How Will Bankruptcy Affect My Credit Score?

Filing for bankruptcy is a major financial decision, and you may already be wondering, how much will bankruptcy affect my credit score? It is a fair question, especially since your credit score can play such a vital role in your financial life.

Whether you are applying for a loan, a credit card, or even renting an apartment, your credit score is often front and center. If you are considering personal bankruptcy in Canada, it is important that you understand the short-term and long-term effects it can have on your credit score.

What Does It Mean to File for Bankruptcy?

Bankruptcy is basically a legal way to get relief when you are drowning in debt and cannot keep up with payments. It wipes out most of your debts, but it does come with some pretty big downsides, like hurting your credit score and possibly losing some assets.

Before deciding to declare personal bankruptcy, it is worth checking out other options like a consumer proposal. With this option, a Licensed Insolvency Trustee (LIT) can make a deal with your creditors to pay back part of what you owe over time and avoid going bankrupt. We always recommend consulting with one first to explore all your debt-relief options before jumping straight for bankruptcy.

Can Bankruptcy Affect Your Credit?

When you are filing for personal bankruptcy, one of the first things that happens is your credit takes a hit. Your bankruptcy gets added to your credit report, and your credit bureau will note that in your file.

Your credit score is a three-digit number that is based on the information in your credit report. It is calculated using a formula from your credit report and your score changes over time as your credit is updated. It is impossible to know how your credit score is calculated or how your actions can change it as credit bureaus and lenders do not share the actual formulas, they use to calculate your score. This is why they should be used mostly as a reference.

What does this mean for your credit score when you file for bankruptcy? At this time, it is normal to see your credit score drop by around 200 points or even more after filing. This negative impact happens because filing for bankruptcy tells lenders that you cannot keep up with your debts, and that raises a red flag for anyone thinking about lending you money in the future.

Even though this sounds a little overwhelming, bankruptcy is meant to give you a fresh start. The drop in your credit score is a part of that process, but it is not permanent, and it is something you can recover from with time and effort.

It is also important to remember that if your credit score was not great before filing (due to the fact you missed payments or already had high credit card balances), the drop might not feel as harsh.

In some cases, getting rid of overwhelming debt can actually help you start moving in a better financial direction.

Ongoing Credit Challenges After Filing for Bankruptcy

Once you have filed for bankruptcy, things might feel a little tougher when it comes to credit. You might find it harder to get approved for new loans, credit cards, or even a mortgage. This happens because lenders see that bankruptcy on your credit report and may feel uncertain about lending to someone who has declared bankruptcy.

But here is the thing: this is not going to last forever. Over time, as you start managing your finances better, the impact of bankruptcy on your credit report will fade. You will start showing lenders that you can handle credit responsibly again, and they will eventually be more willing to work with you.

If you are still wondering how much will bankruptcy affect a credit score in the long term, remember that while the immediate impact is significant, you can take steps to rebuild your credit score and show lenders you have turned things around.

The Lasting Effects of Bankruptcy on Credit Reports

So, how long does a bankruptcy stay on your credit report? Well, in most cases, it will stick around for about six to seven years, depending on what type of bankruptcy you filed. That might sound like a long time, but once those years pass and the bankruptcy drops off your report, your credit score can improve.

During those years, having a bankruptcy on your credit report can make it harder to qualify for things like loans or new credit cards. But do not let that discourage you.

Even though the bankruptcy stays on your credit report for several years, you do not have to wait for it to disappear to start rebuilding your credit. Many people begin working on their credit right after their bankruptcy is filed and see improvements sooner than expected.

Navigating Financial Life After Bankruptcy

After you declare bankruptcy, managing your finances will require some changes, but you do not have to let it stop you from living your life. Sure, getting loans or credit cards might be a little trickier, but this is only a temporary bump in the road. The key is to make sure you are living within your means and making your monthly payments on time.

One helpful step is to work with a Licensed Insolvency Trustee. They can offer guidance on how to rebuild your finances and avoid falling into the same traps that led to bankruptcy in the first place.

With the right plan in place, you can move forward with confidence, knowing that better days are ahead.

Rebuilding and Strengthening Your Credit Report After Bankruptcy

The good news is that while it might take some time, you can absolutely start trying to rebuild credit. Let’s look at some steps you can take to get your credit back on track.

Developing a New Financial Strategy

The first thing you will want to do is create a new budget and stick to it. Having a budget helps you control your spending and avoid falling back into debt. It is important to look at your income, figure out your expenses, and set aside money for savings. Sticking to a budget is one of the best ways to avoid future financial problems and help rebuild a good credit score.

If you are unsure where to start, consider talking to an Insolvency Counsellor. They can help you create a plan that works for you and your specific situation.

Leveraging Secured Credit to Rebuild Your Score

Another great way to rebuild your credit after declaring bankruptcy is to use a secured credit card. A secured credit card is a credit card that requires a deposit, which acts as your credit limit. It is designed for people who have low credit scores and need to rebuild. By using this card responsibly—keeping your balance low and making your payments on time—you can start to show lenders that you are able to manage credit responsibly.

Monitoring and Improving Your Credit Over Time

It is also important to keep an eye on your credit report. Regularly checking your credit report will help you track your progress and catch any mistakes that could be dragging your credit score down. You can get a free credit report from each of the credit bureaus every year, so take advantage of this and stay informed about your credit status.

Rebuilding credit after bankruptcy does not happen overnight, but with time and effort, you will start to see improvements. The key is staying consistent with your payments, keeping your debt low, and monitoring your credit regularly.

How Farber Can Help

If you are feeling unsure about how to manage after personal bankruptcy or need help rebuilding your credit, Farber can help. We offer a variety of services that guide you through everything from filing for bankruptcy to rebuilding your credit after bankruptcy.

Our team includes Debt Solutions Managers. Licensed Insolvency Trustees, and Insolvency Counsellors who can guide you through the entire process of bankruptcy and credit rebuilding.

Whether you need help with a personal bankruptcy filing, support with creating a new financial plan or looking at other debt-relief options — like a consumer proposal — we are here for you every step of the way.

If you are ready to start rebuilding, connect with us for a free consultation and get started on taking control of your financial future, today!