Bankruptcy versus Consumer Proposal – Part four of a series

by Joel Sandwith on November 30, 2010

Last week I posted the third of a series of blogs that will show the differences between consumer proposals and personal bankruptcies.  If you are experiencing financial difficulty, either of these options may be helpful to you.  These articles are intended to shed a little light on each of them for you – but make sure that you contact us if you’d like a more specific evaluation of your situation.

This week we’ll take a brief look at rebuilding credit during and after each of these options.  If you are looking for tips as to HOW to rebuild your credit, read this excellent resource from the Moneyproblems.ca website.  Today’s blog will focus more on the timelines in each of a bankruptcy and a consumer proposal.

One of the most important things you can know about ‘good’ credit is that it lasts 30 days – let me explain.  If you make a credit card payment on time, that’s wonderful, and your credit report will show that.  But if you miss a payment, or make only partial payments, your credit report gets affected immediately, and that problem will stay on your report for up to seven years, even if you get it resolved the next month.  If you DON’T get it resolved the next month, it gets reported again, and again, and so on.  In fact, if you are juggling payments or behind on bills, your credit may already be heavily damaged.

If you file a consumer proposal or a personal bankruptcy, those negative reports stop.  I don’t want to lead you to believe that bankruptcy is positive for your credit, it’s not, but it does stop the continuous flow of re-reported negatives.  Essentially, it starts the clock as to when the negative falls off of your credit report.  So how is a proposal reported differently from a bankruptcy?

A first time bankruptcy stays on your credit report generally for about 7 years after you are discharged.  So, if you are discharged in 9 months, you will be affected for 7 years, 9 months.  If your bankruptcy takes longer, for example if you have surplus, or someone opposes your discharge, then that 7 year clock can take longer to start, and end.  If you have been bankrupt before, not only does a second bankruptcy take much longer to be discharged from, but it also stays on your credit report for 14 years instead of seven – so for some people, a bankruptcy will affect their credit rating for 17 years, and possibly even more!

In a consumer proposal, the rating on your report stays on for THREE years after you have completed your payments (and attended the counseling sessions – you need to go to two in order for your proposal to be successfully completed.)  An important tip about consumer proposals is that you can pay them off as fast as you are able to, with no penalty.

So, here’s an example:  let’s say you have $40,000 in debt.  Let’s also assume that after consulting with us, we help you determine that a good proposal would be $300 per month for 48 months.  (That adds up to only $14,400 – which is realistic in many scenarios.  In this example the person in debt would save over $25,000.)  Now, let’s further assume that you are able to pay the proposal off in three years instead of four – now your credit report will only be affected for a total of six years – three years of payments, and three years on the report.  Not only can the consumer proposal option save an enormous amount of money, it may also disappear from your credit report faster.

If you are dealing with debt right now, and concerned about your credit rating, give this some thought – what good has your credit rating done you so far?  In many cases a ‘good’ credit rating has just allowed you to buy a bigger shovel to dig a deeper hole.  Before things get beyond your control, call us at 310-PLAN, and we will be happy to provide you with a free evaluation of your situation.

Next week: what happens if I file a bankruptcy or a consumer proposal, then come into money?

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