September 5, 2017

We have talked about this topic before but it is a question that keeps arising and is worthy of revisiting.

There is an urban myth that “if you go bankrupt you will not be allowed to get credit again for seven years”.  This is in fact utter nonsense.  But the myth arises from the fact that credit reporting agencies will report a bankruptcy for a period of seven years following the date of filing.

Many people opt instead to file a consumer proposal in the mistaken belief that it will somehow leave them in better shape to re-establish credit after completion.  But here are some important considerations:

A consumer proposal will be reported to the credit bureaus as a default resulting in the same rating as a bankruptcy for the duration of the proposal.  So while you are making payments – up to five years – your rating will be the same as a bankruptcy.  After the proposal is completed your credit report will improve from R-9 to R-7 but you will be treated, by institutional lenders, in exactly the same manner as a discharged bankrupt.

The difference is that a typical first time bankrupt would have been discharged after nine months and will then start taking steps to re-establish credit.   However, a person under a proposal has to wait for five years, or until the proposal has been fully performed to start re-establishing credit.

Some companies actually advertise that they will lend to bankrupts but caveat emptor (beware) most often such businesses charge a higher than normal rate of interest.  The reality is that neither a bankruptcy nor a proposal are ideal ways to handle debts, the best is always to pay it off in the normal course, but neither one is a “show stopper’ when it comes to getting back into debt.