Life after debt: What’s next and how to avoid repeating debt

You have worked hard to regain control over your financial future — whether you have been discharged from Bankruptcy or completed a Consumer Proposal. This is the end of a challenging journey and the beginning of your fresh financial start. However, you may be wondering what’s next and how to avoid more debt on the road ahead.

Let’s discuss what happens after you are discharged from Bankruptcy or complete a Consumer Proposal. We’ll also share several practical steps to help you move forward and rebuild your credit while managing debt effectively. 

What happens when I’m discharged from Bankruptcy?

A discharge from Bankruptcy releases you from the legal obligation to repay the debt you carried as of the date you filed for Bankruptcy, except for specific types of debt that are excluded from the law. This includes student loan debt and child support payments.

The top priority for many people who have been discharged from Bankruptcy is to rebuild their credit rating. This is because an R9 rating will be assigned to your credit rating and a notation will remain on your file for six to seven years if this is the first time you filed for Bankruptcy.

However, it is important to remember that credit is only one item in your financial toolbox, and it is not necessary to rebuild your credit after a Bankruptcy if you don’t want to. The steps below can help you rebuild your credit rating if you decide to pursue this path.

What happens after I complete a Consumer Proposal?

You are released from your Consumer Proposal after you have made your final payment and receive your certificate of full completion. This relieves you from the remainder of your unsecured debts that existed at the time you started the Consumer Proposal, with a few exceptions.

You will be assigned an R7 credit rating, which is less severe than the R9 credit rating assigned after a Bankruptcy. Your credit report will show that you filed a Consumer Proposal for three years after you have completed the Consumer Proposal.

The main priority for those who have completed a Consumer Proposal is often to rebuild their credit rating — just like those who have been discharged from Bankruptcy. However, rebuilding your credit rating is simply one option. If you choose this option, the steps below can help you rebuild your credit and manage your debt.

How to rebuild your credit and manage your debt effectively

Review your credit report

The first step you can take to rebuild your credit rating after being discharged from Bankruptcy or completing a Consumer Proposal is to request a copy of your Equifax and TransUnion credit reports. It is important to review these reports to ensure that all information is current and accurate — and that you’ve truly wiped your financial slate clean.

Your credit report includes all credit products you have held in your name as well as your payment history and credit rating for each product. Review your account status and debt rating for each product and check for errors. Potential mistakes will damage your credit history and your applications for future credit.

Ask yourself if you should get credit again

You may be thinking about getting credit again after you have been discharged from Bankruptcy or completed your Consumer Proposal. Answering the following questions can help you decide if you are ready to move forward before you make an application:

• What are your current and future income expectations? Assessing your income can reveal whether credit will support your financial health or harm it.
• What is your age and lifestyle? You may need credit if you are planning to buy a house, purchase a vehicle, or start a family. If you are nearing retirement, your Canada Pension Plan and Old Age Security benefits may be enough to cover your expenses.
• Why do you want or need credit? Your answer will reveal a lot about your future credit use and provide hints as to whether credit is necessary or if there are better alternatives.

Make a plan before you apply

Developing a solid plan before you apply for credit can help ensure you manage your debt effectively in the future. These steps can help you get started:

• Create a spending plan: A comprehensive spending plan can help you understand whether you can afford credit and consistently pay off your purchases. Research different budgeting methods and choose one that works for you. Include each credit card as a specific spending category to help keep your debts in line.
• Build your savings: Increasing your savings can make you more appealing to lenders and helps ensure you won’t rely on credit for emergencies or large purchases that may be difficult to pay back in a timely manner. Create three separate savings pots for emergencies, occasional expenses, and specific goals.
• Research credit products: There are dozens of credit cards available. Compare features to choose what best fits your needs and familiarize yourself with the interest rates, service fees, annual fees, and payment terms associated with each product. This will help you avoid surprises and make an informed decision.

Take steps to manage your credit

It is important to manage your credit effectively after your application is accepted to avoid repeated debt. These best practices can help you use credit intentionally and stop you from making unsustainable credit decisions:

• Shift your mindset: Responsible credit use involves understanding the difference between having money and merely having access to money. Keeping your creditors and reputation in mind while using credit can help you be mindful of your spending.
• Keep your limits low: High limits invite high balances, which can easily lead to overspending. Set your limit to the maximum you can afford to pay in one month to prevent unsustainable debt.
• Manage your payments: Staying below 30 percent of your total available credit at all times can help keep your payments manageable no matter your limit.
• Pay off purchases quickly: You don’t need to carry a regular balance on your credit card to build your credit. Pay off each purchase as soon as you make it to simultaneously build and manage your credit.

Take control of your finances

You’ve worked very hard to take back control over your finances, no matter whether you’ve completed a Consumer Proposal or been discharged from Bankruptcy. The steps above can help you manage your credit effectively and rebuild your credit rating as you begin your fresh financial start.

If you are struggling with credit management after a Bankruptcy or Consumer Proposal, contact a Licensed Insolvency Trustee. We can help you explore your options so you can make the right decision for your unique situation.