I recently got a question from a reader who was discharged from his bankruptcy about two years ago, and his wife about one year ago. Despite money being tight at the end of the month, it sounds like they’ve done OK to get some new credit after their bankruptcies were discharged. They’ve got some equity in their home now, so it sounds like they were allowed to keep their home when filing for bankruptcy because there was little to no equity in it at the time of filing for bankruptcy. Or, they got an “after bankruptcy mortgage.” Those details were not provided.
Using Your Home As An ATM/ABM?
However, they would like to tap into the equity in their home to take care of a significant Revenue Canada bill and clear up the balances on their credit cards. My first thought is that being proactive, rather than reactive may have helped to avoid being in this situation. Many experts warn people not to take the easy route and use your home as a convenient ATM (Automated Teller Machine) or ABM (Automated Banking Machine).
Being Self-Employed and Owing Tax Money To Revenue Canada
The gentleman mentioned that he’s self-employed. I know what that’s like. Been there, done that. Unlike regular salaried employees who sometimes get a tax refund upon filing their tax return, self-employed folks usually have to set aside tax money and submit it, as it’s not taken off a paycheque. It could also be sales tax money collected on all sales made. Again, that information was not provided to me, but it’s really not that relevant.
Sometimes, you learn things the hard way, like not setting aside money each month for Revenue Canada and then being hit with a big bill from the CRA (Canada Revenue Agency). Trust me, I know what that’s like. I made that mistake myself. As for the credit card balances… maybe they ran into tough times and had to charge living expenses to the credit cards. It can sometimes take a while to pay those balances down, especially when interest payments keep adding to the balance.
But, enough about being proactive. Sometimes we need to be reactive. What’s done is done and these folks need to deal with the current situation. It should go without saying to at least be making the minimum payments on the credit cards and contacting Revenue Canada to make payment arrangements. Don’t ignore it!
Turned Down Before, Should We Try Refinancing Again?
In a word, no. That’s my opinion. The gentleman who wrote in mentioned that they previously tried refinancing the home to tap into some of the equity and use it to pay down debts. Unless the situation is dire, I would personally avoid that. And I have to wonder how they got into a financial pinch so quickly after being discharged! I don’t know exactly when the first attempt to refinance the home was made, but at most, it was two years ago.
Unless there were some unforeseen circumstances or an emergency, I would hope that people who have been through a bankruptcy would have learned something about living within their means and being a good money manager! Extenuating circumstances aside, either expand your means by finding a way to earn more money and learn how to manage the money you have! Although not written for ex-bankrupt Canadians, there is a lot of useful information in the book I reviewed a few months ago “Debt Free Forever” by Gail Vaz-Oxlande, Canadian author and host of the reality TV show “Till Debt Do Us Part“. It’s geared at non-bankrupt Canadian consumers who are trying to get out of debt, but could apply to those who have quickly amassed new debt after being discharged, as well as many useful tips on getting ahead, bankrupt or not.
But back to the original question, should he refinance his home or not? I suggested he not refinance. First of all, the chances of getting refinanced with a recent bankruptcy and with our economy still in a fragile state has many lenders tightening up their credit guidelines. Getting a second mortgage, or refinancing is challenging enough for non-bankrupt people in this economy, let alone for someone with a recent bankruptcy.
It’s Not As Easy As It Used To Be
Prior to the economic downturn, which hit the United States much harder than Canada, getting credit was a lot easier. Just about any Canadian lender I’ve approached for any sort of credit, even SECURED credit, is hesitant, or not likely to extend credit to anyone with a bankruptcy appearing on his or her credit report. Yes, you can get turned down for a secured credit card where you put up a security deposit for the amount of the line of credit you want. Unless things have drastically changed recently, no bank will approve a secured credit card for anyone with a bankruptcy. They want you to wait 6 years until it falls off your credit reports (Home Trust and Peoples Trust are two secured cards an ex-bankrupt Canadian could get).
Without having a crystal ball or psychic powers, I have no way of knowing what the banks’ policies will be like in a few years. But at this time, it’s pretty darned near impossible for a recent ex-bankrupt person to get any secured or unsecured credit from a Canadian bank. Even if it’s secured by real estate.
Of course, I’m not in a position right now to finance or refinance a home, so I am not speaking from experience this time. I actually contemplated not answering this question since I don’t have personal experience with a second mortgage or refinancing a home in 2011 with a recent bankruptcy. But I do know A LOT about the likelihood of ex-bankrupt Canadians getting any sort of credit these days. And I thought that there are probably at least a few other Canadians in this situation who were wondering about this.
Ask Before Applying For ANY Credit Or Refinancing
You should be 99.9% sure that you will be approved before submitting any sort of credit application. Better yet, be 100% certain if possible. I’ve written about this before in several articles here on the “After Bankruptcy Canada” website. Ask, ask and ask again what a lender’s policy is towards towards someone with a bankruptcy appearing on his or credit report. It doesn’t matter what kind of credit you are seeking, ALWAYS ask first, before applying. Better yet, ask several times until you get the same answer at least three times. Some employees will guess or are misinformed. And credit guidelines change. You may be reading this months or years after I wrote the article and the lending environment could be a lot, or at least a little bit different.
Before I obtained any of the secured or unsecured credit I have in the (almost) three years since my own bankruptcy was discharged, I ALWAYS asked about the credit guidelines and how they apply to people discharged from a bankruptcy. If I couldn’t get an answer, or didn’t get a good answer, I moved on to find someone else. To date, the toughest challenge I’ve encountered was getting a car loan. Ironically, it’s sometimes easier to get a mortgage than a car loan, or so I hear.
Is This Overkill?
Why should you care about asking what your chances are before applying? After all, some employees will just say “apply and then you’ll find out.” Obviously! But what many people don’t know is that each time you make a credit application, where YOU initiate the inquiry, it’s called a “hard inquiry” that stays on your credit report for 6 years and will have an immediate negative impact by lowering your FICO score a few points. Having your credit score isn’t such a big deal if you get approved for the credit. Within a few months, you should be able to build it back up and maybe even exceed your old credit score.
But if you are declined for the credit you are seeking, you end up with a slightly lowered credit score and an inquiry that will show up on your credit report(s) for the next 6 years! In the case of the gentleman who wrote in, if he applies for the refinancing again, and is refused, it will show both inquiries. Soon he will look like a credit seeker. Other lenders will see that he’s been trying to get credit and keeps getting turned down. That may lead other lenders to be cautious and also turn him down.
So, before you apply for that refinancing, ask about what your chances are before submitting that application. If a lender won’t tell you, or at least give you a reasonable non-committal opinion based on his or her professional opinion, run don’t walk and find another lender! Again, I am personally not in the position to finance or refinance a home myself at this time, so I cannot speak from personal experience on this issue. Normally I prefer to write about credit issues on life after bankruptcy in Canada that I have personally experienced. If anyone else has experience with this, please contact me and I will be happy to write an update to this article.
Another option to explore – and I would do this if I were in need of refinancing a home after a recent bankruptcy – is to ask several mortgage brokers. Banks probably won’t touch you – in this economy, they typically don’t want to take a chance on someone who’s been bankrupt in the last 6 years. But a mortgage broker may be able to find a lender who will refinance a house. But please, don’t let them take advantage of you with outrageous interest rates! There are probably some lenders out there who will refinance a home for an ex-bankrupt Canadian, but just be sure it’s not going to cost you more than paying your debts as they are now. Better yet, be proactive and don’t let yourself get into a cash crunch that you may think forces you to refinance your home, or sell a priceless family heirloom or your car.