Rebuilding your credit after filing for bankruptcy or insolvency is a reality some Canadians will have to face amid heightened uncertain economic times, experts warn.

The number of Canadians who filed for insolvency increased 23 per cent in the third quarter of 2022 compared to the same time last year, the latest data from Statistics Canada showed in November. While there was a slight decline in personal bankruptcy filings, there was a 32 per cent increase in consumer proposals – which is the second last course of action available to a consumer prior to declaring bankruptcy.

“Higher living costs coupled with rising interest rates are now catching up with people who were already drowning in debt,” Andre Bolduc, a partner and senior vice-president of financial advisory services at BDO Canada, said in a phone interview.

As of the third quarter in 2022, the average Canadian owed $1.83 for every dollar of disposable income they made, according to a Statistics Canada report on Dec. 12.

Once someone is forced to file for bankruptcy, it can take anywhere from nine to 36 months for a consumer to come out on the other side of it, Bolduc stated. 

“The first step to slowly rebuilding credit is take on a credit card with a limit of no more than $3,000,” he advised. 

Following this, there are three common good practices to follow if a consumer wants to remain in good credit standing, he added.

“You want to start with building payment history. This shows a future lender if you pay your bills on time and don’t skip payments,” Bolduc said.

The next step is being cautious of how much credit you’re spending.

“An ideal amount of credit utilization is 30 per cent. A consumer shouldn’t spend more than 30 per cent of the credit they have available to them, and if possible they should stay under that limit,” he explained. 

Lastly, the length of your history matters. It will take at least two years of credit history to demonstrate how reliable you are with your credit, he added.

Rebuilding good credit following a bankruptcy claim can be challenging for many people, Matthew Harris, the founding partner of Matthew R Harris Law, said in an interview.

“Once someone files for bankruptcy, it’s not uncommon to see them file a second or third time – each of which will stay on their credit report for longer,” Harris explained.

In order to help keep a consumer out of this pattern, he advises clients to limit their debt use to one credit card with a low balance instead of taking on as many as five cards, which usually leads to the downward spiral.

Another way to rebuild good standing credit is to obtain a credit card only after you’ve saved enough money to pay it off in full, Michael Massoud, the director of finance, analytics and reporting at CPA Canada, said.

“Consumers can also ensure they don’t take any unnecessary hits to their credit scores by setting up automatic monthly payments to their credit card,” he added.

Massoud explained that the ideal credit score for a consumer is generally 660, which places a borrower in good standing.

“Actively reading a personal credit report will help a consumer to know if they’re improving and staying on the right track,” he added.

Another course of action that will make rebuilding credit easier is keeping a budget will help a consumer stay on top of their payments and allow them to save for expenses that they would have otherwise had to put on credit, he said.

“Getting back on your feet after filing for bankruptcy will come down to a number of small wins which will take time to add up,” Massoud said.