Bankruptcy can provide a fresh financial start for individuals struggling with overwhelming debt, but it comes with long-term consequences, particularly for your credit. One of the most common questions people ask after filing for bankruptcy is, how long will it stay on my credit report? Understanding the duration and impact of bankruptcy on your credit is essential for planning your financial recovery. So, how long does bankruptcy stay on your credit report?
What is credit reporting?
In Canada, there are two primary credit bureaus – Equifax and TransUnion. As credit reporting agencies, their role is to report on each individual’s credit history. This is typically used by credit lenders to assess a borrower before they potentially provide them with a loan. Banks and other creditors use the credit report to assess the risks involved, and the probability of having the loan repaid. For high value loans like mortgages and car loans, you will typically need a good credit report and a strong borrowing history.
How does credit reporting affect me?
Credit reporting plays a significant role in how lenders assess individuals who are seeking to borrow money. In Canada, lenders typically send monthly updates to credit reporting agencies about their borrowers. When someone files for bankruptcy, the Superintendent of Bankruptcy also sends an update to the credit bureaus, including details about any discharge from bankruptcy. The two major credit bureaus then update the individual’s credit report accordingly. This information is made available to lenders, allowing them to assess the borrower’s creditworthiness. If your credit report reflects a bankruptcy and a poor repayment history, it may be difficult for you to obtain new credit. Lenders often use credit reports to make informed decisions about who they lend to, and a history of bankruptcy can significantly hinder your ability to borrow money. Therefore, it’s important to work on rebuilding your credit to make your report as strong as possible before applying for new credit.
How does bankruptcy affect your credit report and score?
In Canada, bankruptcy can remain on your credit report for a significant period, typically six years for a first-time filing and up to 14 years for multiple bankruptcies. The impact on your credit score is substantial, as it signals to potential lenders that you’ve been unable to meet your financial obligations. This can make it more difficult to obtain new credit, loans, or mortgages. Bankruptcy often causes a significant drop in your credit score, typically by 200 to 300 points, depending on your pre-bankruptcy score and other factors. A lower credit score can make it challenging to qualify for loans or even secure rental agreements, as many landlords and lenders review your credit history. While the bankruptcy remains on your report, however, your credit score can gradually improve over time if you focus on rebuilding your credit by paying bills on time, reducing debt, and managing new credit responsibly.
How long does bankruptcy stay on your credit report?
In Canada, the length of time bankruptcy remains on your credit report depends on the type of bankruptcy and whether it is your first or subsequent filing:
First-time bankruptcy
For most people who file for bankruptcy for the first time, the bankruptcy will stay on their credit report for six years from the date of discharge. This means that even after your debts are legally forgiven, the bankruptcy will continue to affect your ability to obtain new credit or loans.
Second-time or subsequent bankruptcy
If you file for bankruptcy a second time, the record of your bankruptcy will remain on your credit report for 14 years from the date of discharge. This extended period reflects the increased risk associated with multiple bankruptcies.
Can you remove bankruptcy from your credit report early?
Unfortunately, you cannot remove bankruptcy from your credit report early, even if your financial situation improves. The bankruptcy record will stay on your credit report for the specified period (six or 14 years, depending on the case). However, you can start to rebuild your credit long before the bankruptcy is removed by following these steps:
- Pay bills on time: payment history is one of the most significant factors in your credit score. By paying bills on time and in full, you can start to demonstrate good financial habits to credit bureaus.
- Use secured credit cards: a secured credit card requires a deposit, and your limit is typically equal to the amount you deposit. Using a secured card responsibly and paying off the balance each month can help rebuild your credit.
- Apply for a credit-builder loan: some financial institutions offer small loans designed specifically for rebuilding credit. Making regular, on-time payments on these loans can help improve your score.
- Keep credit utilization low: try to keep the balance on your credit cards or lines of credit below 30% of the available limit. High credit utilization can negatively impact your score, so maintaining a low balance is key to rebuilding your credit.
- Check your credit report regularly: monitoring your credit report will help you spot errors and ensure that any outdated or inaccurate information is corrected. This can be particularly important after a bankruptcy, as errors can sometimes occur in the reporting process.
How does bankruptcy affect your ability to get new credit?
While bankruptcy stays on your credit report, it doesn’t mean that you will never be able to obtain credit again. Many individuals who have gone through bankruptcy successfully rebuild their credit over time. It will likely be more challenging, however, to secure new credit during the period the bankruptcy is listed on your report. Some of the challenges you may face include:
- Higher interest rates: lenders may offer you credit, but you will likely face higher interest rates due to the perceived risk.
- Lower credit limits: credit limits may be lower initially as lenders may be cautious when extending credit to someone with a bankruptcy on their record.
- Stricter approval criteria: you may find it harder to get approved for loans or mortgages, especially in the early years after your bankruptcy discharge. Some lenders may require larger down payments or offer terms that are less favourable.
Can bankruptcy be avoided?
Before resorting to bankruptcy, it’s worth considering other debt relief options. In many cases, individuals can avoid bankruptcy by:
- Debt consolidation: combining multiple debts into one manageable loan can make it easier to pay off what you owe, often with a lower interest rate.
- Consumer proposal: a consumer proposal allows you to negotiate with your creditors to repay a portion of your debts over time, without resorting to bankruptcy. A consumer proposal is a less severe option than bankruptcy and can remain on your credit report for three years after completion.
- Credit counselling: working with a certified credit counsellor can help you develop a personalized plan to pay off your debts without the need for bankruptcy.
How to rebuild your credit report after bankruptcy
If you’re concerned about your credit report and what life will look like after bankruptcy, there are several steps you can take to begin rebuilding your financial future:
- Explore bankruptcy alternatives: before proceeding with bankruptcy, consider alternatives such as filing a consumer proposal or taking out a debt consolidation loan. These options may allow you to avoid the long-term impact of bankruptcy while still addressing your debt.
- Consult a Licensed Insolvency Trustee: book a free consultation with an experienced Licensed Insolvency Trustee. At Spergel, unlike other insolvency firms, we provide personalized support, assigning you your very own trustee to guide you through every step of the debt relief process, offering expert advice and tailored solutions.
- Embrace bankruptcy as a fresh start: remember, filing for bankruptcy can be the first step toward financial recovery by clearing unmanageable debt. If you continue without addressing your financial challenges, your situation is unlikely to improve.
- Follow tips to rebuild your credit: begin rebuilding your credit by saving money, making your monthly repayments more manageable, and paying bills on time. Over time, these actions will help restore your creditworthiness and improve your score.
- Work on other key factors: a Licensed Insolvency Trustee can also help you improve other aspects that lenders look at, such as your assets, income, and job stability. These factors may be more within your control than your credit report and can positively influence your ability to secure future credit.
Taking these steps can help you regain control of your finances and rebuild your credit after bankruptcy, setting you up for a more secure financial future.
How long does bankruptcy stay on your credit report? FAQs
Here are some of the most common questions we receive about the amount of time bankruptcy stays on your credit report:
Is it true that after 7 years your credit is clear?
In Canada, it’s not necessarily true that your credit is automatically clear after 7 years. While most negative items, including late payments and collections, typically remain on your credit report for up to 6 years, bankruptcy remains on your report for up to 6 years for a first-time filing and up to 14 years for a second or subsequent bankruptcy. After these periods, the negative entries will no longer affect your credit report, but your credit score may still be impacted by other factors. To improve your credit, it’s essential to actively rebuild your credit by making timely payments and managing your debt.
What happens after 7 years of not paying debt?
After 7 years of not paying a debt in Canada, the debt is typically considered ‘statute-barred’, meaning the creditor can no longer sue you to collect the debt due to the expiration of the limitation period. However, the debt may still appear on your credit report for up to 6 years from the last date of payment or acknowledgment of the debt. During this time, it can continue to negatively impact your credit score, making it harder to obtain new credit. The debt may also still be sold to collection agencies or pursued for repayment, even though legal action cannot be taken after the 7-year period. It’s important to handle old debts carefully, as they can still affect your financial standing.
Will my credit score drop when my bankruptcy is discharged?
Yes, your credit score will likely drop when your bankruptcy is discharged. This is because the discharge of bankruptcy indicates to credit bureaus and lenders that you were unable to meet your financial obligations, which is seen as a negative factor. The impact on your credit score depends on your score prior to bankruptcy and other factors, but it is common to see a significant drop, often 200 to 300 points. However, once discharged, the bankruptcy allows you to start fresh and begin rebuilding your credit. Over time, by practising good financial habits, such as paying bills on time and managing debt responsibly, your credit score can improve.
While bankruptcy can remain on your credit report for several years, it does not mean your financial future is set in stone. By taking proactive steps to rebuild your credit, you can begin to recover and improve your financial situation over time. The key is to be patient, disciplined, and committed to improving your financial habits.
If you’re struggling with overwhelming debt, don’t wait until bankruptcy becomes your only option. Contact a Licensed Insolvency Trustee at Spergel today for a free consultation to discuss your options and find the best solution for your financial future. We can guide you through the process and help you take control of your finances again.
