Tips for Rebuilding Your Financial Health after Completing a Consumer Proposal or Being Discharged from Bankruptcy
You completed a consumer proposal, or you were discharged from bankruptcy. Now what? First thing’s first, you should let out a great sigh of relief. It’s called debt relief for a reason.
Although personal bankruptcy, and consumer proposals to a lesser degree, make you start from scratch with your credit, you should feel immense relief from escaping that burden of debt that was weighing you down.
And the best thing about credit is that you can rebuild it. With your learned life lessons about debt management and financial planning, along with the following tips from our government approved financial counsellors, you can stay out of debt for good.
What Happens After A Bankruptcy Discharge?
A bankruptcy discharge is the last step of the bankruptcy process. Once you are discharged from bankruptcy, the bankruptcy process is complete, and it’s time to start rebuilding your credit, managing your finances, creating a realistic budget, and becoming a saver and wealth builder.
A first-time bankruptcy will stay on your credit report for six to seven years following discharge. You may also be asked if you’ve ever been bankrupt, or filed for bankruptcy, when applying for some financial products or services or seeking security clearance. If you are ever asked this question, you must always answer truthfully.
Although your bankruptcy will stay on your credit report for a time, your credit status will be clear as if you’ve never had credit. The debts you could not pay, and that were extinguished in your bankruptcy, will no longer appear on your credit report or hurt your credit score. You will need to start earning the trust of lenders to build your credit again.
A prepaid or secured credit card may help you re-establish your credit.
We understand you will qualify to obtain a mortgage a year after you have been discharged provided you meet other mortgage lender criteria.
What Happens After A Consumer Proposal?
A consumer proposal will remain on your credit report for three years from the date it is paid in full.
As with bankruptcy, you can start rebuilding your credit with a prepaid or secured credit card upon completing a consumer proposal.
After a year of building your credit, having saved a sufficient down payment, and meeting other mortgage lender criteria, we understand you may qualify for a mortgage to buy a house.
Rebuilding Credit Score
Although bankruptcy, a consumer proposal, or debt settlement, will affect your ability to get credit, it is possible to rebuild your credit score and eventually reach your financial goals. Here’s how.
Check Your Credit Report
You should review your credit report at least annually to see how your report looks after your bankruptcy discharge, or completion of a consumer proposal, and to make sure it is accurate. If there are any discrepancies on your credit report, you should address them immediately, so your credit-building efforts aren’t slowed down.
Report any errors on your credit report to the credit bureaus, Equifax and TransUnion. You can do so by completing a form provided by the credit bureaus to explain the information that needs updating.
Equifax and TransUnion are required to give you a free copy of your credit report once a year. You must complete a form on their websites.
Apply for a Secured Credit Card
While applying for a credit card may seem like the last thing you want to do, this is the best way to rebuild your credit.
If you have no credit, you can either apply for a prepaid credit card or a secured credit card. If possible, apply for a secured credit card as it will authorize you to borrow a modest amount in excess of the required deposit. The secured card deposit is usually an affordable lump sum of money that acts as a security deposit in case you default on your account.
A secured credit card provides revolving credit, so you will always have available credit if you make your required payments. A secured card history will also be reported to the credit bureaus.
A prepaid card will only permit you to access the funds you have put on deposit.
Use the Credit Card Wisely
Once you receive your new credit card, start using it responsibly to build your credit. Be sure to pay off the full amount owing each month and never miss a payment due date.
The responsible use of your credit card will create a positive credit report and start increasing your credit score, even within the first year after your bankruptcy discharge, or completing a consumer proposal.
Build Credit in Other Ways
Eventually, you will want to start expanding your credit-building capacity. One way to build more credit is to take out a loan for an RRSP. An RRSP loan is usually a loan that requires payments over a one-year term.
When you borrow an RRSP loan, the funds are deposited into an RRSP account. Along with building your credit, this can also help you receive an income tax deduction and increase your net worth.
If you want to buy a car, look for a reputable company that offers financing to those with poor credit. But make sure that you can afford the monthly payments before financing it. If the cost of borrowing is too high, you will be better off purchasing a less expensive vehicle, or paying cash.
Once you’ve paid off your car loan, your credit score will have improved and you’ll be able to get financing for other purposes, perhaps to buy a home.
Developing Good Financial Habits
During the bankruptcy or consumer proposal process, you will have attended credit counselling sessions as part of your obligations. However, you can benefit from financial counselling even after you get out of debt.
Professional financial counsellors at Baker Tilly Ottawa Ltd. (formerly Collins Barrow Brown Inc.) can help you build your credit, stay out of debt, develop personal budgeting skills, and rebuild your financial health.
If you’re wondering how to stay out of debt, and stay on top of your finances, the most straightforward answer is to develop good financial habits. Reach out to us at Baker Tilly Ottawa Ltd. if you have any questions!
Tips for Staying the Course
- Prepare and keep following a budget so you don’t overspend and fall back into debt;
- Always pay off your credit card each month;
- Don’t miss a payment on any bills or loans;
- Start saving for an emergency fund to cover expenses in case of a financial emergency—e.g., job loss or unemployment due to illness;
- Increase your retirement contributions so you don’t have to go into debt in retirement;
- Start saving for a down payment on a house- look into setting up a Tax-Free Savings Account (TFSA) for this purpose. The larger the down payment, the less mortgage debt you’ll have;
- Consider starting to build a retirement portfolio – saving even $25 a month will grow to a substantial sum over the next 20 to 25 years.
- Set goals to also start enjoying life- put aside funds each month to take that vacation you wish for, or to have a family or personal celebration.
You’ve Earned This
Getting out of debt is a well-earned relief and accomplishment. Whether you completed a consumer proposal or have been discharged from bankruptcy, you did a lot of work to get where you are. Pat yourself on the back and use your financial knowledge to maintain and build a good financial standing and strong credit score.
And don’t forget to enjoy your new financial freedom from debt!
If you are overwhelmed with debt, and your credit rating is low, or you expect it to plummet due to having an account sent to collections, or the garnishment of your pay, it is highly possible that the best thing you can do is to file for bankruptcy or to file a consumer proposal. A consumer proposal is a debt and money management plan overseen by a federally licensed and regulated professional. Consumer proposals stop collections, garnishments, collect lawsuits and accruing interest. A single and affordable monthly payment is required, and you will be debt-free in 5 years or less. Principal reductions to 20% to 40% of the amounts owed are very common. The filing of a consumer proposal will give you a fresh start on building a good credit score.
Baker Tilly Ottawa Ltd., until its recent name change, Collins Barrow Brown Inc., is a Licensed Insolvency Trustee servicing Ottawa, Gatineau and Eastern Ontario since 2002. Its licensed professionals have over 100 years of combined experience in assisting individuals in financial difficulty. They have overseen thousands of successfully completed bankruptcies and consumer proposals. Their passion – their mission – is your health and well-being! Start your journey today with a free initial consultation!