Rebuilding your tarnished name

It has taken a while, but you've learned your lesson. You're really sure of it this time. No more trouble with creditors. No more getting into financial trouble.

Whether you're about to be discharged from bankruptcy or you're emerging from a debt-management program worked out with a non-profit credit-counseling agency, there are steps you can take to get your credit rating back in shape:

• Pay your bills in full and on time.
• Contact your creditors if you are having trouble making payments.
• Keep close tabs on the statements for your credit card and bank accounts. Make sure they're correct.
• Deal with companies you know and trust.

If you are going through the bankruptcy process for the first time, you will normally be automatically granted a discharge after nine months. You are no longer obliged to pay your unsecured creditors and you are free to try to start rebuilding your credit rating.

However, it can be a long road.

Before you took the drastic step of declaring bankruptcy, your credit rating was already about as low as it could get. As you emerge, it'll still be down in the dumps. Your credit report will mention your bankruptcy for the next seven years — 14 years if it's your second bankruptcy.

You will have to tell potential creditors that you declared bankruptcy. Now that you've been discharged, you can try to persuade potential lenders that you are now financially mature and will be able to repay any new debt that you incur. However, nobody has to give you a loan.

Staying on top of your credit report may help you avoid credit trouble in the first place. It's good practice to get a copy of your credit report from all three credit-reporting agencies at least once a year and make sure it's accurate.

There are three companies that maintain credit files on consumers. They are Equifax, Northern Credit Bureaus and Trans Union.

If you've ever applied for a credit card, they'll have a file on you. The three companies have files on more than 20 million consumers. Whenever you apply for credit or try to rent an apartment, there's a good chance someone's going to check your file with one of those companies.

Kevin Leonard — an associate professor at the University of Toronto and an expert on the credit scoring industry — says there are errors on between 10 and 25 per cent of those files. Chances are, you don't know if there's a mistake on your file.

"Over 80 per cent of Canadians have never checked their score, and they should. Because some of the information they use to assess your credit rating could be wrong, and that could cost you a lot of money."

Check your rating

Industry Canada says there's no point hiring a company that claims it can restore your credit rating. They can do no more to change the information on your credit file than you can. If there are errors in your credit file, you have the right to make changes — or include a comment. And it won't cost you anything.

If you do have a well-deserved black mark on your file, a credit bureau won't remove it for seven years. A credit repair company can do nothing to persuade any of those credit- reporting companies to delete the fact you declared bankruptcy before the required time limit has expired.

If you've been granted a discharge from your bankruptcy, make sure you send a copy of the order to the credit-reporting agencies and keep all documents relating to your bankruptcy for reference by future lenders.

Perhaps you took action on your spiralling debt before you were forced to declare bankruptcy. You consulted somebody like Linda Wilke at the non-profit Credit Counselling Services of Atlantic Canada. Her job is to chart survival strategies for people drowning in debt. She reviews each client's financial records and then presents options - from selling assets to trimming spending.

"We'll do an eight-week planner — on this payday you can pay this and this and this, as well as set aside half your rent." 

For those in deep trouble, Wilke can help negotiate a debt-management program between the client and their creditors, which involves a ban on credit cards and a detailed long-term plan to repay all of the debt.

"This is a solution, not a Band-Aid. It's not yet another consolidation loan. This is 'you're going to pay it back, every nickel. And you will get out of debt.'  It's a hard road, but there's an end to it. It doesn't go on forever."

As you emerge from the plan, you can apply for a credit card once again, but with a low initial limit — if you can persuade one of the banks to give you one. This will help re-establish a credit history.

It's no surprise to people like economist Roger Sauvé that more Canadians than ever are getting into financial trouble. He says Canadians are piling up debt like never before.

"The average debt load per household is now over $90,000. The average household income — after accounting for inflation — increased by 12 per cent from 1990 to 2008. But average spending per household increased by 24 per cent over the same period."

Of course, it's always best to make sure you never get to the point where you have to consider steps like debt-management programs or bankruptcy. Understanding credit is a good way to start, as are following a few simple rules:

• Don't accept or use any form of credit until you understand and are comfortable with its terms and conditions, to avoid any misunderstandings between you and the credit issuer.
• Don't wait to report any unauthorized transactions on your account. Contact your credit issuer immediately if your bill includes items you did not buy.
• Don't go over the credit limit on your credit card.