The Quickest Way to Re-establish Credit

Question: I’m about $30,000 in debt with an R9 credit rating. I was OK until last year, but things have gone downhill recently.  I also have a Canada student loan from 10 years ago. I want to take control of this and get back on track as soon as possible. Currently I am about to be laid off, but hope to get another job very soon. I rent my living quarters, have no assets (other than furniture – some nice and new, some not) and an older vehicle that’s not worth more than $1000. I am, however, 1 year into a 4 year lease on a new car that I can’t get out of easily. Despite the financial burden, I’d like to keep the car since it’s reliable transportation and I can also keep making the monthly payments to help my credit rating improve. Is that also a wise idea?

I’ve heard that if I get debt counseling and go on a DMP (Debt Management Program), my credit can be reestablished two years after it’s all paid off – meaning a clean credit record – as if nothing had ever happened.

That sounds very appealing to me as I’d like to get a mortgage and a credit card as soon as possible after the debt is taken care of. Although I could pay less using a consumer proposal, or potentially nothing if I file personal bankruptcy, rumour has it that those NEVER leave you. They’ll certainly remain on my credit rating for 6 or 7 years and possibly always be lurking in the background forever. Is this true? What would be the best solution?

Credit Repair Implications

First, let’s start by dispelling some myths.  You said that you have heard that with a debt management plan “my credit can be reestablished two years after it’s all paid off – meaning a clean credit record – as if nothing had ever happened.”  This is not true.  To quote Equifax, the largest credit reporting agency in Canada, this is how long information remains on your credit file:

Voluntary Deposit – Orderly Payment of Debts, Credit Counseling: When voluntary deposit – OPD – credit counseling is paid, it will automatically purge from the system three (3) years from the date paid.

Registered Consumer Proposal: When a registered consumer proposal is paid, it will automatically purge three (3) years from the date paid.

In other words, a debt management plan through a credit counsellor remains on your credit report for exactly the same amount of time after it is paid in full as a consumer proposal.  There may be advantages to choosing credit counselling over a consumer proposal, but time to repair your credit, or the impact on your credit report, is not one of them.

As you correctly point out, in most consumer proposals you pay less than the full amount owing, and in a debt management plan you generally pay the full amount owing, so in fact in most cases a consumer proposal can be paid off faster, and therefore is a quicker way to repair your credit.

Choosing A Debt Relief Program

With that background, let’s review your debt options:

While you are not currently working, you could do nothing and wait until you find work. Your creditors cannot garnishee your wages if you don’t have any, and until you know how much you will be earning at your new job it’s impossible to know which option you can afford.

Once you return to work you have three potential options: a debt management program (DMP), a consumer proposal or personal bankruptcy. Let’s look at the implications of all three in your situation.

A DMP would deal with your credit card debt. However, there is no guarantee that a DMP can deal with your government student loan. The federal government may decide to continue taking your tax refund until the loan is paid.

You could file a consumer proposal, which, if accepted by your creditors, will deal with your credit card debt and your student loan debt (assuming you have been out of school for more than seven years). The process is legally binding, so unlike in a DMP the creditors can’t change their mind later.

You could also file bankruptcy, but the cost of bankruptcy depends on your income. If you get a high paying job the cost can be significant each month, so once you are working you will want to discuss that with a trustee.

If you file a consumer proposal or a bankruptcy you have two choices with respect to your leased car:

You can keep the car, and keep making the lease payments. That helps your credit rating, but if it is a significant financial burden your other option is to surrender the car when you file your proposal or bankruptcy. The resulting shortfall is included in your bankruptcy or proposal, and you could use your $1,000 car as transportation until you can afford to updgrade.

There are many factors to consider, so we strongly suggest you consult a consumer proposal administrator or bankruptcy trustee to review your options before you decide to file.

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