Being in debt can be a highly stressful time, and it can be unpleasant when you begin to consider all of your options going forward. How will you handle the debt? Are you financially capable of paying off each of your creditors? Or will you be left paying debts for the rest of your life? It’s hard to find a silver lining in situations of financial difficulty; however, there are ways for individuals to start with a clean slate.
When you’ve got more debt than you can pay off, and not enough income, leaving you with no surplus or savings, you may choose to file for bankruptcy. Filing for bankruptcy is a process by which the bankrupt individual surrenders their non-exempt assets in exchange for release from most or all of their debts. Any of your assets, except those that are exempt from bankruptcy, (those that are considered essential for living), are handed over to a trustee. The trustee turns these assets into cash and uses that money to pay off your creditors on your behalf. You will be left with your essential possessions and a chance to start a fresh, debt-free life.
Your new start will require some work to rehabilitate a few aspects of your financial life, including your credit score. Bankruptcy can cause your credit score to plummet, usually it is already poor. Although the effects of bankruptcy on your credit score can differ from one situation to the next, there is an overall negative effect. If you have a good credit score of 700 or more, it can drop by at least 200 points when you file for bankruptcy. Whereas a lower credit score such as 680 can drop by 130 to 150 points.
If it’s your first bankruptcy, this information will remain on your credit report for at least six years from the date of debt discharge, and this time period is extended if it is your second or third bankruptcy. Once you’ve filed for bankruptcy and completed all of the required processes and requirements, the worst is behind you. The next step is to work on managing and improving your credit score and working hard to remain debt-free. Here we share five ways that you can manage your credit score after bankruptcy:
Complete your bankruptcy in the shortest amount of time
- If you are filing for bankruptcy for the first time in Canada, you will qualify for an automatic discharge from bankruptcy within nine or twenty-one months (depending on your income). In order to be finished in the shortest amount of time, you will be required to make monthly payments to your trustee and attend counselling sessions. The benefit of completing your bankruptcy in a short amount of time is so that it will disappear from your credit report sooner. Do what is required of your bankruptcy process, and you will be able to move forward to improve your credit rating.
Pay your bills on time
- This is one tip that needs no explanation. Do not allow late payments to bring down your credit score by ensuring that at least your minimum required payment is made on time every month. Make a list of all your regular bills including hydro, gas, internet, etc. so you won’t forget to pay them, or set up automatic payments for each of your bills every month. This way, forgetfulness won’t even be a factor. Remaining consistent with your payments will show your potential lenders that you know how to manage your money.
Stick to your monthly budget
- Whether you are recovering from bankruptcy or feel that your financial situation is going well, having a realistic budget or spending plan is an excellent way to help manage your money from one month to the next.
- You should allocate a realistic amount of money towards essential expenses such as rent, mortgage, groceries, car payments, etc., and try to put away a set amount of money every month for an emergency fund and your savings. Try to limit any excess and unnecessary expenses. When you start saving money, it proves to your potential lenders that you are responsible and able to handle money. Your budget will help you spend within your means and keep you from mounting any future debts.
- When you set aside specific amounts of money for your different expenses, it will ensure that you only spend what you have. If you do choose to use your credit card, make sure only to make purchases that you can pay back immediately. A golden rule to live by is only to purchase what you can pay for upfront, and this is made easier when you create a realistic spending plan that you can stick to.
- Lastly, if you focus on staying within your budget, you will automatically be avoiding overdraft or non-sufficient fees (NSF). If you find yourself going over your limits and writing NSF cheques, it may be time to revisit your spending plan and see where your money is being spent and make necessary adjustments.
Get a secured credit card
- In order to apply for a secured credit card, you need to save about $500 for the security deposit, which will be held onto by the credit card company for up to two years in case you don’t make payments. Use this secured credit card to make a few small purchases every month that you can pay for on time and in full to help rebuild your credit and restore your credit score.
- It’s also important to remember not to apply for too much credit because every time you do, it will impact your credit report. If your credit card application is declined once or twice, then it’s better to wait at least six months before applying again. When you apply for a credit card, usually, a “hard inquiry” will be placed onto your credit report, and this causes your credit score to drop slightly. Unfortunately, this inquiry can remain on your credit report for three to six years.
Get a Registered Retirement Savings Plan (RRSP)
- Once you have been through the bankruptcy process, if you didn’t already have an RRSP, then it’s a great time to invest in this plan. Try to put more of your savings towards your RRSP regularly, and you will see a better income tax return when tax season rolls around. The more you contribute to your RRSP, the better your income tax return will be.It is always good to have an asset to list on your credit application.
When you’ve made it through the bankruptcy process, it’s time to pick up the pieces and start over, which means it’s time to start making smart financial decisions and avoid ending up in debt ever again. Part of the rebuilding process involves improving your credit score, which can take some time to do. As long as you are not spending excessively, sticking to your budget, and making payments on time, you will see a slow and steady improvement in your credit score over time as well.
Sometimes, reaching out for help can be the best way to stay on track, and at Kevin Thatcher and Associates, we’re here to provide you with the financial advice and support you may need during this time. Our team of friendly professionals can help you find ways to restore your credit score after bankruptcy. Call Kevin Thatcher and Associates today at 1-888-329-5198 to book your free consultation or visit our website here to learn more about what we have to offer.