Bankruptcy is the legal process that allows individuals to obtain debt relief while still being fair to their creditors or lenders. If you are considering this, you should contact a federally licensed bankruptcy trustee to discuss all of the details involved in declaring bankruptcy and how it will affect your overall financial profile. The other alternative during times of financial distress is Orderly Payment of Debts (OPD) also know as a Consumer Proposal which is a little different than a bankruptcy in that a repayment plan is set up and agreed upon by both the individual with all of the debt AND their debtors to retire the total debt owed, over a number of years. Often, the amount of the “total” debt owed versus how much is actually accepted as payment in full is different. Again, this discussion should be with a bankruptcy professional.
If you’re thinking of declaring bankruptcy or going into OPD I would strongly suggest you fully educate yourself on the overall financial impact this decision will have on your ability to obtain credit in the future. Given all of the many lenders have very different rules on how long after the discharge date they will lend to you, it is very important to learn the “right things” to do after that discharge date to effectively start the process of “rebuilding” your finances. If you already own a home or would like to buy one sometime in the future after your financial circumstances improve, this may be a conversation you would have with a mortgage professional sooner than later.
Based on my experience I can say bad things happen to good people and if you are reading this after you have already experienced a bankruptcy or a consumer proposal and have not yet begun to “re-build ” your credit, now is the time and I hope the information below will help you to do just that!
When it comes to getting a new mortgage, good credit is one of the most important attributes a lender is looking for in a potential borrower. Specifically, how you have paid your debts in the past and if there is a black mark on your credit report such as a bankruptcy, in the lenders opinion this is viewed as a fairly big negative regardless of what your credit score is. Depending on which lender you are working with and assuming a sufficient period of time has passed since the discharge date under that lenders guidelines it is important to demonstrate the previous credit issues are in the past. The only way you can effectively do that is to manage your new “rebuilt” credit in a satisfactory manner with not even one late payment. This is how the lenders will know they can trust you will make your payments on time and not go into default again.
Ideally, it would be most beneficial if you were able to exclude some of your debts from the bankruptcy such as a mortgage which is registered against your home however, there is very little equity in the property or maybe even a car payment, again secured by a car where there is very little equity. If you could keep up with these payments throughout the bankruptcy this would provide a lender with some history of satisfactory repayment habits. If that is not the case, again, you do need to show the lender you have changed your habits and can now make your payments on time.
START SAVING– open a savings account or a mutual fund account and have a regular auto-deposit going into that account from your pay cheque account and this way over time you will have accumulated a good chunk of money which will look good to a potential lender as they like to see good demonstrated savings habits when assessing an application for credit.
APPLY FOR A SECURED CREDIT CARD– after experiencing any credit difficulties a secured credit card will most likely be your only option and this means the credit card company will ask for money up front to be used for security. They in turn will give you a credit card with a similar limit available to use just like any credit card you have had in the past. If you make your payments on time and show mature spending habits, you can likely ask for an increase in your credit limit or after you have had that card for a period of time it may be easier to then be approved for an unsecured credit card with a different company.
DON’T MISS ANY PAYMENTS– any lender will be closely scrutinizing your credit habits after you have been discharged from bankruptcy and if you miss a payment or are late on any payments, it will not look favorable for any new credit as it shows you may not have learned from your bankruptcy and are still likely to default on your debts.
MAKE SURE YOUR CREDIT IS REPORTING– when you do get new credit, ask that credit grantor if they will be reporting to the credit bureau on a regular basisand as always ensure all of your payments are being reported accurately by ordering your own credit report on a regular basis from both Equifax.ca and Transunion.ca.
***NOTE****most lenders like to see at least 2 years history of new credit reporting since the date of discharge before they will even consider giving you a mortgage after a bankruptcy. If you have less than 2 years since you were discharged from bankruptcy or consumer proposal, there are some mortgage options available if you have a larger downpayment however, they may be at a higher rate.
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