I’ve Been Told That I Should Not Use Bankruptcy Or A Proposal Because They Will Harm My Credit Rating. Is This True?

 

People in debt don’t use a proposal or go bankrupt because they want to, they use one of these options because they have to. They have no reasonable alternative to assist them in dealing with their debt problems. Most of these people, by the time they come to see a Licensed Insolvency Trustee (LIT), have so much unpaid and delinquent debt that their credit rating is as bad as it can get and bankruptcy or proposal won’t make it any worse.

Rarely, but sometimes, someone sees us who still has an R1 best credit rating. The reason this person comes to see us is that they know they can no longer juggle their debt by “robbing Peter to pay Paul”. Unless a miracle happens, they will soon start to default on minimum debt payment and their credit rating will worsen drastically. So if their credit rating is going to go anyway, they may as well as get a fresh start by eliminating all of the unsecured debt.

Here is an example of this situation where the facts are the same but only time passes;

First situation:  Joe1 comes to see a LIT:

  • He is employed as a server and with tips nets an average of $3,000 a month after taxes.
  • He pays child support of $850 a month which leaves him $2,150 a month for all of his living expenses.
  • Joe lives as cheaply as he can but his rent, utilities, food, clothing and transportation costs him $2,000 a month leaving him $150 a month to service debt.
  • Joe’s 3 credit card debts total more than $30,000 with an average interest rate of more than 13% ($400 a month!).

When Joe1 sees us initially he is up to date on minimum monthly payments (thus preserving his R1 rating), by making payments on his 3 credit cards of $200 each. But because he now has insufficient cash for living expenses he charges purchases on each of the same credit cards $350 each, thereby increasing his overall debt by 3 x $150 = $450. The debt problem continues to get bigger while trying to preserve a good credit rating. Eventually, he gives up and sees a LIT.

Second situation:  Same as above but Joe2 gives up juggling debt for 5 months and by the time he sees the LIT creditors are reporting Joe2 as an R9(worst rating) where he has failed to make payments for 3 months, or they have sent his account to collection, or they have started legal action to try and collect their debt.

In both cases, Joe1 and Joe2 end up in bankruptcy and have an R9 rating. Even though Joe1 had a better credit rating for a longer period of time, they both end up with the same credit rating for the same length of time after bankruptcy.

If they had both chosen a consumer proposal rather than bankruptcy, they would still end up with the same credit rating, an R5, for the same length of time.

We encourage you to try and wait out whatever problems have caused your negative financial situation. Resorting to a consumer proposal or bankruptcy should be the last alternatives you consider. But if the problem does not improve, and if the debt load ends up more than you can control, consider seeing a LIT.