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How Will Bankruptcy or Consumer Proposal Affect My Credit Rating?

Credit scoreI filed a Consumer Proposal in 2009, after realizing that despite all the strategies I had been trying (including buying nothing but the essentials), I soon would not be able to pay all my bills.

Like me, some debtors know they are getting into serious trouble even before they miss any bill payments. Others have missed a few already when they realize that things aren’t getting any better – creditors may even be phoning.

Are you in a chronic financial bind, but are concerned about what Bankruptcy or Consumer Proposal will do to your credit rating?

First, let’s put this into perspective. If you’ve been struggling for a while, your credit rating is likely already compromised.

In my case, although I hadn’t yet missed any payments, my credit rating had almost certainly already been eroded by maxed out cards and over-limit spending. Also, I had recently applied for new credit cards with lower interest rates. Each time you apply for a new card, the credit company sends an inquiry to one of the credit bureaus, Equifax or TransUnion. Too many such inquiries over a short period of time will lower your credit rating. (Note that inquires you make yourself have no effect on your rating.)

If you have already missed credit card payments or even defaulted on loans, your credit rating will have become quite low.

So, it’s rarely the case that filing for Bankruptcy or Consumer Proposal lowers an excellent credit rating. But it’s true that your credit rating, whatever it is, will take a hit when you file.

In terms of Beacon Score, some see their scores drop to the 400s – similar to a new consumer with no credit rating at all. Indeed, you are starting fresh. Also, in both Bankruptcy and Consumer Proposal, all your revolving credit accounts will likely receive the notation R9 – the worst on a scale from R1 to R9.

There’s little reason to be concerned about this immediate effect on your credit rating. Since you are working your way OUT of debt, you’re not likely to be seeking new credit immediately.

Repairing your credit

The good news is, during your Consumer Proposal, or right after the discharge of your Bankruptcy, you can take steps to begin repairing your credit. Your poor credit rating is not permanent.

For instance, a few months after I filed my Consumer Proposal, I had saved enough funds to apply for and receive two secured credit cards. With secured cards (not the same as pre-paid cards), you make a deposit to the credit card company to cover their risk, and from then on, the card operates as a normal MasterCard or VISA. Thus, if you use it, and make all your payments on time, it will help improve your credit rating.

If in doubt about whether you should apply for a secured credit card, ask your Trustee. He or she may have additional useful advice about how to improve your credit rating.

With the help of these cards, in a couple of years my credit rating was in the 580s, and after I completed my Consumer Proposal it was in the 620s.

After Consumer Proposal or Bankruptcy, many consumers also use small bank loans, RRSP loans and auto loans to improve their credit rating.

Three years after the completion of a Consumer Proposal, and six or seven years after the discharge of a first Bankruptcy, the credit bureaus will remove information about them from your credit report. After that, your credit rating has the potential to become as good as that of someone who has never been insolvent.

As with everyone, wise credit use is the key to raising your credit rating.

If you are reading this article because you are exploring insolvency solutions, consider making a free appointment with a Trustee. He or she will be pleased to advise you on your specific situation.