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In some cases, declaring bankruptcy and consequently affecting one’s credit rating is the only way to get out of debt. But is this a good idea?

I sometimes come across people who reject the idea of declaring bankruptcy or making a consumer proposal simply because they fear that by doing so their credit rating will be affected. Even though it is quite legitimate to consider other means to solve a debt problem, such a decision to look for alternatives must be based on good reasons. But my professional experience shows that the mere fear of a deteriorated credit rating is not a good one!

  • First, if you already have a debt problem, your credit rating is probably by now in a bad condition.
  • Second, take also your health in account. What is most important? To maintain your credit rating at its present level, or to solve your debt problem once and for all and, by the same token, eliminate the stress that has been taking a toll on you for so long?

Experiencing an affected credit rating

Yes, bankruptcy will affect your credit file. Your credit rating will drop to R9. It will remain at that level for six (6) years after you’ve been discharged in the case of a first bankruptcy. The same will apply for a consumer proposal, but your credit rating will rise to R7 after three (3) years. However, the terms and conditions of your settlement with the creditors have to be fulfilled.

Nevertheless, given your own circumstances, the benefits may surpass the disadvantages of such an impact on your credit rating. That is, mainly:

  • You will have an opportunity to make a fresh start.
  • The collection agencies will stop harassing you.
  • Your wages will be protected from garnishment.

Improving your credit rating

Once discharged from your bankruptcy, you may consider that your priority is to improve your credit rating. There is no magic formula, but let us say that adopting a creditworthy behaviour can help you to achieve this goal. To do so, for example:

  • Make sure that your bills are paid on time. Late payments have a negative effect on your credit rating. Sign up to pre-authorized payment plans offered by many service providers should you feel that it will be helpful.
  • Keep your balances below 75% of your credit available on your credit cards and on your line of credit.
  • Avoid applying for several loans. Every application leaves a trace in your file, and the simple fact of applying for many loans may be seen as negative by the lenders.

People often forget how important it is, beyond the credit rating, to earn the lenders’ confidence. The following lists some other ways you may use to restore the trust of financial institutions.

  • Keep your job and maintain a fixed income.
  • Avoid frequent moves.
  • Open a savings account or an investment account, and make regular deposits in such accounts.
  • If you can, apply for a loan to invest in a RRSP (a RRSP loan).
  • Demonstrate your ability to maintain a balanced budget and to control your expenditures effectively.
  • Find an endorser. But make sure that the terms and conditions of the reimbursement settlement are really fulfilled. This would avoid a situation in which your endorser would be forced to bear himself the burden of your debt.

Always keep in mind that time and a sound credit management are the most important factors to regain a good credit rating. Indeed, only time can erase the less positive aspects of your credit history. At the same time, by proving your good credit management habits, you provide the best evidence of your ability to repay your debts.

Approaching alternative sources of credit

If the traditional financial institutions refuse to grant you a loan, you may contact alternative sources of credit, with a price however, i.e. higher interest rates. Furthermore, the risk of falling back into the cycle of indebtedness is then very real. Prudence should therefore be exercised, and you should only approach such alternative sources as a last resort.

Equifax and TransUnion

In Canada, there are two credit reporting agencies: Equifax and TransUnion. You can order for free, once a year, your credit file from one of these organisations.

  • Click here to order your Equifax credit file.
  • Click here to order your TransUnion credit file.

If you think that your indebtedness level affects your credit rating, please do not hesitate to contact a Ginsberg Gingras trustee in bankruptcy. You will then get valuable advice, as well as further information about the solutions at hand for you.

Chantal Gingras

President, FPAIR, Licensed Insolvency Trustee

Official Office: Ottawa
Phone: 613-729-4391

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