A Proposal or Bankruptcy Helps Clear up your Credit Report – Myth or Fact?
Several times a week I get calls from individuals (debtors) who believe that if they go through a proposal or bankruptcy their debts will be removed from their credit report and that will make it easier for them to get new credit. THIS IS ALMOST ALL MYTH.
These are procedures in Canadian Federal Law- the Bankruptcy and Insolvency Act, (BIA) designed to enable a person to get a fresh start financially by clearing away most unsecured debts.
A Consumer Proposal is an offer to unsecured creditors to settle their debts. Usually, the debtor offers to make monthly payments for a specified total, and the creditors get to vote on the offer with a majority vote deciding. So, if most of the creditors who vote are in favour of the proposal, the creditors who didn’t vote, or voted against the proposal are forced into the deal. Once the proposal payments are completed, the debtor is free of the debt. This does not mean the creditors got paid in full, it means the Law wiped out the ability of the creditors to chase the debtor for payment. For example, if a debtor’s proposal, accepted by creditor vote is to pay 35% of what is owed, once the 35% is reached, the debtor does not have to pay any more.
The vast majority of proposals end up paying creditors well less than ½ of the creditors’ claims.
Bankruptcy is a different procedure. There is no offer to creditors. The creditors do not get to vote on a bankruptcy. The law dictates what assets and income of the debtor must be gathered by the trustee to be distributed to creditors. In most bankruptcies creditors get nothing or pennies on the dollar. You are free of the debt when you are discharged from bankruptcy.
Typically proposals are designed to pay creditors more than what they could expect if the debtor chose to go bankrupt otherwise creditors wouldn’t vote in favour of a proposal.
So what does a proposal or bankruptcy do to help clear up your credit report ? Nothing. There is nothing in the (BIA) that directly affects or controls credit reports or the actions of credit reporting agencies.
Credit reporting agencies retain credit information on individuals supplied by the individuals’ creditors. There is an obligation on the credit reporting agency to correct known errors in someone’s records but except for provincial limits on how long information can be retained in a person’s credit report, the completion of a consumer proposal or a discharge from bankruptcy does not force the credit reporting agency to “remove” any mention of the debt. The reporting agency may add to the noted debt that it was dealt with by a proposal or bankruptcy but it can still appear.
So, assuming a consumer proposal or bankruptcy is completed, what can you expect to appear in your credit report ? You can assume the credit report will provide the information that you went through a proposal or bankruptcy and the date when the proposal was completed or the date you received your discharge from bankruptcy. It can also include comments about the debts that were not paid in full because of the consumer proposal or bankruptcy.
Here is an example to make my point; If I were part of the team that helped heal you from serious car accident injuries, you wouldn’t expect your driving record to be improved because of our actions, would you ?
A Licensed Insolvency Trustee can assist you in getting free of your debt, but we can’t help you improve your credit report – that is up to you.