What is a credit rating and does filing bankruptcy affect your credit?
I’m Crystal Buhler, Licensed Insolvency Trustee with C. Buhler & Associates Ltd. One of the most common questions we hear when people are considering a bankruptcy or Consumer Proposal is “how will this affect my credit report?” It might surprise you to hear that many people we deal with have never missed a payment before filing, and often have quite good credit. I often hear clients say they have perfect credit, and they don’t want to lose it by filing bankruptcy or a consumer proposal.
Let’s take a step back and talk about credit for a moment. In Canada, there are 2 major credit bureaus – Transunion and Equifax. These are not banks, but rather independent organizations that provide banks with a report, compiled from various sources, about you and about your financial history. Just as you would include a list of references on your resume when you are looking for work, your credit report is like your list of financial references. The Credit bureaus generate a report that contains factors such as your employment status, how much debt you have, if you make your payments regularly, and in certain cases they’ll calculate a ‘score’ and make it available to financial institutions, so they can make informed lending decisions.
When someone tells me they have “perfect credit”, but they are seeking to deal with debt, I often ask, “Have you applied to your bank for a line of credit or loan to deal with your debts?” The answer generally is, “They declined me, and said I have too much debt.
So, if the contents of your credit report do not help you to be approved for new credit, then do you really have ‘perfect credit’? I’ve always said your credit report is only relevant in making financial decisions when it’s able to help you achieve your financial goals.
So how does the credit reporting system in Canada work?
Credit is rated on a scale of 1 – 9, with 1 being the best. A credit score of 1 means you have been making all of your required minimum payments. The number scale slides all the way from 1 to a 9, which will appear on your credit report when your debt has been written off, or when it assigned to a collection agency, or to a law firm.
If, by the time you chat with us, you have already missed a few payments, your lender probably reported this information to the credit bureaus, and you have a ‘mark’ against your credit.
Many people say, “they don’t want to file for bankruptcy” because it will “destroy their credit”. Yet, as we have seen, if your credit score has already been impacted by a late payment or two, or won’t permit you to access to new credit at reasonable rates, it’s already impacted. Even a debt that’s been sent to collection will remain on your report for 6 years – which in certain cases, is longer than the impact a Consumer Proposal would have on your credit.
So yes, bankruptcy and a consumer proposal do appear on your credit report. Technically, bankruptcies and consumer proposals are reported as a 9, and each will remain on your credit report for a specified period of time from the time of filing.
The question you want to consider is not if filing a bankruptcy or consumer proposal will hurt your credit, but rather is your credit report presently helping you manage your debt? If not, filing a bankruptcy or proposal may be the best way to re-set your score, and draw a line in the sand….a point from which you can improve.
If you need fresh start, we can help. Contact us today for your free consultation.