How a Bankruptcy or Consumer Proposal affects your credit rating

When evaluating your options for how best to deal with unmanageable debt, a Bankruptcy or Consumer Proposal are always worth considering. But many people are understandably concerned about how will potentially affect their credit rating. To answer this question, it’s helpful to first understand what your credit rating is, why it matters, and the factors that impact it.

Measuring lenders’ risk

Your credit rating is a calculation of how capable and likely you are to pay your debts in full and on time. Banks and lenders will use your credit rating to decide (a) whether extend credit to you, (b) how much credit they’re willing to offer, and (c) what interest rate they’re willing to charge.

Credit bureaus calculate your credit rating by considering numerous data points and other information reported on your credit file. This includes your:

  • Employment history
  • Past and current addresses
  • Types of credit (e.g. credit cards, loans, mortgages, etc.)
  • Credit limits
  • Balances
  • Delinquencies (i.e. late, missed, or partial payments)
  • Etc.

Each piece of information is weighted to reflect its potential effect in increasing or decreasing your credit risk — and therefore how it affects your overall credit score. For example, high utilization (i.e. how high your balances are versus how much credit you have available) accounts for nearly a third of your credit rating.

Impacts of a Bankruptcy or Consumer Proposal

Filing a Bankruptcy or a Consumer Proposal will have a negative impact on your credit rating. However, the overall impact may vary.

A Bankruptcy will likely drop your credit score to the lowest possible level. This not only affects your credit worthiness with banks and credit card companies — but also insurers, landlords, utility companies, and potentially employers. A bankruptcy will remain on your credit report for six years after the date of discharge.

Though a less drastic option to filing a bankruptcy, a Consumer Proposal may still drop your credit rating to the lowest possible level. Lenders will likely consider you high risk, which can impact your ability to obtain credit going forward. A successful Consumer Proposal will be removed from your credit report three years after you receive your certificate of full performance.

Looking at the bigger picture

Bankruptcies and Consumer Proposals aren’t right for everyone. But don’t let the potential negative impacts dissuade you before you get the full picture. After all, if your debt has become unmanageable, it’s likely you have:

  • Missed or been late on your payments
  • Used or are nearing all your credit limits
  • Applied and been rejected for additional credit or limit increases
  • Received calls from creditors or collections agents

These all cause considerable damage to your credit rating in their own right. And they will continue to cause damage until you find a permanent solution.

Bankruptcies and Consumer Proposals provide a clear and affordable path to eliminate your debt for good. Once you receive your discharge or certificate of completion, you can immediately begin taking steps to repair your credit and rebuild your financial life.

Although both options have an initial negative impact on your credit rating, should you receive your discharge from bankruptcy or successfully complete the terms of your proposal, you will have the opportunity to rebuild and prove your credit worthiness to pursue further financial freedom.

Life-Changing Debt Solutions

If you’re currently struggling with problem debt and wonder whether a Bankruptcy or Consumer Proposal is right for you, contact MNP for a Free Confidential Consultation today.

During this no-obligation initial meeting, a Licensed Insolvency Trustee will review your entire financial situation and outline all the options available to help you get a financial fresh start. A Licensed Insolvency Trustee must provide an honest and unbiased assessment of every debt solution available — including the potential benefits and drawbacks of each. They will provide clear, thoroughly detailed recommendation and help you make the best decision for your unique situation.

Don’t wait. Take the first step toward debt freedom and begin repairing your credit rating right now.