Credit Basics 101 – Bankruptcy and Consumer Proposal

There are many misconceptions about bankruptcy and consumer proposal. Many people believe that one form of this insolvency will impact their credit less severly than the other. Part of the reason is due to the fact the agencies providing these services are for profit agencies. As their revenue is derived from a portion of the monthly payments required while in these programs, their advice may be a little biased. Regardless of how agencies market both of these programs, lenders view both programs in exactly the same way. The difference between the two programs is the terms of completion.

Bankruptcy is the declaration that you are no longer able to pay your creditors. It is a federally regulated process through individual agencies. Depending on your income, entering bankruptcy is either a nine month process or a twenty-one month process. In either case, you are required to pay a base monthly payment to your trustee (the person overseeing your bankruptcy) as well as 50% of any excess income over their allowable limits. After your time obligation and monthly payment obligation have been achieved, you will then be discharged from any further credit obligations. The bankruptcy will remain on the credit bureau for six years from the discharge date.

Consumer proposal is the process of offering your creditors a certain percentage of your debt to be paid back over a negotiated period of time. This process is also facilitated through the same agencies. Consumer proposal remains on the credit file for three years after the obligations are met. Although consumer proposal remains on the credit file half the time of a bankruptcy, it is important to consider that the time required to pay back the acceptable percentage may result in consumer proposal affecting you longer than a bankruptcy. For example, if you are in bankruptcy for nine months and discharged, your credit file will be affected by a total of six years and nine months. Alternatively, if you opt for a consumer proposal that requires payments over a five year span, your credit file would be affected for a total of eight years.

Regardless of which option is chosen, banks view both with the same regard. However, sub-prime lenders favor clientele who have been through this process for two reasons. Firstly, all other debt obligations are satisfied. The lender does not have to worry if you will choose to pay the credit card as opposed to the auto payment when you have insufficient funds at your disposal. Secondly, after going through this process, most people are careful not to fall into old habits again that got them to the point of bankruptcy. They become very financially responsible and that results in lower risk for the lender.