What about my credit score in bankruptcy or a consumer proposal?

One common concern when it comes to addressing debts through an insolvency is the effect that a bankruptcy or a consumer proposal will have on an individual’s credit score.  The effect of an insolvency on a credit score is significant; however, with a little patience and work, credit scores can be rebuilt.  If you are considering your financial options and are concerned about the effect on your credit score, there are three important questions to ask yourself:

  1. What is the purpose of having good credit?
  2. How much is your credit score worth to you?
  3. Can you rebuild your credit?
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1 – What is the purpose of good credit?

There are a variety benefits to having a good credit score.  It can increase your chances of having a loan or credit card approved; or may affect your ability to secure rental accommodation.  Arguably the biggest benefits come through lower interest rates and reduced requirements for deposits for utilities and telecom services, etc.  A lower interest rate on a car payment or mortgage can save thousands over the lifetime of a loan.  In a nutshell, the main purpose of a good credit score is to save you money

2 – How much is your credit score worth to you?

Given that the main purpose of a good credit score is to save you money, it makes sense to check and see if that is what it is doing.  You can maintain a good credit score by making the minimum payments each month to your creditors; however, in most cases, a lot of this payment is going towards interest, not paying down your debt.  The Government of Canada provides a credit card payment calculator that can help shed light on the cost of maintaining your credit score (https://itools-ioutils.fcac-acfc.gc.ca/CCPC-CPCC/CreditCardPaymentCalculator.aspx?lang=fra&lang=fra).

Consider the following case:

Susan has $30,000 in credit card debt and is only able to pay monthly minimums totaling $750.  At typical interest rates, she would need to spend approximately $45,000 over seven years to satisfy her debts. Susan’s good credit score is supposed to be saving her money but instead it is costing her almost $15,000.

3 – Can you rebuild your credit?

Yes!  While insolvency will damage your credit score in the short term, it is possible to completely rebuild that credit score after you complete your insolvency.  Insolvency is not the end of credit!

Credit impacts – Bankruptcy vs Consumer Proposal:

Bankruptcy – Bankruptcy results in an R9 rating on your credit bureau.  Ratings go from R1 (pays on time) to R9 (bankruptcy/bad debt).  This has a serious effect on your credit score.  Your first bankruptcy filing affects your credit for duration of bankruptcy proceedings (9 to 21 months) plus 6 years.  Subsequent bankruptcy filings will affect your credit for at least 24 months plus 14 years.    Once you have been discharged from your bankruptcy, you can begin rebuilding your credit.

Consumer Proposal – Proposals result in an R7 rating on your credit bureau.  While not as bad as the R9 of bankruptcy, this will still have a significant impact on your credit score.  Proposal filings affect your credit for 6 years from the date of filing or 3 years from the date of completion, whichever comes first.  Once your proposal has been accepted by your creditors you can begin rebuilding your credit.

Rebuilding your credit

The good news is that building your credit score up is straightforward and you have already done it at least once in your life.  Responsibly using (and paying off!) credit each month is all that is required to build your credit score.  After a bankruptcy or proposal, most people start off with a secured credit card and use that to build toward other forms of credit.  This process does take a bit of time and effort; however, there is no reason that you cannot regain your excellent credit rating from before your insolvency.

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Conclusion

If you are struggling to make ends meet due to your debts and are hesitant to talk to a Licensed Insolvency Trustee because you are concerned about your credit score, take a moment to see what the real financial cost of servicing that debt will be.  A good credit score is just one aspect of your overall financial health.  If maintaining that score is preventing you from working towards other financial goals or causing you financial stress,  it may be time to contact us for a Free Consultation.