When you are struggling with debt, it can feel like you are stuck in a nightmare. You may not know where to turn for help. And when you finally find the courage to reach out for assistance, you may be worried that your creditors will try to stop you from filing a Consumer Proposal or Personal Bankruptcy. This is a completely normal concern that many people have before filing.

In this article, we will answer the question: can creditors stop me from filing a Consumer Proposal or Personal Bankruptcy?

What is a Consumer Proposal or Personal Bankruptcy

When an individual is unable to repay their debts, they have the option of filing for bankruptcy or a consumer proposal. They are both legal processes that allow the debtor to have their unsecured debts settled by the process. You can learn more about which debts are released in a consumer proposal or bankruptcy.

A consumer proposal is a type of debt relief that allows a debtor to make payments over a period of time to settle their debts. This can be an attractive option for those who are able to make regular payments but are struggling with the amount of debt they owe.

Personal bankruptcy, on the other hand, allows a debtor to have their unsecured debts settled without agreement by their creditors. However, this option comes with some serious consequences, including the potential loss of assets and a more serious note on a debtor’s credit report. As a result, it is important to speak with a Licensed Insolvency Trustee (LIT) before making the decision to file for bankruptcy.

Can creditors stop me from filing a Consumer Proposal or Personal Bankruptcy?

No, your creditors cannot stop you from filing a Consumer Proposal or Personal Bankruptcy. However, they can object to your proposal or bankruptcy if they feel that it is not in their best interest or if they believe you have done something in contradiction with the BIA.

If your creditors do object to your proposal or bankruptcy, you may need to appear before a court. In most cases, however, creditors will not object to a Consumer Proposal or Personal Bankruptcy if they believe that it is the best way for you to repay your debts.

It is quite uncommon for creditors to object to a consumer proposal or bankruptcy. When there is an objection, it is usually for a reason that is known ahead of filing. An LIT must perform an assessment of your situation prior to your filing. During this assessment, if it is uncovered that there are any potential issues that may cause an objection by creditors, they will let you know.

How do I know if my situation qualifies for one of these options

The best way to know if your situation qualifies for a Consumer Proposal or Personal Bankruptcy is to speak with a Licensed Insolvency Trustee. They will be able to assess your financial situation and provide you with the best options for debt relief.

The rule of thumb, however, is that if you are struggling to pay your debt and your debts exceed the value of any equity you have in your assets you will most likely find a solution with either a consumer proposal or bankruptcy.

You can also check our our article on 10 ways to pay off debt faster.

If you decide to file, what should you expect?

If you decide to file a Consumer Proposal or Personal Bankruptcy, you can expect the following:

• Your creditors will be notified of your decision and they will no longer be able to contact you directly for collection purposes.
• You may be required to give up, or buy back from the Trustee, some of your assets, depending on which option you choose.
• Your credit score will be impacted.
• You will be required to make affordable payments to your creditors, either through a consumer proposal or as part of your bankruptcy.
• You will be required to attend credit counseling sessions.

You should also check out our other article that answers ‘is a consumer proposal worth it?‘.

While creditors cannot stop you from filing a Consumer Proposal or Personal Bankruptcy, it is critically important (and required) to speak with a Licensed Insolvency Trustee before making your decision. They will be able to assess your financial situation and provide you with the best options for debt relief. Filing for a Consumer Proposal or Personal Bankruptcy is a big decision that should not be taken lightly. But if you are struggling with debt, it may be the best option for you.

This article was written by Angela Rodgers, CIRP, LIT. She is a Licensed Insolvency Trustee and the President of Powell Associates Ltd. She has worked in the insolvency industry for over 20 years. No matter if you are looking at filing bankruptcy, a consumer proposal, or simply looking for debt management advice, Angela can help.

When you are struggling with business debt, it can feel like you are stuck in a nightmare. You may not know where to turn for help. Do you file for a consumer proposal or personal bankruptcy? Which one is best? How will they impact me, and my business?

These are great questions that we will answer in this article.

Both options can provide relief from business debt, but they work in different ways. So will a consumer proposal or personal bankruptcy deal with business debt? Let’s take a closer look…

***Disclaimer: When dealing with business debt there are nearly an infinite amount of possibilities as to how your situation may need to be handled. While we are providing this article as general information, it is imperative that you receive personalized advice with respect to your specific situation from a Licensed Insolvency Trustee.

The Difference Between a Consumer Proposal and Personal Bankruptcy

A consumer proposal is a process whereby you negotiate with your creditors (via a Licensed Insolvency Trustee) to offer your creditors less money than you owe. They are typically paid over a 60 month period. It is not uncommon to see reductions in debt of ~80%. You do not lose any assets, nor are your payments based upon future earnings.

Bankruptcy is the ultimate debt relief option that involves surrendering your assets to your trustee (and don’t worry, in most instances, you can retain your assets if you want to ) for distribution to your creditors and making monthly payments that are based upon how much money you earn monthly.

Of course, these are just basic explanations of a consumer proposal and personal bankruptcy. For a more in-depth explanation visit our articles that covers consumer proposals and bankruptcy.

Corporation vs a Sole Proprietorship

When considering whether to file a consumer proposal or declare bankruptcy to deal with any business debt, you must understand how your debt is actually owed.

Sole Proprietorship

A sole proprietorship is a business that is unincorporated. All of your personal and ‘Business’ debt is owed by you personally. Legally, there is no distinction between the two. If you file for bankruptcy or a consumer proposal both your personal and business debt will be settled.

Corporation

Unlike a sole proprietorship, you and your corporation are two distinct entities. Corporations do provide their owner’s limited protection against liability and debt. If you apply for credit in your corporation’s name and do not personally guarantee it, you will have no personal liability for any defaulted debt.

Creditor protection doesn’t apply to all debts, however. If you are a director of a company, you have certain director obligations that you must meet. The most common is to collect & remit HST/GST as well as employee source deductions. If you fail to do so, these can be assessed on you personally.

Being A Sole Proprietorship vs Incorporated in a Consumer Proposal or Bankruptcy

The structure of your company will highly impact the potential outcome that a consumer proposal or bankruptcy might provide you. There are many reasons for this, but two primary reasons are:

# 1 – Corporation Liability Protection

If your business is incorporated you personally have some liability protection against your creditors. This means that your creditors can only come after the assets of your business and not your personal assets, assuming you have not personally guaranteed any debts. Unfortunately, most people have personally guaranteed debts inside of their corporation, often without realizing the implication.

# 2 – How Certain Debts Are Treated

Certain debts are treated differently depending on how you operate your business and what option you wish to pursue. For example, if you owe CRA for any Payroll source deductions as a sole proprietor and wish to file a consumer proposal, this debt is considered a secured debt (because it is a deemed trust).

However, if you’re incorporated and your company owes source deductions, you will personally only have a contingent Director’s Liability that is treated as an unsecured debt in the event you personally file a consumer proposal or bankruptcy.

How a Consumer Proposal Can Help with Business Debt

A consumer proposal is a great option to help with business debt and avoids filing bankruptcy. A consumer proposal is like debt settlement – you negotiate with your creditors to come to terms to settle your debts at less than 100% by way of affordable monthly payments. Determining if a consumer proposal is worth it depends on several factors. The benefits, and what type of proposal you can file, will depend on your business structure.

Consumer proposals as a Sole Proprietorship

As mentioned above, as a sole proprietor your situation will be dealt with in the same manner as a regularly-employed consumer that files a consumer proposal.

Consumer proposals as a Corporation

A corporation is unable to file a consumer proposal, instead, they are able to file what is known as a Division 1 Proposal and is also regulated by the Bankruptcy and Insolvency Act. A Division 1 proposal operates like a consumer proposal but is intended for corporations and consumers who owe more than $250,000 in debt, excluding their primary residence.

This is usually done if there is an intention to continue operating the business and offers the opportunity to restructure its debt

There are certain circumstances where it makes sense to file a consumer proposal in your own name and dissolve your existing company. This might be the case where the business is not viable to continue operating post-filing or in the event the business restructures, the owners are unable to financially survive due to personally-guaranteed debts and/or Director’s Liability claims that CRA may have against you.

How Personal Bankruptcy Can Help with Business Debt

Bankruptcy is typically the last resort option that businesses and consumers take to tackle their debt. However, bankruptcy can be an incredibly effective way to eliminate debt, especially some of the tougher debts to tackle such as source deductions owed to CRA.

Bankruptcy as a Sole Proprietorship

Your situation will be dealt with exactly as it would if you didn’t run a business. If you owe CRA and they do not have a memorial judgment against you or your property, then you are able to have these debts included and discharged upon successful completion of your bankruptcy. If you owe deemed trust debts they can be included and discharged as well, however, the secured nature of them must be factored in.

Bankruptcy as a Corporation

Just like personal bankruptcy, a corporate bankruptcy will eliminate all dischargeable debts from inside the corporation. It will not release any guarantors of personally-guaranteed debts, nor release the director from any potential director’s liability claim.

Because of this, it is uncommon for a corporation to file a bankruptcy unless there are assets left inside the corporation or in the event the owner of the corporation does not want to deal with the wind-down. Consulting a Licensed Insolvency Trustee is highly recommended if you are considering a bankruptcy for your corporation.

How a Licensed Insolvency Trustee Helps With Business Debt

A Licensed Insolvency Trustee is required when filing a consumer proposal, Division 1 proposal, personal or corporate bankruptcy. Our Trustees can assist you in knowing which debts can and cannot be discharged, understanding your current financial position, and that of your company, as well as helping you understand the best approach to navigating your business debt.

No matter if you are looking for advice or want to file a bankruptcy or consumer proposal, do not hesitate to reach out to us.

This article was written by Angela Rodgers, CIRP, LIT. She is a Licensed Insolvency Trustee and the President of Powell Associates Ltd. She has worked in the insolvency industry for over 20 years. No matter if you are looking at filing bankruptcy, a consumer proposal, or simply looking for debt management advice, Angela can help.

With the additional government funding, financial hardship programs, and other government spending due to the pandemic it is completely understandable why we have seen an increase in queries related to the existence of government debt relief and debt relief for Canadians. If you are looking for a debt relief company, you are certainly not alone.

While many consumers have been able to refinance their house with a real estate secured debt consolidation loan, many have begun to look at other debt-relief options. Unfortunately, while many firms claim to offer government debt relief solutions they unfortunately do not exist as consumers believe they do.

While a debt settlement company may claim that these programs exist, they are often alluding to government-regulated debt relief options; the consumer proposal and bankruptcy. Both of these programs provide relief from creditors for any unmanageable and/or outstanding debts with varying degrees of severity.

Is there a government debt settlement program?

As you can guess from our comments above, there are no government debt relief programs or emergency debt relief that will give you money to help you pay off your debt. The programs mentioned above do allow for the reduction of your unsecured debt (such as credit cards debts & consolidation loans) but they are not government programs.

To clarify further, if a government program exists the implication would be that the government themselves would be the ones either negotiating with your creditors or providing the funds to pay your creditors. This type of program does not exist.

Instead, there are government-regulated programs. These debt repayment programs are offered by private companies that are subject to federal government oversight. The only federally regulated debt relief program firms are Licensed Insolvency Trustees, such as Powell Associates Ltd; Debt settlement companies and unregulated debt relief companies must refer individuals to a trustee for any government-regulated programs.

Debt Relief Options That Do Exist

If you are trying to find the right debt relief solution for your financial situation then there are multiple options you can consider on your journey to becoming debt-free.

A Debt Consolidation Loan

If your situation isn’t tremendously bad, traditional debt consolidation may work well for you. The process involves applying for a personal loan or line of credit from a bank and using that new debt to pay off existing higher-interest debt. This doesn’t result in any debt reduction but does often provide for interest relief if your new loan has a lower interest rate than your previous debts.

While using a new loan to pay out another can be one of the best debt-relief options and is specifically effective when used to consolidate high-interest credit card debt it doesn’t come without risks.

Risks of Consolidation Loans

• Consolidation loans can sometimes have a higher monthly payment than the debt you originally had. This is particularly true if you are having trouble with line of credit and other low-interest or interest-only payment debts.
• The approval of a consolidation loan is dependant on your credit score. If you have debt problems now your credit may already be impacted negatively and affect the odds of getting approved. Read more about debt consolidation loans & bad credit here.
• Oftentimes people cite having multiple payments as the issue and want to consolidate those into one monthly payment. Sometimes there is merit to this issue, however, more often than not if, for example, 5 x $100 payments are unaffordable, then a single $500 payment would also be unaffordable.

Credit Counselling

A Credit Counselling Agency offers what is considered a creditor-sponsored debt relief service known as a debt management plan, or DMP for short. Creditor sponsored simply means that creditors support this type of program actively. In fact, the majority of funding that many credit counseling agencies receive is from creditor donations. While these debt management programs are often marketed as being better for your credit, they have the same negative impact as a consumer proposal.

DMPs are particularly effective when debt levels are relatively low. Otherwise, savings can typically be greater in other options with a similar credit impact. See here for an article on debt management plans.

Risks of Debt Management Plans

• Similar to the risks above, DMPs can sometimes have higher monthly payments than what you are currently paying. This is because DMPs are termed over a shorter period of time; typically 3 to 5 years in length.
• While most creditors do participate in debt management plans, they are not obligated to. You may think everything is good to go and suddenly be told that a creditor didn’t agree to the debt management plan.

Consumer Proposal

A consumer proposal is a government-regulated debt settlement option that allows a consumer to negotiate with their creditors and reduce their unsecured debt. These proposals often amount to a significant reduction in the consumer’s overall debt level, allow for one affordable monthly payment, and save interest costs. Consumer proposals require the services of a Licensed Insolvency Trustee.

Those with unmanageable debt levels who are trying to become debt free should explore consumer proposals as they are an extremely effective tool for eliminating debt and the only regulated alternative to the bankruptcy process.

Risks of Consumer Proposals

• The main risk to a consumer proposal is in the event the majority of your creditors completely refuse your offer to them. This is generally rare and is usually a risk that is known ahead of time based upon your financial situation.
• Once you enter a consumer proposal, if you are unable to keep up your payments and fall behind a total of 3 monthly payments then your proposal will be annulled. This basically means you will go back to owing what you did prior to entering into your proposal.

Learn if a consumer proposal is worth it in your situation.

Bankruptcy

Bankruptcy is the most extreme option for debt relief. Put simply, a Licensed Insolvency Trustee will evaluate your financial situation and determine if bankruptcy is a suitable option for you. They will review your income, assets, and your past financial transactions. Based on these, they will be able to determine what a bankruptcy would look like and estimate a monthly payment for your bankruptcy.

Bankruptcy is usually best suited for people who have high debt levels or have had a substantial change in circumstance that significantly, and on a longer-term basis, impacts their expenses and/or income levels.

You can learn which debts bankruptcy will release you from here.

Risks of Bankruptcy

Bankruptcy is based upon your income and assets when you file and for the duration of your bankruptcy. It is possible that if your income increases or if you acquire assets during the term of your bankruptcy that:

• Your bankruptcy payments may increase to a level that is far higher than originally planned, and/or
• You may end up losing assets that you received during bankruptcy. An example of this would be if you received an inheritance during the term of your bankruptcy.

Further, if you do not fulfill all the terms of your bankruptcy the trustee must oppose your bankruptcy which can have many consequences such as, but not limited to, an extended bankruptcy period, or additional payments.

Conclusion

It is our opinion that you should always seek professional debt advice before making any decision. If you are looking for helpful debt relief for Canadians you are certainly not alone and navigating the process yourself can lead to poor results.

Every situation is unique and without proper evaluation it is incredibly difficult, if not impossible, to know which option will help you get out of debt in the most effective manner. We’d love to help. Don’t hesitate to contact our office for a free consultation.

Government Debt Relief FAQ

Do debt relief programs hurt you?

The goal of any debt settlement program is to provide relief, not to put you in a worse position. However, it is important that you work with a firm that will ensure you are properly educated on all relevant debt consolidation & relief options in Canada. In certain instances, especially if you are settling bad debt with the various debt solutions your credit may improve as you no longer have the weight of the negative accounts on your credit report.

How can I get my debt forgiven in Canada?

The only government-regulated debt forgiveness programs in Canada are consumer proposals and bankruptcies. These two programs are regulated by the Bankruptcy and Insolvency Act.

Outside of this, you can ask your creditor directly for relief but they will typically only defer interest charges for a short period of time. While this may be enough to get you ahead, in our experience, the duration of the deferral is rarely enough to allow people to catch up.

Does Canada have a debt relief program?

Canadian debt relief plans are only offered by private companies. While no government-funded program exists, a consumer proposal & bankruptcy are both regulated by the Canadian government and are offered by Licensed Insolvency Trustees. A debt settlement company may claim to offer consumer proposals or bankruptcy but only Licensed Insolvency Trustees are legally allowed to implement these solutions.

Does credit consolidation ruin your credit?

Credit consolidation, more commonly known as debt consolidation is simply the process of consolidating your debt into a single monthly payment. The most common methods of consolidating your debt are debt consolidation loans, debt management plans, consumer proposals, and bankruptcy.

Depending on your financial situation these may or may not impact your credit negatively. For many people struggling with consumer debt, even the most severe forms of consolidation can help improve credit in the long run.

Are there any free debt-relief programs?

No. There are no free debt relief programs in Canada. However, for regulated debt solutions, any fees that you pay are built into the monthly amount.

Are there Government of Canada Debt Relief Grants?

No, the Canadian government does not provide debt relief grants. If the government ever does provide a Canada Debt Relief Grant we will let you know on our website!

This article was written by Angela Rodgers, CIRP, LIT. She is a Licensed Insolvency Trustee and the President of Powell Associates Ltd. She has worked in the insolvency industry for over 20 years. No matter if you are looking at filing bankruptcy, a consumer proposal, or simply looking for debt management advice, Angela can help.

When it comes to unmanageable debt, there are a few different debt relief options available to you: consumer proposal and bankruptcy. Each option has its own benefits and drawbacks, so it’s important to understand what each one entails before making a decision. In this article, we will focus on the question of whether or not a consumer proposal or bankruptcy will release you from all types and forms of debts. Keep reading to find out!

Difference between consumer proposal and bankruptcy

A consumer proposal is a formal legal process through which you can negotiate with your creditors to come up with a repayment plan and make monthly payments that suits both parties to generally deal with your unsecured debt. This option is sometimes referred to as debt settlement. We previously wrote an article discussing whether a consumer proposal is worth it – feel free to check that out.

Bankruptcy is also a legal process. If you choose to file for bankruptcy, all of your assets will be liquidated (or you can opt to pay for some, or all of them and keep them!) and these proceeds will be distributed to your creditors. You may also be required to make payments depending on your income level, family size, and non-discretionary expenses (i.e. medical expenses, work-related expenses, child support, etc.).

Despite popular belief, you do not lose everything in Bankruptcy. Learn more about the assets you can keep in Nova Scotia, New Brunswick, or Prince Edward Island.

Both options are filed through an Insolvency Trustee and are legislated by the Bankruptcy and Insolvency Act (BIA).

Knowing which debts can and cannot be included if you file a consumer proposal or bankruptcy is paramount to knowing if either is the right debt relief option for you. If it ins’t you may want to look at other options.

So, will a consumer proposal or personal bankruptcy release you from all types and forms of debt?

While a consumer proposal and bankruptcy will release you from most types of unsecured debt, neither option will automatically absolve you of all your debt obligations. The Bankruptcy and Insolvency Act outlines debts that are not discharged in s. 178. While the BIA can be a little complicated to read, here is a brief summary of the most common debts that are not discharged by a consumer proposal or bankruptcy.

Debts not dischargeable when you file a consumer proposal or bankruptcy

Section 178 of the Bankruptcy and Insolvency Act outlines the following debts are not dischargeable in both types of bankruptcies:

• Fines, Penalties, and/or Restitution orders imposed by a court.
• Any court-awarded damages in regards to intentionally inflicted bodily harm, sexual assault, or wrongful death resulting from them.
• Debts related to alimony or alimentary pensions.
• Any debt related to support or maintenance of a (former) spouse or child.
• Debts arising from fraud, embezzlement, misappropriation, or defalcation.
• Debts resulting from obtaining property or services by lying, or via fraudulent means.
• Student loans or any other provincial loans for students, such as apprenticeship loans, unless you have been out of school for 7 years. Read about Student Loans and Bankruptcy.
• Any Secured debt, unless you wish to surrender the asset used as collateral. This would include debts like a mortgage or car loan unless you want to give up your house or car. Your secured creditors will allow you to continue making payments and retain the asset.

If you fail to include a creditor in filing a bankruptcy or consumer proposal, depending on exact circumstances, you may be required to pay the creditor what they would have received had they been included in the consumer proposal or bankruptcy and been eligible to receive a dividend.

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Still not sure which of your debts will be discharged?

If you are unfamiliar with the terms indicated above, then they likely will not apply to you. The most common debts people face in the list above are:

• Student loans not outside of the 7 year window, and
• Child/Spousal Support obligations.

Most unsecured debts, such as personal loans, payday loans, lines of credit, and credit cards can be discharged.

Unsecured debt is simply a debt that does not have any collateral attached to it. A credit card is an example of this.

Secured debt, by contrast, does have collateral. A car loan is a perfect example of this.

Your best bet is to talk with a Licensed Insolvency Trustee

So, if you want to file a consumer proposal or bankruptcy as a way to get out of debt, be sure to speak with a Licensed Insolvency Trustee to find out which debts will and will not be released. They can help you understand your debt relief options and help you start your journey to becoming debt-free.

Common Questions We Get About Dischargeable Debts In Consumer Proposals And Bankruptcies

Do traffic and parking tickets count as fines and penalties imposed by a court?

Yes. While you may not have actually attended court, they are considered to be imposed by the court and as such will survive a consumer proposal or bankruptcy.

How are student loan payments treated if they survive?

During the period of your bankruptcy or consumer proposal you are not required to make student loan payments, however, the interest will continue to accrue on your student loans. It is recommended, if you are able, to make these payments. Student loans may require your Licensed Insolvency Trustee’s permission for you to make payments on your loans while in your consumer proposal or bankruptcy. In saying this, we have observed student loans reporting missed payments on the credit report.

However, if student loans submit what is known as a Proof of Claim; a legal document indicating that you actually owe them money which allows them to participate in the proposal or bankruptcy will receive payments from your consumer proposal payments or your bankruptcy payments.

Are some debts treated differently in a consumer proposal vs a bankruptcy?

As it relates to whether or not they are discharged, no. However, in a consumer proposal, certain debts must be paid within specific timeframes regardless of the overall duration of the proposal. For example, if you operate a business as a Sole Proprietor, owe source deductions, and wish to file a consumer proposal you will have to pay those within 6 months of your consumer proposal being court-approved.

This article was written by Angela Rodgers, CIRP, LIT. She is a Licensed Insolvency Trustee and the President of Powell Associates Ltd. She has worked in the insolvency industry for over 20 years. No matter if you are looking at filing bankruptcy, a consumer proposal, or simply looking for debt management advice, Angela can help.

You’re probably here because you’ve finally realized you have to do SOMETHING about your debt.  Maybe you’re losing sleep at night worrying about all the bills.  Perhaps you’re getting calls from creditors because you’re late on payments.  Or perhaps you and your spouse are fighting about money issues because there doesn’t seem to be enough to go around every month.

You might have thought that bankruptcy was your only way out of this financial bind. However debt troubles show up, you’re not alone—hundreds of thousands of honest Canadians are in the same boat as you!

There are other choices.  A consumer proposal is one of them. The question remains: Is a consumer proposal worth it? Is a consumer proposal a good idea? Let’s explore…

What is a Consumer Proposal?

What is a consumer proposal, and what happens in a consumer proposal, exactly? Very simply, it’s just a deal you make with your creditors, the people to whom you owe money.  Typically you pay back much less than 100% of the money you owe, so it’s a great deal for you.  It’s also a good deal for the creditors—they will agree to the proposal because you are offering something more than they would receive if you were to go bankrupt.

“A consumer proposal is just a deal you make with your creditors – typically you pay back much less than 100% of the money you owe.”

Another significant benefit of a proposal is that you pay no interest.  Once the creditors have agreed to the proposal, you pay a fixed monthly amount with 0% interest.  Usually, you have five years to make the payments, but you have the right to pay the proposal off early if you want to.

What Debts Can be Included in a Consumer Proposal?

The answer to this question depends on understanding the difference between secured and unsecured debts.  A secured debt is always secured against an asset of some kind, such as a house or a vehicle.  If you don’t make the regular payments on a secured debt, the secured creditor you owe money to has the right to take the asset away from you.  The most common examples of secured debts are mortgages and car loans.

Unsecured debts are everything else, and you CAN include almost all of these debts in your consumer proposal.  This list includes:

• Credit cards

• Bank loans

• Tax debt

• Payday loans

• Utility bills

• Unsecured lines of credit

• Personal loans

• Student loans if it has been more than seven years since you completed your studies

Here are the types of unsecured debts that you CANNOT include in a consumer proposal:  student loans if it has been less than seven years since you completed your studies, court-ordered fines, and spousal or child support payments.

How Does a Consumer Proposal Work?

So what’s involved in the consumer proposal process?  The first step is to meet with a Licensed Insolvency Trustee (LIT) such as Powell Associates Ltd.  Trustees are licensed and regulated by the Federal Government and are Officers of the Court. Learn more about Trustees here.

“LITs are the only people with the legal power in Canada to provide you with protection from the people you owe money to.”

A Licensed Insolvency Trustee (LIT) is the ONLY professional with the legal power to provide you with protection from the creditors.  No other agencies, such as credit counsellors or the various debt consulting firms that operate in Canada, have these legal powers or the ability to file a consumer proposal.

When you call our bankruptcy trustee at Powell Associates Ltd. the first step is to gather some information from you.  We can do this in person, by video or over the phone.  Either way, we will ask about how much you owe and to whom.  We’ll look at your income and the substantial items that you may own, such as vehicles and a house if you’re a homeowner.

Finally, we will find out how many are in your family.  All of this information gives us a clear picture of your financial situation.  Next, we’ll schedule a meeting with you.

We’ll let you know what all of your choices are to deal with your debt at the initial meeting.  Based on your information, we can estimate what your payments in a proposal might be.  Together, we can look at your budget, and you can decide whether filing a proposal is the best option or whether filing for bankruptcy makes more sense.

“Based on your information, we can estimate what your payments in a proposal might be. We want to set you up for success!”

If there are any other ways of addressing your debt besides a proposal or bankruptcy, we’ll let you know those as well.  We want to set you up for success!  If you are filing a consumer proposal, we want to make sure the payments will be affordable for you while still acceptable to the creditors.

Once you decide to work with us, the next step is to provide us with documentation to prove your income, debts, and assets’ value.  Once this documentation is complete, we meet with you again, and we can file your proposal with the creditors.

“Once your proposal is filed, the creditors must stop their collections activity – the nasty calls and and they can’t file a lawsuit or garnish your wages!”

Filing the proposal gives you formal, legal protection from the people to whom you owe money.  You stop making payments directly to them.  The creditors must stop any further collections activity—those nasty calls will finally come to an end!  They also can’t file lawsuits against you or garnish your wages.

The proposal filing starts a formal, legal clock ticking.  From the time it is filed with your creditors, they have 45 days to consider your proposal and decide whether to agree with it or not.  Most of the time, the creditors agree with your initial proposal offer: after all, your creditors are receiving more money than if you filed personal bankruptcy.  Generally, creditors prefer consumer proposals to personal bankruptcy and are motivated to agree with them.

One aspect of how consumer proposals work is a real benefit to you; you don’t need to get all the creditors to agree with it.  The consumer proposal includes all of your debts – you make one payment every month to deal with your debt instead of keeping track of multiple payments.

Another advantage of a consumer proposal is that you can include tax debt owed to Canada Revenue Agency!  Once those creditors that control 50% of the debt agree with your consumer proposal, it becomes legally binding on all creditors.

Sometimes, a majority of your creditors don’t agree with your initial proposal.  That simply starts a negotiation process with them.  They think you can afford more than what you offered in the consumer proposal.

“Sometimes a majority of your creditors don’t agree with your initial proposal. That simply starts a negotiation process with them that we will help you with.”

At Powell Associates Ltd., we will look at their counter-offer to you and recommend the best response to them.  Often, a modest increase in the amount of the payment you offer will get enough of the creditors on board to finalize the deal, regardless of whether they all agreed with it.

Once enough of the creditors agree to the proposal, the proposal becomes legally binding on you and the creditors.  From then forward, you only have two obligations:  make the regular monthly payments, and attend two mandatory counselling sessions.  We will schedule those sessions with you; they cover some vital topics, including budgeting, spending habits, setting financial goals and the responsible use of credit.

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The Pros and Cons of a Consumer Proposal

Many consumers choose a consumer proposal over a bankruptcy. We wrote an article on the 9 most common reasons to file a consumer proposal instead of personal bankruptcy.

The pros are:

• It allows you to avoid more severe action.  It can be tough to decide to tackle your debt head-on, but there’s one thing we’ve learned over the years:  waiting to deal with your debt rarely improves the situation!

• You typically pay much less than the total amount of the debt back, and the payments are in a manageable 5-year plan.

• You get immediate protection from your creditors once the consumer proposal is filed.  Creditors can’t garnish your wages or take any other legal action against you. They can also help with frozen bank accounts.

• The proposal includes all of your debts in one affordable monthly payment with 0% interest.

• Your monthly payments in a consumer proposal may be lower than your monthly payments would be in personal bankruptcy because the payments are usually over five years.

• The proposal includes everyone you owe money to, and the terms of the consumer proposal bind all the creditors. Once completed you will receive a release from most creditors.

• You feel better about dealing with your debt, as you have at least paid back what you can afford to.

• You keep your assets, unlike in personal bankruptcy, where you may have to give up some of your assets, such as your house.

• Some people work for institutions where filing bankruptcy has to be disclosed and could risk employment—filing a consumer proposal avoids that difficult situation.

• Finally, your credit rating, which will take a hit when filing either a consumer proposal or personal bankruptcy, can be repaired sooner when you have filed a consumer proposal versus filing personal bankruptcy. Learn how a consumer proposal or bankruptcy impacts your credit rating.

Of course, the advantages of consumer proposals must be weighed against the cons. We are often asked ‘How bad is a consumer proposal’ so let’s explore the cons.

The cons are:

• There are very few!

• The primary consideration is whether you can afford to make the monthly payments in a consumer proposal.  In discussions with us at Powell Associates Ltd., we’ll look at your budget and assess whether your consumer proposal payment is affordable.  If it turns out you can’t afford the consumer proposal payment, then filing personal bankruptcy may turn out to be the best choice for you, and we will assist you with that.

• In some situations, an individual can complete a bankruptcy within nine months.  Some individuals, especially those with lower incomes, may feel better addressing and completing their debt obligations more quickly than the typical five-year period for a consumer proposal.

See more consumer proposals vs other debt consolidation options.

Take the Next Step!

Powell Associates Ltd. has helped thousands in New Brunswick, Nova Scotia, and Prince Edward Island overcome their debt.  We understand that unexpected financial setbacks can happen.  We offer debt solutions to reduce your stress and worry.  Schedule a FREE CONSULTATION with one of our LITs at any time to discuss the best option to fit your unique financial situation.

• Our experienced team is dedicated to finding a debt solution you can afford and will review all debt relief solutions.

• There are no additional fees or interest charges.  The cost of filing the consumer proposal is included in the monthly payments to your proposal.

• We will meet with you as often as you need.  Filing a proposal or bankruptcy is a significant life decision—we’re here to give you the tools and advice to make the best decision possible.  The key is that the decision to proceed and how to proceed is yours; we will not push you into something you’re not comfortable with!

• You will always receive prompt responses and resolutions from our trustees and staff.

• We will always be fully open and transparent with you—your debt has already caused enough stress so you don’t need any unpleasant surprises.

“You must gain control over your money or the lack of it will forever control you.”

-Dave Ramsey

 

 

Matt Munro has been a Licensed Insolvency Trustee (LIT) since 2003 and a Chartered Professional Accountant (CPA) since 2008. This article was written by him when he was employed at Powell Associates Ltd.

There are debt solutions available that will save significant sums of money for you.

Your debt is getting you down, and for good reason.  You know it’s a problem, but you’ve been putting it off for months, and maybe even years.  Will Rogers, the cowboy philosopher, said:  “If you’ve dug yourself into a hole, the first thing to do is stop shovelling!”

So it is with debt problems. You need to stop digging and start looking around to see how deep the hole is and your options for getting out of the hole. In such cases, you should learn more about bankruptcy rules and engage the services of a bankruptcy trustee to help you in these situations.

Introducing Nathan & Amanda

Let’s look at an example to see the total cost of debt.  Nathan and Amanda have accumulated $32,500 in credit card debt at an average interest rate of about 20%; this doesn’t include their car loan.  They have two kids and monthly combined take-home pay of $4,500.

They have kept current with their debts, and they are renters, hoping that someday, they will have saved enough for a downpayment on their own home.  They’ve been able to stay current on their credit card debt, so their minimum monthly payments on the cards are only $550.  This amount allows them some flexibility in their budget to deal with expenses outside their regular spending.

However, look at the table below to see what happens if they keep on this path.

Yikes!! If Nathan & Amanda continue to pay the minimum payments on their debts each month, the $32,500 in total debt they owe today will cost them $139,409 when they finish paying it off.

Minimum payments will seem like forever

Making only the minimum payments, it will take 251 months to finish paying the debt, or 20 years and 11 months! Clearly, not a good plan!

Let’s imagine that Nathan and Amanda decide to grind their budget a little harder and pay an additional $100 per month toward their debt. They will pay a total of $70,460 to pay off the $32,500 in debt, and it will take them over nine years. The extra payment makes a HUGE difference, as you can see in the table.

This plan is much better, but it’s still a lot of extra money going to interest payments, as it more than doubles the original debt. What if Nathan and Amanda pay the debt off in just 60 months or five years?

Payments too big can break the budget

This accelerated payment plan reduces their interest payments even more. Instead of paying over $37,000 in interest, they are now paying just over $19,000 in interest. However, it has one major drawback:  the monthly payment amount. Can Nathan and Amanda adjust their budget sufficiently to make a payment of $861 per month, month after month, for five years?  They might be able to pay this much for a little while, but it will be challenging to keep it up over five years.

To understand why let’s take a little closer look at their budget. With their $4,500 in monthly take-home pay, they spend nearly $4,000 on basic expenses. Rent, groceries, a small car payment, utilities, telecommunications and activities for their kids cost them $3,950 per month. By paring back on the groceries, the kids’ activities and changing their cell phone plans, they can just make the $861 payment per month work.

But this budget makes no allowance for significant car repairs or out-of-pocket health expenses. Nor is there an allowance for any emergency saving if something unforeseen happens, such as a job layoff.

It’s precisely this predicament that leads thousands of Canadians each year to explore alternative ways of dealing with their debts. The most obvious choice that most Canadians know about is bankruptcy. But bankruptcy isn’t necessary in most cases, and it has the harshest possible credit rating impact.

A negotiated step short of bankruptcy

Another option for dealing with debt very aggressively which does not have such a negative credit rating impact is a consumer proposal.

A consumer proposal is a deal you make with the creditors to pay back some of your debt over a fixed period, generally five years. The creditors usually agree to proposals because they are getting more back than they would in bankruptcy. In a typical proposal, however, much less than 100% of the debt is paid back. Furthermore, the payment plan in a proposal carries no interest. Let’s return to Nathan and Amanda’s situation.

For comparison’s sake, let’s say they filed a consumer proposal to pay back $9,000 of their $32,500 of consumer debt. They are offering to pay the creditors a little more than a quarter of the debt. Their monthly payments in this example are $150 per month.

The table above illustrates how much better this is than the other three options—it’s a huge improvement in the total amount paid back and in the monthly outflow to service the debt. Nathan and Amanda save more than $700 per month to service their debt than paying it off in full over five years.

The biggest drawback to a consumer proposal is the adverse effect on your credit rating. However, compared to bankruptcy, once the creditors have agreed to the consumer proposal (usually 60 days after its filing), you are free to begin rebuilding your credit.

Determining if a consumer proposal is worth it in your situation depends on many factors so speaking with a professional is a must.

One crucial aspect to filing a consumer proposal:  you can’t do it on your own!  You must work with a Licensed Insolvency Trustee (LIT)—they are the only professionals in Canada licensed to help individuals file a consumer proposal or personal bankruptcy.

The opportunity cost

Now that you know there are debt solutions available that will save significant sums of money for you, there is another consideration. It’s referred to as the opportunity cost of money. What are we talking about here?

If the proposal allows you to save dollars that you would have otherwise spent to pay the debt, what else could you do with that money? It’s not hard to come up with a list:

• Save for your retirement

• Save for a child’s education

• Save for a downpayment to buy your own home or renovations to your existing home

• Save for your dream vacation

• And on, and on

Let’s look in more detail at the first item on this list, so you can see the full impact of not dealing very aggressively with debt. What if you took the funds saved from filing the consumer proposal and invested them in your retirement?

The proposal saves $700 per month in cash compared to paying the debt in full over five years. Over five years, that is a savings of $42,000. If those funds are invested and receive an average return of 4% per year, the investment will double every eighteen years. If Nathan and Amanda are 37 when they file their proposal, by the time they are 64, that investment could be worth $103,518. Nice!

The question you have to ask yourself then relative to your debt is: “Is it worth it to keep shovelling??”  Maybe it’s time to look at all of the choices for dealing with your debt and do something different than what you’ve been doing so far.

Matt Munro has been a Licensed Insolvency Trustee (LIT) since 2003 and a Chartered Professional Accountant (CPA) since 2008. This article was written by him when he was employed at Powell Associates Ltd.

 

On September 28, 2020, the Office of the Superintendent of Bankruptcy released its most current statistics on personal bankruptcy and consumer proposal filings for Canadian debtors.

Canada – there were 40,600 personal bankruptcies and 71,866 consumer proposals filed in the 12-months ended August 31, 2020.  Personal bankruptcies were down 25.0% and consumer proposal filings were down 7.6% as compared to the 12-months ended August 31, 2019.  There were 2,273 personal bankruptcies and 4,191 consumer proposals filed in Canada in the month of August 2020.

New Brunswick – there were 1,730 personal bankruptcies and 2,129 consumer proposals filed in the 12-months ended August 31, 2020.  Personal bankruptcies were down 26.7% and consumer proposal filings were down 11.7% as compared to the 12-months ended August 31, 2019.  There were 104 personal bankruptcies and 141 consumer proposals filed in New Brunswick in the month of August 2020.

Nova Scotia – there were 2,101 personal bankruptcies and 2,355 consumer proposals filed in the 12-months ended August 31, 2020.  Personal bankruptcies were down 37.2% and consumer proposal filings were down 5.0% as compared to the 12-months ended August 31, 2019.  There were 104 personal bankruptcies and 141 consumer proposals filed in Nova Scotia in the month of August 2020.

Prince Edward Island – there were 270 personal bankruptcies and 270 consumer proposals filed in the 12-months ended August 31, 2020.  Personal bankruptcies were down 30.8% and consumer proposal filings were down 21.7% as compared to the 12-months ended August 31, 2019.  There were 12 personal bankruptcies and 20 consumer proposals filed in Canada in the month of August 2020.

 

 

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Powell Associates Ltd. is a Licensed Insolvency Trustee. We are experienced, hands-on insolvency practitioners who understand the personal impacts of major financial stress;

• You won’t be stuck in an assembly line process.

• You will expect and receive prompt responses and resolution of issues from our supportive and experienced team.

• We will review your debt solution options, including filing a consumer proposal or personal bankruptcy.

• We help Canadians with overwhelming debt get fresh financial starts.

Once you file a consumer proposal or personal bankruptcy, we deal directly with your creditors on your behalf. Your unsecured creditors are required to stop contacting you or continuing legal proceedings against you. Contact our bankruptcy trustee in Halifax for a free consultation.

We offer free consultations to review your financial situation and practical debt resolution options. Contact us to discuss your situation over the phone, a video chat, or in-person in Saint John, Moncton, Fredericton, Charlottetown, Dartmouth, or Miramichi.

If you have already taken the appropriate action to rebuild your credit, you should be well on your way to a higher credit score. Now it’s time to fine-tune and build on what you have already accomplished.

In this series’ previous blog posts, we’ve provided you with all the background and action steps to rebuild your credit. Now it’s time to fine-tune and build on what you have already accomplished.

Credit Rebuilding Series:

Part 1 – What is Your Credit Score and Why is it so Important?

Part 2 – How Is Your Credit Score Calculated?

Part 3 – Reviewing and Repairing Your Credit Report

Part 4 – Rebuilding Your Credit

Part 5 – Fine-tuning and Monitoring

Ideally for credit rebuilding you should ask a professional bankruptcy trustee Halifax to guide you with tips. However, here are a few steps that can help you in getting started with your credit rebuilding process.

1.  Make More Than Minimum Payments

Making payments in addition to the minimums required on your credit cards and loan accounts has a couple of benefits.

First, you reduce the amount of interest you pay over on the loan or credit card.  The other advantage is the credit utilization ratio will be lowered and positively impact your credit score.

Take this step even for loan payments with regular, recurring amounts.  For example, if your loan payment is $125 per month, but you instead pay $130 per month, it will boost your credit score slightly.  The more you can pay the account balance down, the better.

2.  Keep the Overall Size of Your Credit Portfolio Manageable

Balances on too many credit cards, retail cards and loans at the same time will cause you to lose points on your credit score.  You will appear to be a greater risk to the lenders.

A general rule of thumb is that if you have more than three credit cards with balances, two retail card balances (such as a Canadian Tire card) and several loans, then your credit profile may be getting too large.  Look at paying off some of the smaller balances while keeping the cards open.

3.  Do Not Close Credit Accounts for Promotional Offers

Lending is a very competitive business, and there are always offers to transfer your credit balances from one credit card to another.  If your credit is already good, doing this makes sense.  You may be able to reduce your total interest payments by applying for a card with 0% interest for a year on balance transfers.

However, if you are rebuilding your credit and you decide to do this, you need to keep the old accounts open and use them periodically.  Remember that the longer you have an established credit history with one company, the more powerfully this reports to the credit bureaus.  You want to avoid actions that will reduce the average age of your credit accounts.

4.  Obtain and review your credit report once or twice per year

As long as you are in the active credit rebuilding process, obtain and review your credit reports once or twice per year.  Be vigilant about correcting any errors that may show up and remove old, closed items once the time limits for their reporting end.

5.  Check Your Credit Reports After Your Consumer Proposal or Bankruptcy is Completed

Once you complete your consumer proposal or your personal bankruptcy is discharged, it is essential to review your report again. Wait for 8 – 12 weeks as it takes a bit of time for the Public Reports section of your report to update, and the lenders also need time to reflect the change in your status accurately.

If you filed a consumer proposal, this is the time when you can ensure that your lenders and bureau reports are showing a ‘7’ rating vs. a ‘9’ rating. The act of completing your consumer proposal and having the proper notations in place with the credit bureaus on your report will create a significant boost to your credit score, so make sure you look after these critical details.

6.  Stay on Top of Your Budget!

Stay on top of your budget every month!  Budgeting and credit rebuilding are closely linked. Your budget guides how much credit you can safely be applying for and managing, especially when you are looking to add installment credit such as new loans (vehicle loans) to your credit portfolio.

Ensure that you do not ‘poach’ money from your emergency savings to pay for credit products.  You don’t want to get into a cycle where you are using credit to pay for unexpected bills that arise.

Final Thoughts on the Credit Rebuilding Process

Credit rebuilding is your responsibility, and you cannot rely on the bureaus or the lenders to do this work for you. The credit reporting system is highly efficient and effective at reporting negative items very quickly. However, neither the lenders nor the credit bureaus are interested in doing any of the credit repair and rebuilding work we’ve discussed here on your behalf.

Although the process of credit rebuilding is straightforward, it does take persistence, patience, and consistent attention over several years, especially if you have filed a consumer proposal or personal bankruptcy. Beware of any companies trying to sell you ‘quick credit rebuilding’ services. These are often scams—the credit bureaus have set their reporting formulas to ensure that someone cannot quickly rebuild their credit. After all, they and the lenders want to see a sustained and stable track record of using credit responsibly, and that takes time.

Remember, you can do it!  It’s critical for your long-term financial well-being—take the time and effort to do the work, and you will reap the rewards with a positive credit report and score.

Always keep in mind that improvements to your credit score will still take time. You can trash your credit score in a couple of months, but building it back will take much, much longer.

One major hurdle you must overcome in your credit rebuilding program is this: you need to start using credit again! It may be hard to accept that you need to start using credit again if you’ve just filed a proposal or bankruptcy or if you’ve had issues before with managing credit. However, it’s the only way to re-establish your relationship with the lenders and credit bureaus.

Your purpose in using credit now will be completely different. Before, you probably relied on credit to make ends meet every month. Once you file a proposal or bankruptcy, your take-home pay every month should be sufficient for your living expenses and leave some leftover for savings.

Your use of credit now will be for the sole purpose of rebuilding your credit. Following are the most significant actions you can take in this rebuilding phase. Remember, do not take these steps unless you have done the work necessary to repair your credit. Not all of these steps will apply to every situation—take advantage of the steps that apply to you.

1. Apply for a Secured Credit Card

The first and most essential credit rebuilding tool is a secured credit card. What makes these cards ‘secured’ is that you submit a deposit to the credit card company, typically between $200 and $500. The amount you have on deposit also acts as your credit limit. Don’t apply for a secured credit card until you have surplus funds set aside, as you may need to keep your security deposit with the company for several years.

Use the card every month for purchases that are already in your budget—gas expenses are an obvious choice. As you pay the balance off in full every month, you build a positive track record with the bureaus. One quick note: make sure you wait to receive your bill from the card company. If you pay the bill too soon, the debt may not register with the credit bureaus, which is your main objective in using credit vs. another payment method. A professional bankruptcy trustee can help you out with more tips in this regard to build out a good credit score for you.

Several companies offer secured cards in Canada—check out each of them to make sure you’re getting the card that best fits your needs. Look carefully at their terms and conditions, especially:

• their interest rates

• the grace period for payment—length of time from billing until expected payment

• the annual fee for the card, if any

• do they report to both credit bureaus in Canada?

2. See if your Rent Can Report to Equifax

Until recently, it was not possible in Canada to have your regular rental payments report to the credit bureaus.  Landlords could check your credit rating and history to assess your suitability as a tenant.  As the tenant, however, your positive rental history did not report to the bureaus. 

However, recently Equifax has begun to accept records of rent payment information.  Several services in Canada now offer to assist tenants with this, for a fee, of course.  Equifax has advised that while your positive rent payments will show up on the bureau reports, it may be several years before these payments begin affecting your credit score.

This option will be of greatest interest to those who are just beginning to build a credit profile, as well as those whose credit is severely damaged and who have a long road back to positive credit.  Rent reporting will also be a bigger priority for anyone who cannot afford any credit products in their monthly budget. It is also important to realize that rent reporting will also work against anyone who struggles to make on-time rent payments as late and missed payments are very negative for a credit report.

3. Consider a Phone Contract with a Major Supplier

It may not be the cheapest option, but by taking out a contract for a cell phone, your monthly phone bill payments will report to the bureaus. If your credit score and history are very poor, you may need to make a security deposit. However, this is another simple way to take an existing expense and turn it into an item that reports monthly to the bureaus. To positively affect your credit score, it is essential that a cell phone contract show up as a new piece of credit, beginning after a proposal or bankruptcy filing.

4. Add Installment Credit

Once you have a secured credit card in place, adding installment credit is another significant step in your credit rebuilding journey. You should ONLY do this if you can afford the monthly payments for a loan within your budget. There are three main choices for adding installment credit.

Registered Retirement Savings Plan Loans

One frequently used choice for installment credit is a Registered Retirement Savings Plan (RRSP) loan. You invest the funds in an RRSP, benefit from the tax deduction, and use the tax savings (refund) to accelerate your loan repayment. The RRSP loan will show up as a separate item on your credit report. Make a preliminary inquiry with your bank but remember to advise them if you have filed a consumer proposal or bankruptcy so they do not needlessly make a credit inquiry.

Vehicle Loans

Another possibility for an installment loan is a vehicle loan. Of course, this will only be applicable if you need to replace a vehicle. Be very careful with this, however! If you have filed a consumer proposal or bankruptcy or have damaged credit, the interest rate charged will be very high.

Ideally, you will look at an older vehicle and have some money saved for a down payment. Do NOT finance the car or truck’s entire value at very high interest rates—this is a prescription for financial disaster! Ensure that the loan’s length matches the expected vehicle life—you don’t want to be owing money on a vehicle with no useful life left.

Credit Rebuilding Loan

Another option for installment credit is a credit rebuilding loan. A few companies offer these. Again, be careful of the terms and conditions and make sure the monthly payment fits comfortably in your budget. You also want to be sure that you understand the total cost of borrowing for a credit rebuilding loan, as the interest rate is likely to be high.

5. Keep Your Credit Utilization Ratio Low

Keep your credit utilization ratio at 35% or lower.  A rate of 10 to 20% is even better.

Your credit utilization ratio is calculated by taking the amount of revolving (credit card and line of credit) debt you have and dividing it by the total amount of credit available. If you are using $5,000 of $10,000 available credit, your utilization rate is 50%. Your credit utilization ratio includes all of your credit cards and any lines of credit you have. One card or line of credit with a higher ratio can be offset by another revolving credit with a lower usage percentage.

6. Reactivate Dormant Accounts

If you have older credit accounts in good standing, begin using them again if you can. The lenders and credit bureaus like to see you successfully managing credit over a long time. Even using these accounts once or twice a year will allow the history to show up on your report and benefit your score.

This advice also applies if you filed a consumer proposal but had a credit card account at a zero balance that was not listed in the proposal. In this situation, you should start using the card again after the consumer proposal is agreed to by your creditors. You will need to check with the lender that the credit is still available to you after your filing.

7. Limit New Credit Applications

Limit your credit applications to three or four per year as new credit applications negatively affect your credit score. Also, do your best to limit applications to situations where you are reasonably confident of being approved. Avoid chasing after offers for credit where you are ‘pre-approved.’ You still have to apply for these offers, and when you do, they will generate a hard inquiry on your report that will report negatively.

If you apply for credit and are declined, ask the lender for an explanation. If you don’t receive a satisfactory answer, get your credit report and see what issues are causing a problem. Do NOT apply to several other lenders immediately after being rejected for credit. Multiple applications within a short time are a major red flag to the bureaus and can take dozens of points off your score within weeks.

In the early stages of credit rebuilding, it is essential to advise new creditors of your proposal or bankruptcy before applying for credit with them. Usually, they can tell you about their lending policies toward people who have filed a consumer proposal or personal bankruptcy. When looking to rebuild credit after a consumer proposal or bankruptcy there is no point in taking the hard hit from a credit inquiry if the lender will refuse your application as a matter of policy.

If you take the above steps (the ones that apply in your situation), your credit will improve in a very significant way over time. Remember to be patient and persistent with your credit rebuilding efforts. Once you get some of the basic building blocks in place, such as a secured credit card and some installment credit, credit rebuilding will happen automatically without giving it a lot of thought.

However, it is always critical to ensure that you follow good practices with your credit, such as always making your payments on time. In the following article in this series, we’ll cover what you need to do to fine-tune and monitor your credit.

Part 1 and Part 2 of this series on credit rebuilding have explained what your credit score means, who uses it, and how the credit bureaus establish your score. Now let’s get into what you must do if you want to rebuild your credit.

The first step, before any rebuilding, is to repair your credit. Why? If there are negative items or mistakes on your credit reports, you must do what you can to address those items before spending any money on new credit products or services. If you don’t, you may be wasting your time and your money!

Credit Rebuilding Series:

Part 1 – What is Your Credit Score and Why is it so Important?

Part 2 – How Is Your Credit Score Calculated?

Part 3 – Reviewing and Repairing Your Credit Report

Part 4 – Rebuilding Your Credit

Part 5 – Fine-tuning and Monitoring

To repair your credit, you must first find out what your credit report is saying—that’s the starting point. You should consult with a bankruptcy trustee in Halifax for financial advice in this regard.

1. Obtain Your Credit Reports

Apply to both of the two credit bureaus in Canada, Equifax and TransUnion, to receive your credit reports. You need to obtain both reports.

Some lenders may only report to one of the bureaus, and each of the lenders will typically use one of the bureaus as a starting point for their review of your credit request.

Both bureaus also have forms to fill out to fix any errors. It is a small expense but you need those to move on so please follow the links and get your reports.

2. Review Credit Reports

Errors can easily show up on your report—estimates are that at least 20% of credit reports have errors in them, and if you have had issues with credit in the past, then the likelihood of mistakes is even more significant.

These errors can occur because of simple clerical errors, or they may be a sign of identity theft or fraud. Errors can also result from decisions the lenders have made about how they interpret your situation, particularly if you have negative items on your report or have filed a proposal or a bankruptcy. Pay attention to the following items:

• Ensure your personal history is correct. There will be a record of your residences going back several years—these periods will vary by Province and by the credit bureau. Ensure all of your residential information is accurate and that there is no confusion with other people whose names are spelled similarly to yours.

• Check and double-check all of the information about your various credit accounts. You need to ensure that your account information is accurate, including who is responsible for the account, the total amount authorized, the current amount owing, and the payment history. Any information about late payments, payments sent to collections, and the account’s current status must also be correct.

• Examine the Public Records section of your credit report. Although errors in this part of the credit report are rare, you need to address them if they are present. If you have filed a consumer proposal or personal bankruptcy or have had any court judgments, there will be a notation in this part of your credit report—make sure it is accurate.

• Look for unauthorized or old credit inquiries that have shown up on your credit report. You can request the removal of those old inquiries. They are supposed to drop off automatically, but they may not—it is always best to be proactive in dealing with your credit report and not assume that the lenders and bureaus will look after these items for you.

• As you review your credit reports, be especially vigilant for any signs of identity theft. The presence of accounts on your report that you did not sign up for is a good indication that you may be a victim of identity theft.

Credit reports can be a little confusing, especially if you have never looked at one before. For a complete explanation of a credit report, have a look at the Government of Canada’s Guide.

Both credit reporting agencies have toll-free numbers you can call to get an explanation of anything that is confusing on your credit report. However, do NOT expect to make any changes over the phone. The only help you can expect from the bureaus is to clarify what the lenders have reported.

3. Repair Your Credit

Credit repair is (a bit of) a pain! You have to write to the bureaus and wait for their response—there is no easy way around this. The bureaus only accept change requests in writing.  If you try and apply for new credit without finishing the credit repair step, you will likely be wasting your time.

The steps you need to take to repair your credit will depend on your unique situation.

Address Bad Debts or Delinquencies

If you have poor credit and have NOT filed a proposal or a bankruptcy, then your credit situation is almost certainly a result of bad debts, delinquencies or a history of missed payments.

You MUST address any bad debts or delinquencies on your credit report before taking any other steps. Contact the creditors and make arrangements to resolve these debts in one way or another. You can see if the lenders will negotiate with you or if you need to pay the debt in full to settle the debt. Make sure you request that the creditors notify the bureaus of the settlement arrangement once completed.

If you filed a consumer proposal, then you have dealt with your debts. However, many of your creditors will report the consumer proposal as a bankruptcy. When this occurs on your credit report, you can request that the bureaus change the reporting, so each account says ‘Filed a Consumer Proposal’ rather than ‘Filed a Bankruptcy.’

However, many lenders will report accounts included in your consumer proposal as a ‘9’ rather than a ‘7’ on your report. Although you can request the change in status from a ‘9’ to a ‘7’, you are unlikely to be successful as long as you are still making payments on your consumer proposal. Once you have fully paid your consumer proposal, you can have the ‘9’ or bankruptcy rating changed to a ‘7’ rating for each of the debts listed in your consumer proposal.

If you filed a bankruptcy, credit rebuilding begins once you have been discharged from your bankruptcy and your prior debts officially released. You should still check your credit report to ensure that all of the debt you took into the bankruptcy is reporting accurately and that there are no other errors in other sections of your credit report.

Catch Up on Missed Payments

If you miss any payments, make them up as soon as possible. Missed payments have a significant adverse effect on your credit score. If your history with a lender has been good and you have only missed one payment, consider writing to them and asking them to reverse the negative report to the credit bureaus—this is known as a ‘goodwill adjustment’—your credit score will thank you!

Remove Old, Closed Accounts

Many credit reports will have older accounts that have been closed for several years. Although these accounts are supposed to automatically drop off after a preset time, usually six years from the last time they reported, this may not automatically happen. If your credit is damaged, you must remove these older, closed accounts as soon as it is allowed. By doing so, new, post-bankruptcy or proposal credit accounts will have a more significant impact on your score.

Ensure Credit Limits Have Not Been Reduced

In certain circumstances, a creditor may reduce your credit limit on an account. If they do this, your credit utilization ratio may rise above 30% and negatively impact your score. Please pay attention to your cards’ credit limits and any card companies’ notices that they have changed your credit limits. Contact the lenders to get the limits raised or pay the cards down, so your credit utilization ratio stays below 30% if possible.

Congratulations! If you’ve completed the above steps, you’ve done the part of credit rebuilding that’s the least fun.  Now you are ready to begin the more exciting work of building your credit score, which is the focus of the next article in this multi-part blog series.

It’s still going to take time and some attention, but once you put a few building blocks in place, the rest of the journey will be easier and more rewarding.