I need to file Bankruptcy but I’m worried about my Credit Score
A common question that we hear is what will a Bankruptcy or Consumer Proposal do to a person’s credit score. If you are in financial trouble and have missed payments, or are exhibiting the symptoms of financial difficulty, your credit may already be negatively impacted.
Is my credit score good or bad? Should I care?
Most people know that missing payments on a bill or a loan will negatively impact your credit. Did you also know that carrying a balance on your credit cards can decrease your credit score? Also, using most of your available credit, will negatively affect your score. This is true even if the amount of credit which you can access is nominal (ie. A small credit card).
We often discuss consolidation loans as a method to resolve financial problems. Many of the people we talk to have already tried to get a loan and were turned down because of their poor credit score. Unless it is helping you solve your financial problem, your credit score is irrelevant. Said another way – unless you can use it as a tool to help you – your credit score is useless to you.
Can I fix it?
How does one go about repairing their credit? Is there a way to rebuild a credit score that has been damaged by late payments, collections, and high credit balances?
First, if you have debt that is causing you stress – speak with a Licensed Insolvency Trustee. As Canada’s only federally licensed debt professional, they will discuss all your options with you, (not just bankruptcy). If you have a copy of your credit report, bring it with you, and your Trustee will be able to provide you specific insights on how to improve your score.
Did you know that a late payment can show on your credit report for as long as 6 years? According to Equifax, most types of negative information remain on your Equifax credit report for 6 years. This means that something as simple as a late payment, or something as dramatic as a bankruptcy have the potential to show on your report for the same amount of time.
Think about that. Does it make sense for people who’ve already missed several payments on multiple accounts to be concerned about a ‘black mark’ on their credit, when there are already many on the report?
We often refer to a bankruptcy or consumer proposal as a ‘line in the sand’ on a person’s credit report. It is the point at which the credit stops accumulating bad points and starts accumulating good ones. A Bankruptcy or Consumer Proposal will show on your credit for a pre-determined period. After this time has passed it is removed, together with all the accounts included in the bankruptcy or proposal. Essentially, your credit report has been reset. It is then up to you to rebuild your credit, make wise purchasing decisions, and budget your income.
Don’t get me wrong, filing a Bankruptcy or Consumer Proposal often restricts your access to credit for the first few years after the process is complete. However, many people use that time to address other issues that may have contributed to their financial problem. Perhaps poor health needs some attention, or a relationship needs some work. Most people find they are somewhat credit-averse in this period anyway, and so not having the ability to access credit isn’t a significant loss. After the process is removed from your report, your score can improve quickly, and may result in a better credit rating much sooner than had you continued making (& missing) payments on the accounts.
If you are experiencing financial problems, and have found that your credit score won’t help you solve them, then your credit should not be your first concern. Eliminating debt, improving cash flow, and financial recovery must be your goal.
Let us help!
If you are struggling with debt and worried about your credit score, contact us for your free financial consultation. Our Licensed Insolvency Trustee will discuss your options in a no-obligation, free consultation by phone, video conference or in person, at any one of our three offices.
Want an even more eye-opening look at Credit Scores….watch CBC’s Marketplace investigation of three Canadians who investigated their credit scores using different options available. Spoiler alert…..NONE of the numbers they got were the one their bank used!
If you have more questions and would like to speak to our Licensed Insolvency Trustee click the button below to schedule your free consultation.