Life after bankruptcy - How to start over
February 22 2017
What you'll learn
- How to react to a bankruptcy
- How to start over
- The aftermath of bankruptcy
- How to recover from bankruptcy
There are two ways to deal with a bankruptcy: cry about it, or start looking ahead.
50 years ago, declaring bankruptcy was a shameful thing. You had not only failed your creditors, but the strict moral code governing Quebec society. Even today, the word “bankruptcy” is often associated with “failure”, “disaster”, “catastrophe” … In a society where success and performance are king, declaring bankruptcy is a major trial to go through. But you don’t have to see it that way.
Each year, approximately 25,000 people in Quebec declare bankruptcy. For most of them, this event is foremost a relief and a learning experience. Bankruptcy is above all else a means to escape your debts, and your angry creditors.
Why a relief? Because if financial distress lasts for years, your mental and physical health are sure to be affected. Experts say that tightening your belt for over five years in order to pay your debts makes little sense from an economic standpoint. If you have no assets to protect (your RRSP and employee pension are not subject to seizure, save for some exceptions), bankruptcy is probably the logical solution.
Technically, once you declare bankruptcy, a trustee in bankruptcy will deal directly with your unsecured creditors, and all salary garnishments and legal proceedings are suspended. After a period of time, the trustee will sell your seizable assets and liquidate your savings (except for your RRSP). The proceeds from this sale will go towards reimbursing your creditors. Many bankrupts must make overpayments for a certain amount of time, which usually amount to 50% of any net revenue over $200 per pay period.
Then, the trustee occasionally calls for a creditors' assembly. Your presence is mandatory. You are also legally obligated to attend two training sessions on the causes of your bankruptcy and the way to handle your personal finances going forward. Discharge usually comes ten to twenty months after declaring bankruptcy.
Most bankrupts no longer view money, credit and debt in the same light. They have learned to live within their means and, most importantly, to create and follow a budget. Contrary to popular belief, even if the word “bankruptcy” is written in bold letters on your credit report for the next six years, that doesn’t mean a potential creditor will refuse to trust you. In fact, it may be quite the opposite!
Most bankrupts manage to rebuild their credit after two years, the minimum period required by lenders. Why is that? Someone who has filed for bankruptcy starts over with a clean slate. Their debt ratio falls to zero, and most importantly, they are often traumatized by the experience, which can be a powerful incentive to be more financially responsible. But in order to avoid the same pitfalls, bankrupts do need to make significant changes to their lifestyle and consumption habits, the support of relatives, and sound advice from trained professionals.
That being said, most bankrupts will find it hard to get credit in the first year following their bankruptcy. This can be a painful situation, as it makes securing a place to live, or services such as electricity, cable, and other services very difficult.
Getting back to normal
One of the best ways to get back up is with a little help from your friend (or spouse, or family member). This person can agree to cosign your application, or take full responsibility for your account with the supplier. This last option is less than ideal, however, since it only delays recognition of your newfound probity by the credit bureau. A cosigner is definitely the way to go, even if only for a few months.
After a bankruptcy, opening up a new bank account may prove difficult. Your institution will most likely place a hold on all your checks for a few days (excluding government-issued checks and paychecks), and will be reluctant to provide you with a checking account.
The best way to rebuild your credit is to borrow once more, as soon as possible. You will then place the borrowed amount in a single option, such as an RRSP loan or a GIC. In the case of the GIC, the financial institution will freeze your investment and retain the certificate as collateral. If you make your payments regularly, you can quickly rebuild your credit. Take a look at our article to find out how to determine your borrowing capacity.
The same technique can be applied to obtaining a credit card. The bank can keep a certain amount; say $500, as collateral, which will serve as your credit card limit. After a year, you can ask for your collateral to be returned, or increase your credit limit.
You can purchase a house or a condo once more after declaring bankruptcy, thanks to a rent-to-own program. This establishes a purchase price for the property once the lease ends. The amount you pay in rent can be carried over, either partly or entirely, to a down payment. The rental period gives you the time to find a lender and show how serious you are if your rent is always paid on time. The landlord-seller can, however, require a deposit as collateral, which can also serve as a down payment when purchasing the property. This deposit will have to be done through a bank draft or deposited in a notary’s trust account.
Lastly, when you declare bankruptcy, your credit rating falls to R9 (the highest rating being R1). Each year after your discharge, if you’ve made a focused effort to rebuild your credit, contact Equifax and Trans-Union to see your credit report (it’s free). Studies show that up to 25% of their records have inaccuracies. If that’s the case for you, contact your financial institution and your creditors so they can set the record straight with the credit agencies.
- In case of a bankruptcy, Hydro-Québec cannot cut off your power, and your balance will be restored to zero. If your power has been cut off and you have declared bankruptcy, Hydro-Québec has no choice but to reconnect you; they can, however, demand a deposit equal to two months of service.
- In case of a bankruptcy, an auto lender cannot reclaim a vehicle if it is essential to finding a job or maintaining basic revenue, or if public transportation is deemed inadequate.
- Bankruptcy legally frees you from any debt you had incurred at the time you declared bankruptcy (aside from alimony, money owed to welfare assistance, money owed to student loans taken out up to seven years prior to bankruptcy, court-ordered fines or tickets).
- You will keep most of your furniture, clothing and toys.