This is easily one of the most common questions someone asks when considering declaring personal bankruptcy. And, as with most things in the insolvency world, the answer is “It depends”.
What does it depend on you ask?
To answer that, we need to take a step back and talk about “Credit Worthiness”. There are actually three factors that affect ‘creditworthiness’.
- Your credit report/score
- Your debt ratio
- Your income or job stability
Most of the time, when someone asks how bankruptcy will impact their ability to get credit, they are referring to their credit score.
So, let’s start there….
Your Credit Score and the impact in bankruptcy
Two things impact the effect bankruptcy has on your credit score:
- Where your score was at the time of filing for bankruptcy, and
- What you do AFTER bankruptcy to improve your score
A quick summary of credit scores….
They range from 300-900. 300 is bad. 900 is good. At the time of bankruptcy, you could have a very low score if accounts have been delinquent and/or in collections. Or, you could have a reasonably high score if you have been keeping your payments up to date and have not maxed out your credit.
Generally speaking, most people are in the 4-500’s after they declare bankruptcy. The minimum range a person should strive for is 650-700 and anything above 700 starts to put you in a good position to obtain credit at a decent interest rate.
How do you get your score to increase?
Another great question! Well, you first have to stop the negative reporting. Bankruptcy effectively does that as the accounts are either inactive or closed when you declare bankruptcy (or once you are discharged). However, and this is a big however, you need to ensure creditors have stopped reporting your accounts as delinquent and that all creditors (including collection agencies) have been notified. Often it takes several calls to a creditor to ensure they have updated things properly.
Next, you need to get some type of “good credit” back on your report. This requires using new credit after the date of bankruptcy. In some cases, you can get credit while you are in bankruptcy – a car loan, for example, or a secured credit card. In other cases, you may have to wait until you are discharged from bankruptcy (which can be beneficial in the case of a car loan, for example, as the interest rates should be lower once you are out of bankruptcy).
The good news is that secured credit cards are relatively easy to get with paying a deposit down. The key, of course, is to ensure you make your payments on time and that you limit the balance you carry, or simply do not carry a balance, to decrease your interest costs. Because, as you can imagine, interest rates will be high.
Two more notes on this before we move on:
- Banks will generally not give credit until you are out of bankruptcy for a number of years
- Secured credit cards come with an annual fee
Your Debt Ratio is the amount of debt you owe to income. In a bankruptcy scenario, your unsecured debt is released. Therefore, the simple act of declaring bankruptcy improves your debt ratio because you owe less money. Going forward, you want to be very careful not to build up too high of a debt ratio.
Tip: Do not go by lenders versions of what percent of your income you should be able to handle in debt payments. Use your own formula based on your lifestyle and income/expense situation.
Job Stability/ IncomeYou need to have a steady, suitable income and you should meet employment guidelines (ie. employed for at least a year, or two years, or self-employed statements for a number of years, etc.).
In summary
Your ability to get credit is impacted by three things. And all three need to be strong in order for you to qualify for credit.
You need to have a good, strong credit score. You need to have a low debt ratio and you need to have job stability and suitable income.
Take one away, and you will have a difficult time obtaining credit.
Having said that, if anyone has not noticed, getting credit is not really an issue these days. Where the banks won’t give you credit, a second or third-tier lending place will. With a hefty price (high-interest rates) of course.
So, my final piece of advice: don't be too keen to jump back on the credit bandwagon. Take your time, do your research, consider what you need credit for and when. Take the steps necessary to improve your credit score while paying the least amount of interest possible (ie. a secured credit card) until your score is where it needs to be for you to qualify for a lower interest cost.
Wishing you all happy, healthy finances!
Mary Ann Marriott, LIT, CIRP
Allan Marshall & Associates Inc. Servicing Halifax and Bridgewater, NS maryann@wecanhelp.ca