a lot of cases the truth is that bankruptcy’s impact on a credit rating doesn't necessarily ruin people's ability to get credit. Whether it is destructive to your ability to obtain affordable credit depends on several factors:

FACTORS AFFECTING CREDIT

1. The state of your credit prior to filing a bankruptcy
   
   There are other things that are very bad for your credit which could mean that your ability to obtain affordable credit is already as bad as if you had made a bankruptcy filing:
   
   Bad payment history
   Your payment history accounts for a large portion of your credit score, potentially 35% of your score. If you’ve had late or missed payments, have accounts in collection, or have had an account written off by a lender due to non-payment, these will have a serious impact on your credit rating. It’s common for an individual considering bankruptcy to already have items on their credit report which indicate a bad payment history.
   
   Maxing out your credit
   The extent to which you've used your credit can account for approximately 30% of your credit score. The Government of Canada recommends 35% as the ideal amount of your credit limit to use, but individuals who are considering bankruptcy have often used 100% of their credit limit on all or most of their credit facilities (ie. they’ve maxed out their credit cards and lines of credit). This can have a serious negative impact on your rating.
   
   Lack of established credit history
   Around 15% of your credit rating is typically based on the length of time you’ve been using your existing credit facilities. The longer you can show good usage and payment history on an active account, the better. However, it isn’t uncommon for those considering bankruptcy to have taken out new debt in the recent past. Sometimes, they've tried consolidating their debts, closing down old accounts with a good track record in favor of a new account with a lower interest rate.
   
   Even if you've had a good track record with a new account, it won’t hold much weight with lenders. They want to see currently active accounts that have been in good standing for a long time. 
   
   Don’t forget, it’s not just your bills that need to be in good standing. If you've co-signed someone else’s debt or are a joint holder of debt with someone else, their missteps impact your credit rating. It’s a good idea to pull your credit report to see what you’re starting with before deciding that the negative impact bankruptcy has on your credit rating is going to make a difference for you.
    
2. A good credit score doesn't necessarily mean you'll be approved for affordable credit
   
   If you've always meticulously kept up with your payments and made sure to clear up any errors, you may have a decent credit score based on the reports you pull from the credit agencies, despite having made some of the mistakes above. But that doesn’t necessarily mean that lenders will look favorably on you. They sometimes ignore the credit score you see and calculate one on their own based on the details found in your credit report. A relatively sophisticated lender (which tend to be the ones that offer an affordable interest rate) may be able to sniff out signs that you’re insolvent even if your credit score looks okay. In that case, you likely already will have trouble obtaining affordable credit.
    
3. There may be more important things than your immediate credit score
   
   It feels nice to have a good credit score and to know (or at least think) that you can get access to more credit if you need it. But it’s important to step back and evaluate whether that’s truly important when considering your overall situation. If you don’t have an immediate need for new credit (or already have more debt than you can afford to pay off, such that you shouldn't be obtaining more credit), then the impact on your credit rating likely won’t make much difference in your life in the short term.
   
   And while bankruptcy will show up on your credit report for 7 years or more, it won’t necessarily impact your ability to get affordable credit for that long. Lenders look at all of the details in your credit report and decide whether to offer you credit based on a lot of things, not just the score you see on your report. If you get started on credit-rebuilding strategies immediately after filing a bankruptcy, you may find that you can get affordable credit within a couple of years of completing the bankruptcy process. By then, you'll likely be in a better financial position to be able to afford to take on the debt, so the timing often works out well.
   
   Right now, if your debt is overwhelming you, it may be more important to get the relief offered by bankruptcy and focus on rebuilding. This often has the effect of shortening the time period to improving your credit when compared to toughing it out for years trying to keep up with payments.  

STARTING FRESH

Bankruptcy isn't the right option for everyone, but it can be a starting point for improving a person’s credit in the future. By dealing with the debt that’s impacting your credit-worthiness already and providing the breathing room needed to get off the debt treadmill, you can start anew with healthy debt relationships that will increase your credit rating going forward. 

Too many people delay coming to see a Licensed Insolvency Trustee due to fear over the impact on their credit rating. As a result, they often end up spending months, years or even decades struggling with their debt before they reach out for help. I wish people knew it didn’t have to be that way.

FREQUENTLY ASKED QUESTIONS

Q: How can I find out what my current credit score is?
You can find out your credit score, and see the details on your report that are impacting it, by pulling your credit report from either TransUnion, Equifax, or both. Both is actually preferable because some lenders only report to one or the other, so your credit score can actually be different on each.

While the credit agencies will give you the option of paying for regular credit reporting information, you can pull the reports for free. Here are some links to get TransUnion and Equifax reports.

Q: I have my debt under control but I need help fixing or rebuilding my credit. Can you help?

A Licensed Insolvency Trustee is a good resource for advice on fixing your credit so you may want to book a free consultation to find out more. We can provide referrals to trusted individuals who can help where we can't.

There are many people who sell advice and/or help with credit ratings, or give advice online, but proceed with caution. Some are more knowledgeable and reputable than others, so you'll need to do your research. There is no magic pill to increase your credit rating, so be cautious about paying anyone who says there is.