While going bankrupt is likely not on anyone’s wish list of life experiences, when it does happen it needs to be dealt with to minimize its knock-on effects.
Chief among those is one’s ability to get a mortgage.
“It’s not the end of the world for most people, but they have to know what to do when they’re getting out of [the bankruptcy],” says Chad Riddell, chief operating officer and mortgage broker with True North Mortgage in Calgary.
He breaks it down into a “rule of two, two and two,” whereby a person must be discharged from bankruptcy for two years, and must re-establish two credit lines from the day of discharge.
“If you have all that, you don’t miss any payments, you should be in a position to get approved for another mortgage.”
Those credit lines can be any two of a credit card, loan or line of credit, although lines of credit can be hard to establish for those who have gone bankrupt as the lower interest rates are generally given to clients in good financial standing.
Securing a loan for a registered retirement savings plan can also be a prudent option, in effect killing two birds with one stone. “It helps to re-establish some credit, but it also helps build some savings for you,” says Lee Welbanks, principal broker at Welbanks Mortgage Group in Toronto.
Like Mr. Riddell, he also endorses the two-two-and-two rule but emphasizes that it’s also important to build up some savings as well.
“A lender doesn’t want to look at somebody who’s coming back to the table without sort of learning their lesson,” he says. “They need to re-establish credit and be responsible with it, and they also need to get some savings in place.”
However, not every lender will be open to lending to bankruptees. Some lenders will take a hard-line stance with anyone who has gone bankrupt, but that doesn’t necessarily mean the end of the road. “If the profile is strong, they’ll still look at it,” Mr. Welbanks adds.
Another thing that may help is the amount of down payment being used. Mr. Welbanks lists 10 per cent as the magic number in this situation, saying that the risk of default when a borrower goes from 5 to 10 per cent with their down payment is approximately halved.
As a word of caution, though, those trying to re-establish their credit walk a fine line. Any glitches could prove costly, meaning that it is vital to stay on top of minimum payments to the new credit cards and other loans.
“All it takes is one 30-day late payment to show up on your credit history and you’ve basically blackballed yourself from there,” he adds.
As another word of advice, Richard Moxley, a former mortgage broker and the host of CreditTV.ca, says that while re-establishing credit, preferably with two credit cards in his opinion, it is important to stay under 50 per cent of a card’s limit to show financial discipline.
However, that doesn’t mean that the card shouldn’t be used. Quite the opposite, in fact, as the cards need to be used at least once a month.
“A lot of people think they have to keep a balance to have good credit,” he says. “That’s not true, they just have to use it, whether it’s $5 or $1,000, it doesn’t matter.”
Mr. Moxley also advises any clients who have been discharged from their bankruptcy to get copies of their credit reports from both Equifax Canada and TransUnion Canada and go over them both carefully.
When people go through debt programs, he says, creditors sometimes don’t remove the balance following discharge, leaving mistakes on the credit report.
“What stops a lot of people [from qualifying for a mortgage] is not the fact that they’ve been through a bankruptcy or a debt program, but because their credit report still shows them owing all this money that they legally don’t owe any more,” he says.
Ultimately, though, while it may take a fair bit of work for someone to position themselves to get a mortgage following bankruptcy, it’s important they know that it’s not a lost cause. But it does require some immediate action following discharge.
“Don’t wait until two years down the road when you go to make an application to try and fix it then,” Mr. Welbanks says. “You really need to grab the bull by the horns right after you get discharged and take the right steps.”