After Bankruptcy in Canada: How to Rebuild Your Credit
July 27th, 2009 by A Licensed Insolvency Trustee
One of the most common reasons for not wanting to declare bankruptcy in Canada is the fear that you will never be able to borrow again. Of course owing more money than you can afford to repay is the reason you file bankruptcy, so finishing a bankruptcy and then running out to get more credit is not generally a good idea. But, in today’s society, most large purchases, like buying a house or a car, are done with credit. So what’s the secret to rebuilding your credit after bankruptcy.
After Bankruptcy Credit Repair: The Only Trick You Need to Know
Understanding how to repair your credit after bankruptcy is quite simple: you only need to concentrate on one technique:
That’s it. The key to rebuilding your credit after you are discharged from bankruptcy is to save money. During your bankruptcy you were probably required to make a payment to your trustee each month. You were required to keep a budget so you know where you were spending your money. Great, now that your bankruptcy is over, keep doing it.
Open a savings account, and each month, or each paycheque, put the payment you were making to the trustee into the savings account. You lived for nine months without that money; keep doing it. Have your bank set it up to automatically take the payment from your chequing account on the day you get paid and deposit the money into your savings account.
After a few months you will have a sizeable amount of money in your savings account. If you can save $200 per month (and remember, once your bankruptcy is finished, you are no longer making payments to the trustee or your unsecured creditors) after five months you will have saved $1,000.
You could take that $1,000 an apply for a secured credit card. You give the credit card company $1,000, and they keep the $1,000 as a security deposit, and give you a credit card with a $1,000 limit. That credit card appears as a credit card on your credit report, so you have now started rebuilding your credit.
Keep saving money, and five more months go by and you have another $1,000 in your savings account. Go to your bank or financial advisor and start an RRSP (if it makes sense in your situation). Make your first $1,000 contribution to your RRSP. Then, ask the bank for a $1,000 RRSP loan. This works best in February of each year just before the RRSP deadline. The bank initially may not want to lend you the money since you were bankrupt a year ago, but since you have started to repair your credit with a secured credit card, and since you have already deposited $1,000 in an RRSP at their bank, they will probably lend you the money.
Because you have made a $2,000 RRSP contribution, you will probably receive a tax refund between $500 and $800 higher than if you had not made the contribution; you can use your refund to repay most of the RRSP loan. Use your $200 monthly savings to repay the rest.
Where does this leave you? One to two years after you are discharged from bankruptcy you will have no debt, a credit card, $2,000 in an RRSP, and an RRSP loan that you have paid in full. Although the bankruptcy will still appear on your credit report, you have now taken steps to rebuild your credit. If you keep saving money you will have a down payment that you can use to purchase a car, or even a house.
Want to learn more? Read about steps to take to rebuild credit after bankruptcy, and read the posts in the After Bankruptcy section of the Bankruptcy Canada Blog for more information.
There is life after bankruptcy, and it starts with a disciplined approach to saving money.