How Bankruptcy and Consumer Proposal Affect Your Credit Score In Canada | Refresh Financial
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How Bankruptcy and Consumer Proposal Affect Your Credit Score In Canada

bankruptcy We all know that bankruptcy doesn’t do your credit score any good. But do you know exactly how it will affect your credit score in Canada and for how long? Let’s dig into it.

What is Bankruptcy

Bankruptcy is, according to Wikipedia, a legal status of a person or other entity that cannot repay the debts it owes to creditors.

If you find yourself buried under a mountain of debt that is impossible to pay back, bankruptcy might be the solution you’re considering. It will sweep away most of that debt, with a few exceptions such as student loans, child support, and fines. You’ll be protected from legal action relating to your debts, some assets will be protected, and if you had already been experiencing wage garnishes related to your debts, they’ll cease once you’ve declared bankruptcy. In short, you get a do-over. It sounds like a good deal, but the toll it takes on your credit is huge.

Bankruptcy and Your Credit Score

Choosing bankruptcy means your credit report will show it for up to seven years. If it’s your second bankruptcy, that turns into 14 years from the date you are discharged. During this time, any creditors considering lending to you are likely to see you as a high risk borrower. Your credit rating will take a severe hit, knocking it right down to the bottom of the credit score scale. It will continue to drag your credit score in Canada down until that seven year period is up.

No New Credit

You’re going to have to do some serious work to drag that credit score out of the gutter. Any loans, lines of credit or credit cards you obtain will either have to be co-signed for or secured, meaning you put the funds down first, as insurance for the lender. It can take some individuals upwards of a decade to recover from bankruptcy. During all of that time, you’ll have trouble booking travel, renting cars, buying a home, and the list goes on.

Consumer Proposal

There is an alternative to bankruptcy, though, that’s not quite so harsh. It’s called a consumer proposal and you’ll still have to pay down some of your debts. You’ll start the consumer proposal process by making a repayment proposal - you’ll suggest a doable amount that you can pay back, rather than the full amount you owe, and your creditors will review it and accept it or deny it. If it’s accepted, you’ll make static monthly payments until your proposal is complete. After it’s complete, it will appear on your credit report for three years, during which it doesn’t quite pull your score down as low as a bankruptcy would, but it still gives it a good cutting down.

Luckily, you can recover from both situations with a little hard work and self-discipline. If you’re recovering from bankruptcy or a consumer proposal, consider a Refresh Financial program to give your credit a serious boost. Click here to learn more and get started.

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