How to rebuild your credit after a bankruptcy or a consumer proposal?

For many people, the fear of the impact of a bankruptcy  or a proposal  is a barrier in their decision-making on the best ways to regain control over their finances. In fact, they place a great deal of importance on the fact that the mention of bankruptcy remains on a credit file for 6 years at Equifax and 7 years at TransUnion and lose sight of the fact that such a step is sometimes the best, if not the only, way to resolve their debt problem and rebuild their credit history. In our experience, doing nothing (status quo) is often the worst option .

Your  credit file  contains two parts: a credit rating for each of your debts (R-1 to R-9 or I-1 to I-9, depending on the type of debt) and your score. The score is the equivalent of a general average in your high school academic record. To understand how to rebuild your  credit , it is important to know the factors that influence your score. The four most important are your payment habits (35%), the utilization rate of your  line  and  credit card  (30%) and the age of your accounts and new credit applications (15% and 10%) . These four factors therefore account for 90% of your score.

So, if you filed for bankruptcy but continued to pay your car loan on time, you will have a perfect score (I-1) on your car loan credit score. This rating will therefore have a positive effect on your score and the closer you get to the end of your loan, the more this positive impact will have weight. Conversely, if you have late payments on your car loan or your mortgage during your bankruptcy or proposal, you will have a negative rating on your file for 6 years and this will have a negative impact on your score. . Finally, be aware that a credit score has the same weight whether it is for a debt of $500 or $5000. Thus, do not neglect the timely repayment of a debt simply because you consider it negligible.

Second, if prior to filing for bankruptcy or proposal you used to have high balances on your line of credit or credit cards, the fact that they will have been wiped out by your bankruptcy will eliminate the negative impact that they had on your score. Know that it is better to have a card or line of credit with a high limit but a low balance than the reverse. The reason is simple: You are thus demonstrating that you have the capacity to go into debt but that you choose not to do so.

Third, new credit applications, on the other hand, count for 10% of the score. It is therefore very important not to apply for a loan or a credit card without having a virtual certainty that it will be accepted. A refused credit application will appear in your file for 3 years and may have a significant negative impact on your score if there are too many of them (ex: more than 2 per year). A meeting with the representative of your financial institution before submitting an official loan request could provide you with good advice to avoid such a refusal. Finally, it is important to consult your credit report before applying to ensure that it contains no errors that could compromise your chances of success. If in doubt,

You must at all costs avoid applying for loans immediately after the end of your bankruptcy. Patience will reward you. Although each case is unique, normally the negative effects of a bankruptcy or proposal will be felt for up to two years after the process is completed.

In conclusion, bankruptcy or the proposal will have a short-term impact on your credit file, but this option is sometimes the only or best way to get rid of your debt and regain a balanced budget. Failing to give a push only perpetuates financial problems and delays getting your credit report back in shape.

For any questions or for advice on your own financial situation, do not hesitate to contact our personal finance experts or make an appointment . It’s free, confidential and without obligation.