19 Oct

Should I Declare Bankruptcy or File for a Consumer Proposal?


Posted by: Jenni MacDonald

Many people go through challenges in life that affect their finances.  Whether it’s divorce, job loss, health issues, or a worldwide pandemic, it can be difficult to get your finances sorted out and back on track.  Too often, people wait YEARS to confront their debts and are then overwhelmed and not sure where to go for help.  If a mortgage broker can’t help a homeowner relieve the financial stress, then a consumer proposal or bankruptcy might be required.  

If you currently own a home, you may have a refinance option available to help you use the equity in your home to pay off some of the debts that are dragging you down each month.  If the equity in your home is not enough to cover the debts you need to pay, then a Mortgage Broker can work with a Bankruptcy or Consumer Proposal Trustee to put together a plan that will get you back on your feet faster than if you went out on your own.

Keep in mind that Mortgage Lenders/Banks view Bankruptcies, Consumer Proposals, and Debt Programs all the same…bad credit management.  There is a trend within the Banking world where lenders are starting to review clients’ credit situations when their current mortgages are up for renewal.  In the past, clients could just choose a term option and sign a piece of paper and their mortgage was renewed.  In the future, if a client has had a Bankruptcy or Consumer proposal during the term of the mortgage, lenders may not approve the renewal.  

If a Debt Management Plan is absolutely necessary, then it is important that you know how to improve your credit score after a debt program is entered into.  By getting your credit score back on track quickly, you can have a better chance at qualifying for some other mortgage options whether it is for a purchase or refinance, or renewal in the future.  

What are some steps you can do so that your credit score gets repaired quickly?

  1. I would recommend that the moment you FILE that consumer proposal or bankruptcy you need to take steps to start rebuilding your credit.  I know it will be difficult but even a pre-paid credit card that reports to the credit bureau will help you establish new credit.  Ultimately, lenders will need to see 2 different credit trades for at least 2 years with a limit of over $2500.
  2. Secondly, pay off the consumer proposal or bankruptcy amounts as quickly as possible.  While most banks want 2 years of re-established credit, there are mortgage lenders that will consider approving mortgages for clients that are even one day discharged from a debt repayment program.  If you already have a home, a Mortgage Broker may have some options to help you pay off your Consumer Proposal faster and get you building your credit score sooner.  
  3. Third, once your program has been paid and discharged, your credit bureau will not be automatically corrected.  It will take 6 years after your discharge for the debts to “fall off” your credit bureau without being proactive.  If you contact Equifax and Trans Union directly, you can have your credit bureau updated within 30 days of discharge.  You can fax them a letter, 2 pieces of front and back of your ID and the full Statement of Affairs and Discharge Certificate to have your credit bureau correctly updated.  Your trustee will not do this step for you!  A Mortgage Broker may help you with this step as well. 

If you are looking to purchase your first home or move, please don’t hesitate to contact me today for a better understanding of the rules and what you qualify for.

For more information on Credit Scores visit https://jmacdonald.ca/mortgage-tips/credit-scores-score/