May 9, 2024
Getting credit during a consumer proposal or bankruptcy isn’t easy, but it can be done. We examine how each of these impacts your credit score and how you can recover it.
Fear of what will happen to their credit rating is one of the many reasons people worry about filing for bankruptcy or a consumer proposal. We understand it’s a scary thing to think about.
We also won’t deny that filing for either will impact your ability to use credit. There are ways to begin to build credit while going through each process, however. It is even possible to finish each process with a better credit score than you had going into it.
Bankruptcy and consumer proposals are two different legally protected ways for individuals to seek debt relief. Both differ in a variety of ways. Here’s a very simple explanation.
A consumer proposal is a legally protected agreement between you and your creditors to pay back part of your unsecured debt while removing the remainder.
It allows you to keep all your assets, such as your car and home, while reducing the amount of unsecured debt you owe by up to 80%. It also reduces your monthly payments dramatically.
Unsecured debt is debt that is not backed by an asset. Credit cards, payday loans and personal loans are examples of unsecured debt. Car loans and mortgages cannot be included in a consumer proposal, but a Licensed Insolvency Trustee can help you review so you understand how they can be handled.
So, if you have $25,000 of unsecured debt, a consumer proposal once negotiated, will allow you to only have to pay back a percentage of that debt, which you pay over an extended period of time. A consumer proposal can last up to five years and many people choose to pay it off early
A stay of proceedings is automatically issued when you file a consumer proposal. This stops your creditors from suing you, garnishing your wages and prevents debt collectors from contacting you.
Only a Licensed Insolvency Trustee can file a consumer proposal for you.
Learn how a consumer proposal can reduce your debt by up to 80%.
Learn all about consumer proposalsBankruptcy allows a person to wipe the slate clean. In simple terms, you surrender your assets, and in exchange, you have your debts removed. Secured debts, such as a car loan or mortgage, can be included in a bankruptcy.
Like a consumer proposal, declaring bankruptcy issues a stay of proceedings, which stops creditors from taking legal action against you and garnishing your wages. It also stops debt collectors from calling you.
A first bankruptcy process takes between 9 and 21 months, depending on your situation. Again, only a Licensed Insolvency Trustee can file a bankruptcy for you.
Let’s look at how credit is measured. TransUnion and Equifax are the two main credit reporting agencies in Canada. These agencies rate your credit accounts on a scale of 1 to 9. In this case, R1 is the highest and R9 is the lowest. Credit scores are measured on a scale between 300 and 900, 900 is the highest. Filing either a consumer proposal or bankruptcy will affect both of these.
Filing a consumer proposal automatically results in an R7 rating on your accounts listed in the proposal, which indicates you have agreed to make regular payments as part of a debt management plan.
It is also likely to drop your credit score by 100-150 points.
TransUnion will keep a record of the consumer proposal on your credit report for six years from the date it is filed, or for three years after it’s completed, whichever happens first. Equifax will keep a record of it for three years after the consumer proposal is completed.
Filing for bankruptcy will result in an R9 rating to the accounts included in bankruptcy, the lowest rating possible. It can also cause your credit score to fall by over 200 points.
Equifax will keep a record of the bankruptcy on your credit report for six years after it is completed. TransUnion will keep it for seven years. However this retention period can vary by province or territory.
While filing a consumer proposal or bankruptcy affects your overall credit position, it’s likely that before filing a consumer proposal or bankruptcy, your credit rating and score were already impaired.
A strong credit score isn’t necessarily a predictor of your financial health. Sometimes people with good credit ratings and scores must file for bankruptcy for financial relief.
No matter if you have good or bad credit, before filing a bankruptcy or a consumer proposal, remember that it is better to have bad credit and no debt than a good credit rating and unmanageable debt.
A credit rating and score are recoverable during a bankruptcy and consumer proposal.
There are a few different ways that someone can begin to build up their credit score when going through a consumer proposal or bankruptcy.
Recovering credit is a process that takes time. It’s a journey, but with consistent effort and responsible financial behaviour, it’s possible to rebuild your credit and improve your financial standing. Here are a few ways to get credit while going through a legal debt relief program.
A secured credit card is a great way to build credit after filing either a proposal or bankruptcy. After filing for bankruptcy, a secured credit card is really your only option. You must turn over all your credit cards to your Licensed Insolvency Trustee when you file for bankruptcy.
So how does a secured credit card work?
The limit on a secured credit card is backed by money you give the card company as a deposit.
Here’s the process. If you give the card company $500, then your limit on the card will be $500. The $500 deposit is held as a security for payment. If you don’t pay your credit card bill, the card issuer will take the $500 you gave them and cancel your card.
If you pay your bills in full and on time each month, the card company will report this to the appropriate credit bureau, thereby allowing you to begin to establish a good credit history. Establishing a payment history after the date of bankruptcy or consumer proposal will help boost your credit score.
Those who file a consumer proposal can keep a credit card with a zero balance at the date of filing. This will help re-establish credit during the consumer proposal.
Many people worry that filing a consumer proposal will drop their credit card limit, this is not automatically the case.
Filing a consumer proposal does not directly affect your credit card limit but your credit card company could impose you a lower limit after filing a proposal.
The biggest and most important thing about using a credit card when going through a consumer proposal is to make sure you are making your payments on time and in full. Doing so shows the lender you can be trusted to use credit in a responsible manner.
If you consistently pay in full each month, your credit score and rating will improve over time. It does not happen overnight, but it makes a huge difference.
This may not seem as obvious as the other ways of getting credit but hear us out. Building an emergency fund allows you to plan for future costs. It means you can afford to cover things using the money you already have instead of relying on credit.
Using an emergency fund to pay for large, unexpected costs instead of a credit card with money you don’t have helps keep the balance on a credit card low.
This means you keep your credit bills manageable and affordable. It helps you maintain a good record of paying your bills on time and in full.
If you are falling behind on credit card bills and are worried about debt collector calls, speaking to a Licensed Insolvency Trustee can help you find a path forward. Our Trustees offer a free, confidential consultation. They can assess your situation and are ethically bound to act in your best interest when advising what debt relief options are available to you.
May 9, 2024
Getting credit during a consumer proposal or bankruptcy isn’t easy, but it can be done. We examine how each of these impacts your credit score and how you can recover it.
