It is a popular misconception that if you go bankrupt you will never again be able to purchase a home. The reason for this misconception is that a bankruptcy has a negative impact on your credit report, and therefore with “bad” credit you won’t be able to qualify for a mortgage. I have two responses to that assertion.
Credit Capacity
Even those with a good credit score may not qualify for the mortgage they want. The reason for this is something called credit capacity which is simply the amount of debt a person can assume and repay based on financial ability. This ability to pay is based on your existing debt payments as a percentage of your income.
Is your credit good enough now that you can qualify for a mortgage to buy the home of your dreams? If you have a lot of debt, you probably can’t get a mortgage now, so filing bankruptcy can’t make matters any worse.
In many cases declaring personal bankruptcy makes it easier in the future to qualify for a mortgage. Why? Because if excessive debt is holding you back now, and filing for bankruptcy eliminates your debt, as a debt free person you will be more likely to qualify for a mortgage.
Credit Score
Filing bankruptcy eliminates most of your unsecured debts, which is good, but declaring bankruptcy also puts a note on your credit report that says you went bankrupt, which is not positive. As you can see, it’s a balancing act: you want the good on your credit report (no debt after bankruptcy) to have more weight in calculating your credit score than the negative implications of going bankrupt.
Once you have filed bankruptcy to clear your debt, then you can take steps to rebuild your credit. Pay all of your monthly bills on time, start saving money, and when you have some cash saved consider getting a secured credit card or take out a small loan that you can repay quickly to re-establish your credit.
The second most important strategy to improve your credit score is time. The farther in the past your bankruptcy is, the less negative impact it will have on your credit report.
Here’s another little known fact: while Equifax reports a first time bankruptcy on your credit report for six years after discharge, most mortgage lenders want you to be “clear” of your bankruptcy for only two years before they will consider lending to you on favourable terms. So, if you can takes steps to rebuild your credit and save for a down payment during the first two years after you are discharged, there is a high likelihood that you will be able to qualify for a mortgage.
Yes, you can go bankrupt and purchase a home, but whether or not you can qualify for a mortgage, and how quickly it will happen, will depend on your efforts to rebuild your credit and save for a down payment.
I went for a joint preapproval, with my brother, after 2 years bankruptcy discharge. My brother had the DP and perfect credit. Mine is almost at 700. We were going in with both our incomes totalling 95000/year. I own my car outright, and a GIC RRSP. Even though I have rebuilt my credit after bankruptcy discharge via an unsecured Capital One credit card,(and its only going up), the “lender” only gave it to my brother. Regardless if you have shown that you pay your bills, and you have a DP, it is at their discretion. Also, on the credit report thru a broker, he found that Equifax is lazy at reporting proper information and was inconsistent and doesn’t really show a true report, however Trans Union is more concise. Just so you know…don’t pay the 14 bucks a month online to monitor your credit, its just a cash grab, not to mention a BIG waste of credit dollars, I’m speaking of experience. Just request the credit companies for a copy via mail FOR FREE. Thanks!
…what the bankruptcy trustee wont tell you… is that for qualifying for a mortgage thru a “Traditional” lender AKA the major banks, after bankruptcy discharge, you need 2(TWO) credit accounts history for 1 YEAR. Not just one type of credit for 2 TWO years like I had.
Apply for the first one immediately after discharge, then 6 months later, go to somewhere like Canadian Tire/ PC Financial/ Walmart stores, NO BANKS, to apply for the 2nd credit card…AND PAY IT OFF AS SOON AS POSSIBLE WITHIN 30 DAYS OF USING IT IN ORDER TO NOT TO INCUR INTEREST CHARGES( money in their pockets) AND BEFORE THEY NOTE ANY LATE PAYMENTS ON YOUR CREDIT REPORT.
Hi Jackie. You are correct, it is important to keep a close eye on your credit reports, but you can do it for free; no need to pay the monitoring fee. You are also correct that it is entirely up to the lender whether or not they choose to lend, based on their own rules. You are correct that a second source of credit (another credit card or loan) significantly improves your chances of qualifying for a mortgage, and I agree that it’s important to not incur a lot of debt to accomplish that.
Bankruptcy is trading some of your assets and in return your debts are forgiven. It may be caused due to change of lifestyle, gambling, job loss etc. But all these can be sorted before it lands up in legal hands. Rightly said once you are done with bankruptcy, try to clear all your debts as soon as possible. Save money, pay your bills on time and with the saved money, get a secured credit card or take a small loan, so that you can repay quickly to re-establish your credit. I too have heard that even if you are bankrupt, you can buy a home.
Can you buy a car after being bankrupt? How long before you would qualify for a car loan from a car dealership?
Hi Krista. Yes, you can buy a car while bankrupt, or after being bankrupt. Many car dealers will deal with you, but they will often charge a higher interest rate during the first two years after bankruptcy, unless you have a significant down payment, or have taken other steps to rebuild your credit.
My final payment for the discharge from my bankruptcy was in Feb 2020. The discharge papers were filed but never signed due to the pandemic because the courts in Ontario were closed.
I sold my home in August of 2020. Apparently there was a lean put on my home by A Farber (bankruptcy company). That lean should have been removed on discharge.
Following the sale of my home A Farber took an additional amount of $100,000.00.
If the Covid pandemic had not have happened, the discharge would have been signed. Since the debt was fully paid there should not have been any further action to the bankruptcy.
How do I go about getting that money returned to me?
You really need to speak to a lawyer. A. Farber would have registered on title when you filed for bankruptcy and they would be entitled to your share of the equity in the home at that time. If there was no equity then they might not be entitled to anything. They might also argue that the house increased in value during your bankruptcy and as such represented an “after-acquired asset” (this is a technical term that means something you obtained after you filed). Your creditors are also entitled to after acquired assets.
If you have already gone to speak to A. Farber and still have questions then the next step is to hire a lawyer to look into this for you. Sorry.
What kind of lawyer should I talk to?
An “insolvency lawyer” – one that is familiar with bankruptcy law in Canada.