A lot of people are concerned about how filing for bankruptcy or consumer proposal will affect their credit rating. It’s a common misconception that these legal processes permanently damage your credit. This isn’t true. Rebuilding credit after bankruptcy or consumer proposal is certainly possible. The goal of bankruptcy is to provide you with a legal process that makes it possible for you to eliminate much of your debt (and, for many people cases, all of your debt) and get a fresh start. Therefore, rebuilding your credit rating is not just possible, but an important part of the process. When you file for bankruptcy or consumer proposal, you are required to attend two financial counselling sessions. In these sessions, you will learn financial and money management tips that will help you avoid financial difficulties in the future. You will also learn what you can do to improve your financial situation and rebuild your credit rating after you have completed your consumer proposal or been discharged from bankruptcy.
Consumer Proposal, Bankruptcy and your Credit Rating
When you file a consumer proposal and it is accepted by the majority of your unsecured creditors, a note is placed on your credit report. This note remains on your report for three years after you have completed the consumer proposal. Most proposals are paid off in between one and five years, depending on your situation and the terms of the proposal. However, you are able to pay off your proposal more quickly if this is possible for you. There is no penalty for paying your proposal more quickly.
A similar note is placed on your credit report when you file for bankruptcy. In the case of a bankruptcy, this note stays on your report for six years after you have been discharged from bankruptcy, if it is your first time filing for bankruptcy. For first-time bankrupts, you may be eligible to be discharged from bankruptcy in nine months, depending on your situation. Many people worry about bankruptcy or consumer proposal ruining their credit rating. The truth is that, while having these processes noted on your credit report can make it more difficult to get loans, your credit report has likely already been damaged before you even get to this point. To understand this, you’ll have to look at your particular situation. If you are in a position where filing for bankruptcy or submitting a consumer proposal makes sense for you, you have likely already missed bill payments or made payments late. These actions are already noted on your credit report, which hurts your credit rating. If you do not take action to improve your financial situation, your credit will continue to be hurt by missed and late payments. However, if you file for bankruptcy or consumer proposal, you put yourself in a situation where rebuilding credit is possible.
Rebuilding your Credit
There is no “magic bullet” that allows you to rebuild your credit instantly. You cannot pay to improve your credit rating and no company or organization is able to go into your credit report and make changes. Several companies advertise that they are able to do this, but you should be wary of these organizations. The only way to rebuild your credit is by following good credit practices. In order to understand what are considered “good credit practices,” you’ll need to understand a bit about how credit ratings are calculated. One of the most important aspects of a credit report is how often you pay your bills on time. This makes sense. Lenders want to see that you have a proven history of on-time bill payments before they are willing to lend you money. Therefore, in order to rebuild your credit rating, you will need to show that you can pay your bills on time. One way to do this is with a secured credit card. You may find it difficult to get a loan or a credit card once you have completed a proposal or bankruptcy. However, with a secured credit card, you put down a deposit that is held by the lender for as long as you have the card. This deposit becomes your credit limit on the card. For example, if you put down a $500 deposit, you will have a card with a $500 limit. Using this card and paying your bills on time can help you with rebuild your credit. Keep in mind that a secured credit card is different from a prepaid card. A prepaid card is similar to a gift card. Once the money on the card is used up, the card is empty. There are no monthly bills to pay and, therefore, using one of these cards does not help with rebuilding credit.