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- Is Bankruptcy Always Worse For Your Credit Than A Consumer Proposal?
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One of the main things people worry about when considering bankruptcy is what it will do to their credit rating. This is a legitimate concern, as bankruptcy gets reported as a negative item on your credit report. The effect on a person’s ability to obtain credit is something we always take into account when helping individuals figure out the best solution for their debt problems.
We often hear from people that they don't want to consider bankruptcy due to concerns about the impact on their credit. Usually they prefer to make a Consumer Proposal because they believe it will be less destructive to their credit rating. However, as we discussed in a previous blog, bankruptcy’s impact on a person’s credit rating isn’t always the most important consideration, for several reasons. In fact, in some cases bankruptcy’s negative impact on a person's ability to obtain credit is not worse than the impact of a Consumer Proposal or other options.
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Here are some reasons for this:
A Consumer Proposal often shows up on your credit report for almost as long as bankruptcy
According to the Government of Canada’s website,both Equifax and TransUnion (Canada’s two large credit reporting agencies) remove a bankruptcy from your credit report 6 years after the date you're discharged if you file a bankruptcy in Alberta. (This is for a first-time bankrupt; if you declare bankruptcy more than once, the bankruptcies will appear on your credit report for 14 years.)
Depending on your situation (most importantly, your level of income), you may be discharged from bankruptcy just 9 months after you file. In this case, the bankruptcy will show up on your credit report for 6 years and 9 months.
On the other hand, Equifax and TransUnion remove a Consumer Proposal from your credit report either:
- 3 years after you finish paying the proposal off, or
- 6 years after you fie the proposal (whichever is sooner).
Most people who make a proposal are making payments for five years, so it shows up on their report for six years. Therefore, a bankruptcy may only stay on your credit report for 9 months longer than a Consumer Proposal.
The impact of having a Consumer Proposal show up on your credit report can be the same as having a bankruptcy show up
In Canada, a Consumer Proposal is reflected as an R7 on your credit report, along with certain other debt solutions such as a consolidation order or a debt management program. A bankruptcy is reflected as an R9, along with debts written off or sent to collection.
While an R9 is worse for your score than an R7, the practical impact is often that either one will seriously impact your ability to obtain credit, or to get offered affordable interest rates. The impact will depend on the lender, but some may view them as essentially being equally bad in terms of their willingness to lend to you.
A bankruptcy often shows up as “completed” before a Consumer Proposal
Once you've been discharged from bankruptcy or completed the payments under your Consumer Proposal, this information will be sent to the credit reporting agencies and they will update the report to reflect the completed status.
Many lenders look favorably on a completed insolvency when it is coupled with other good news on your credit report or credit application (such as new credit being used carefully, and a high enough income to support the level of debt being sought). In fact, we've heard from multiple mortgage brokers that it is possible to get approved for a mortgage with a good interest rate within a couple of years of completing an insolvency. In other words, the lender may overlook the bankruptcy or Consumer Proposal that's still showing up on your credit report if you've shown that you’ve done all the right things to improve your relationship with credit.
Individuals are often able to complete a bankruptcy before they can complete a Consumer Proposal. A first time bankruptcy usually lasts 9 months to 21 months. On the other hand, many creditors will only approve a monthly-payment-style proposal (as compared to a lump-sum-style proposal) if it provides for payments for five years. Therefore, if you're able to obtain good credit within 2 years of completing an insolvency filing, it may be that you can essentially move on from a bankruptcy sooner than a Consumer Proposal.
There are many reasons why a Consumer Proposal may be a better option for an individual than bankruptcy. One of these is that the Bankruptcy and Insolvency Act contains provisions that can prevent a person from getting discharged from bankruptcy if they had the means and stability of income to make a proposal to their creditors but chose not to. We are certainly not advocating to file a bankruptcy when a viable proposal is a good option for you.
However, depending on the situation, concern about the credit report impact alone may not be a sufficient reason to choose a Consumer Proposal (or other option) over bankruptcy, when other factors are considered. It’s important that any individual considering an insolvency filing seek the advice of a Licensed Insolvency Trustee to determine the best solution for their situation.
Charla Smith & Company is a Calgary-based Licensed Insolvency Trustee, serving the southern Alberta region. We regularly help individuals review their options for dealing with overwhelming debt, including determining whether a bankruptcy or a Consumer Proposal is the right option. If you'd like to explore these options, please reach out to us.
Disclaimer: This publication provides general information and should be seen as broad guidance only. The information contained herein cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon this information without obtaining specific professional advice relating to your particular circ*mstances. Charla Smith & Company Ltd. does not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.
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Frequently Asked Questions
Licensed Insolvency Trustees (or LITs) are the only people who can provide bankruptcy or Consumer Proposals as an option for dealing with your debt. They are uniquely qualified to provide these services and give you advice about your debt. For more information, see our blog post:What is a Licensed Insolvency Trustee?
Absolutely. A Licensed Insolvency Trustee can talk to you about an array of options, including aConsumer Proposal. There may be some options that are not realistic for you, based on your situation. A Licensed Insolvency Trustee will meet with you and go over the options, helping you figure out which options are realistic for you and which one is the best to deal with your debt. Contact us to book a meeting to find out more.
A Licensed Insolvency Trustee is your best resource to discuss whether a Consumer Proposal is right for you. For general information on Consumer Proposals, check out our Consumer Proposal page. However, the best way to find out what a Consumer Proposal would look like for you is to book a free consultation with a LIT.
Often no one finds out unless you tell them. Most bankruptcies do not have to be advertised in the newspaper and, while any bankruptcy filing goes on the public record, someone would have to search for it (and pay a fee) to find that record.
Reach out to us. You can make an inquiry directly from our website byclicking here, or you can call or text us at 1-403-899-3890. We will respond quickly, and work with you to find a good time for the meeting.
Sometimes it helps to know how much your creditors would get in a bankruptcy, as this can help you figure out what a fair settlement with your creditors looks like. The amount your creditors could expect to receive if you made a bankruptcy filing is very much dependent on your situation.
A Licensed Insolvency Trustee will review your assets, debts, income, and family situation, while considering the applicable provincial laws about exempt assets, in order to determine what impact bankruptcy would have on your creditors. Be careful taking advice from anyone else about bankruptcy – only a Licensed Insolvency Trustee can provide bankruptcy filing services, so they have the training and experience to provide information you can rely on.
For more details on the features and benefits of Bankruptcy,visit this pageor contact us.
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