Filing for bankruptcy is a significant financial decision that can have a lasting impact on your creditworthiness. In Canada, where credit plays a vital role in many aspects of life, it’s crucial to understand the effects bankruptcy may have on your credit score.
Credit score basics
A credit score is a numerical representation of a person’s creditworthiness. Lenders use credit scores to help assess the risk of extending credit to an individual. The most commonly used credit scoring model in Canada is the FICO® Score, which ranges from 300 to 900. The higher the score, the better the creditworthiness. However, filing for bankruptcy can cause a substantial drop in the credit score.
Bankruptcy and credit
When individuals file for bankruptcy in Canada with the Office of the Superintendent of Bankruptcy, the filing is noted on their credit report. Declaring bankruptcy will get you the lowest possible credit score assigned by credit bureaus, and bankruptcy typically remains on a credit report for 6 or 7 years, depending on the province. It’s a substantial period considering that it serves as a potential red flag to lenders and creditors. As a result, declaring bankruptcy can severely impact personal finances and the ability to reach life goals for years.
It’s important to note that not only will declaring bankruptcy affect your credit score, but it may also impact anyone who has co-signed a loan, shares a credit card or has shared or joint assets, like a home or car.
Alternatives to filing for bankruptcy
If you still have some ability to pay back your debts, there are options to help you get out of debt.
- Consumer proposals. If your debts are lower than $250,000, you may be able to work with a Licensed Insolvency Trustee (LIT) to create a consumer proposal. This is a contract your LIT will negotiate with you and your lenders to repay your debts over time. This will impact your credit score, but not as much as declaring bankruptcy, and consumer proposals stay on your credit profile for the length of the agreement, plus a few years, depending on your province.
- Debt repayment plans. Working with a professional credit counsellor, you can create a plan to consolidate some (but not all) debts. The counsellor will negotiate with your lenders and combine your debts into one more-manageable payment. Additionally, talking to a credit counsellor won’t affect your credit score. Credit counsellors charge various fees, which can change from agency to agency. Be sure to ask up front before signing any agreement.
Rebuilding credit after bankruptcy
The good news is that the negative effects of bankruptcy on a credit score aren’t permanent. And although bankruptcy filings can stay on credit reports for years, individuals may start rebuilding their credit shortly after their bankruptcy discharge.
By adopting positive financial habits and seeking professional guidance when you need, you may gradually rebuild your creditworthiness and move towards a healthier financial future.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.