In today’s blog posting we’re going to tackle a topic many of you have asked about: What happens to a credit score when someone files for bankruptcy protection?
Filing for bankruptcy can be a challenging decision, and understanding its impact on your credit score is crucial. Let's dive in and explore this together.
When you file for bankruptcy in Canada it will have a significant impact on your credit score. A bankruptcy filing is a legal process that allows individuals to eliminate or reduce their debts under certain circumstances. A bankruptcy can only be filed by a Licensed Insolvency Trustee (also known as a LIT). See our list of Trustees on this site for more details and contact information.
Credit Scores: Your Credit Rating (R-score) and Your Beacon Score
When you file a Bankruptcy any existing debt drops to R9 on your credit report. The best score is R1, so you can see the impact. And your Beacon Score, the other measurement of credit worthiness, drops to between 300 and 450 in most cases. A top Beacon Score is anything above 800.
In Canada, a bankruptcy filing will remain on your credit report for six to seven years, depending on the province you reside in. During that time period your credit score will remain low, making it challenging to obtain new credit or loans. Though you can take steps to begin boosting it once the Bankruptcy ends.
Lenders will see the bankruptcy notation on your credit report and may consider you a higher risk borrower. But there are still options for you! It's also essential to realize the impact on your credit score will vary depending on your individual circumstances. If you had excellent credit before filing for bankruptcy, the drop in your credit score will likely be more significant. If you already had damaged credit due to previous financial difficulties, the impact may be less severe. And the only way to go is up!
Despite the negative impact on your credit, it's not permanent. Over time, as you demonstrate responsible financial behaviour and start to rebuild your credit history, you will see your credit score and Beacon Score both improve. You do that by taking proactive steps to rebuild your credit, such as applying for a secured credit card, making your monthly payments on time and managing your budget carefully.
Once your Bankruptcy ends, I recommend applying for either the Capital One Secured Mastercard or the Home Trust Secured Visa - both can help begin the rebuilding process. This new credit will show up on your credit report as R1. During the Bankruptcy period you may want to check out the KOHO Secured Mastercard or the NeoFinancial Mastercard. Both will give you access to credit card-like conveniences while you are under Bankruptcy protection.
Once Your Bankruptcy Ends
The post-Bankruptcy goal? To push your Beacon Score up so you qualify for a small amount of new credit (which will then further push your score higher) We're aiming for a high of 700 to 800. Once your Bankruptcy has been successfully completed and a further 6 years pass, all old debt included in the Bankruptcy will disappear off your report, leaving only the "good debt" (new debt)
Filing for bankruptcy in Canada will have a substantial impact on your credit score, and that information will remain on your credit report for several years. But remember: Bankruptcy is not the end of your financial journey, it's a fork in the road to new destinations! By taking steps to rebuild your credit and demonstrating responsible financial behavior, you will gradually improve your credit score over time.
If you'd like to check your credit score regularly as you work through the Bankruptcy, here are the two apps you can download (with the associated credit bureaus linked for each one):
Remember: There IS life after debt!
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