Rebuilding Credit After Consumer Proposal or Bankruptcy

Published: October 25, 2018 Last updated: November 28, 2021 at 17:05 pm

There is no question after you file a consumer proposal or personal bankruptcy, your score is going to take a beating. Credit scores range from as low as 300 to 900, with most Canadians in the 600’s and 700’s.

After you file a consumer proposal, expect your score to drop into the low 500’s, maybe even lower than that.

When your score is that low, you are no longer attractive to prospective card issuers. Mortgage lenders and car dealers will look at you warily, and you may even find it hard to rent a place to live.

Some Canadians say they don’t care about this. They are so relieved to get out from under a mess of debts and card carnage, the last thing on their mind is to go out and rebuild their personal credit history.

But that is totally the wrong way to think.

This article explains how to establish new after your consumer proposal or bankruptcy. It also teaches you how to increase your score quickly and how to clear up reporting errors which may be dragging down your score.

New Cards After Consumer Proposal

When you file a consumer proposal, you might not have to hand over all your cards to the trustee. Trustees have differing views on this.

Some are okay if you have a card with a zero balance on it, and if you are not using it at the time of filing, and while waiting for approval of your consumer proposal, they may allow you to keep it.

Now keep in mind even if this is your situation, there is nothing to stop your card issuer from cancelling your card, even if it is in perfect standing.

There is a decent chance they will find out about your consumer proposal (via a soft inquiry on your personal history) and for many card issuers, that’ll do it. Your card will be toast.

Also, please understand if this card you are hanging on to was issued by a credit card issuer who is already being affected by your consumer proposal (for example you have two credit cards from this bank, or a personal line of credit as well as a credit card) the chances of them cancelling this “clean” card is pretty much 100%.

When you file your consumer proposal, you’ll wait forty-five (45) days after you have filed to find out if your creditors accept your proposal as offered.

Most of the time, properly constructed consumer proposals are accepted the first time. If not, the debtor works with the trustee and the creditors to come up with a revised offer that suits all parties.

Once the terms of your consumer proposal have been accepted and approved in court, in my view you are free to turn your attention to rebuilding your credit score with new credit cards too.

Not every trustee feels this way.

I do occasionally meet clients who believe they were told by their trustees that if they apply for new credit while in their consumer proposal, the trustee would cancel and void the consumer proposal.

I like to think they just misheard what was explained to them, as this feels totally wrong to me. If you are not sure, reach out to the Office of the Superintendent of Bankruptcy and ask their advice.

Anyway, after your consumer proposal is approved, you might still have a cell phone contract, a car lease or loan, or perhaps even a mortgage.

These will all continue to report to both Equifax Canada and Trans Union Canada, and it is important you remain on point with your scheduled payments.

If you wish to rebuild your credit score, this is best achieved with NEW credit facilities. For most people, this entails applying for a new credit card. More on that below.

New Credit Cards After Bankruptcy

When you declare personal bankruptcy, you must hand over all your credit cards to the trustee – even those you are not using and which have a zero balance. As a result, you may not have anything breathing new life into your personal credit history.

You might still have a cell phone contract, a car lease or loan, or perhaps even a mortgage. These will all continue to report to both Equifax Canada and Trans Union Canada, and it is important you remain on point with your scheduled payments.

If you wish to rebuild your credit score, you must wait till you receive your discharge from your personal bankruptcy.

These days, most personal bankruptcies last for either nine months or twenty-one months. It depends on your household income.

Once you receive your discharge from personal bankruptcy, you should get to work rebuilding your credit score. This is best achieved with NEW credit facilities. For most people, this entails applying for a new credit card.

Getting Approved for a Credit Card – How it Works

Whether you filed a consumer proposal or personal bankruptcy, it’s quite likely your new credit card company is going to require you to leave a security deposit with them.

Most such card issuers require one dollar left for every dollar of available credit. So if you want a $1,000 limit on a new credit card, you would be asked to give $1,000 to the card issuer. This money is held in safekeeping for you and protects the card issuer against you reneging on your new card obligations.

In my experience, if the secured credit card is issued by a bank, there is the possibility they will return the security deposit back to you within two to three years, provided you demonstrate responsible usage and payment patterns.

Other card issuers such as the HomeTrust Visa or Peoples Trust MasterCard, typically keep the security deposit until such time you close the account completely.

Our clients usually apply to Capital One for their first new credit card after personal bankruptcy. Seems like everyone is approved – even if they had a Capital One card included in their bankruptcy.

What I like about the Capital One Secured Credit Card is that the security deposit is as little as $75, and maxes out at $300, regardless of the actual limit they accord you.

For Canadians coming out of personal bankruptcy or a consumer proposal, cash reserves are often in short supply. So not having to match the new card limit with hard-won savings is very attractive.

There are other ways to rebuild your credit score after a consumer proposal. There are some companies out there who offer credit rebuilding personal loans, where the whole point is to lend money to a Canadian specifically to rebuild the personal credit score, and NOT necessary to finance a significant purchase.

These can even be set up such that the loan proceeds are used solely to repay the loan itself!

I suppose these have their merits, and occasionally I meet new clients who are proud to explain it all to me as I review their personal credit history. But in my view, it’s not really necessary.

That first new credit card is an important first step towards increasing your personal credit score after a consumer proposal.

After you receive the new card, in my view you should use the card vigorously, while making frequent payments towards the balance owing.

Don’t wait for your monthly statement to make a payment. You could make online payments, two or three times a month, and more. As often as you like – the more often the better.

I recommend this for two reasons. Firstly, you want to avoid having large balances owing reflected on your credit report. Even if you pay them off in full each month, no one could tell that by looking at your report. Your card issuer will report the balance owing on the statement date, which might be prior to you making that large monthly payment.

Secondly, your card issuer will note your responsible usage and payment patterns. You stand a better chance of receiving credit limit increases in the future.

You care about that because you want to show you are a responsible user of decent credit facilities.

All things being equal, down the road a mortgage company or car finance company will look more fondly at a debtor who has responsibly managed a $5,000 limit card than a $500 limit card.

Within three or four months of activating that first new credit card, consider applying for another card. Two new credit facilities are better than one!

Our clients have successfully applied for a Canadian Tire MasterCard in this fashion.

Clear Up Reporting Errors In Your Credit Report After a Consumer Proposal

We often see significant reporting errors in the personal credit reports of our clients who have previously filed a consumer proposal or personal bankruptcy. These reporting errors have a HUGE IMPACT on the credit score and can really slow down your return to a high credit score. For example:

  • Sometimes a consumer proposal is not shown as fully paid
  • Sometimes bankruptcy is shown as undischarged
  • A debt may say “bad debt, collection account or unable to locate”
  • Debts included in the insolvency might still show high balances
  • Often the balances are higher than the limits
  • Collections may be showing as unsettled

It’s a bit of work for you, but you can insist Equifax and Trans Union Canada clean up such errors. You will have to put together a full package to support your claim that the errors are not warranted.

The package typically must include two clear pieces of ID (front and back), a recent copy of your personal credit history, and all documentation that will corroborate your position.

It’s best to include a cover letter summarizing your claim in point form as well.

Assuming you got it right the first time, you should hear back from both credit bureaus in four to six weeks.

You will be pleasantly surprised by the result!

If you wish to have this done professionally, you may use our services. We expect turnaround and results in a week or less. And because we have done this so many times, we get it right the first time and save you time and energy.

Case Studies – Canadians Rebuilding Their Credit Score After a Consumer Proposal

We help lots of Canadians rebuild their personal credit scores after filing a consumer proposal or personal bankruptcy. Here are several recent examples (names changed for the privacy of course) from our client base where we increased their score in a very short period of time.

  • Manuel 607 to 676. Six months after he completed his consumer proposal.
  • Siovan 561 to 644. While she was still in her consumer proposal.
  • Laura 587 to 676. As she completed her consumer proposal.
  • Alice 570 to 702. Over the course of a year after she paid off her consumer proposal.
  • Simon 497 to 686. Over the course of a year after he paid off his consumer proposal.
  • Artem 545 to 720. A former bankrupt. We increased his score by 175 points in one week!
  • Carmen 475 to 721. Over the course of a year after he paid off his consumer proposal.

The Takeaway

No matter how bad things seem, or how low your credit score, there is no reason to give up. We have helped hundreds of Canadians completely recover from a life-changing insolvency. Some we have helped increase their personal credit score by over 400 points over a number of years!!

So if this is you, and you are in or have recently completed a consumer proposal or personal bankruptcy, ask us how you can rebuild your credit score.

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