Credit counselling, Consumer proposal or Bankruptcy… Which option is most favourable?

A couple in their 30s contacts me for a mortgage. They want to buy a new home. She’s a high school teacher and he’s a computer firm manager. Incomes are good. I check their credit.

Let’s stop here for a minute… If they have good credit, an approval is simple and we can provide the clients with several mortgage options.

But let’s assume that this couple ran into some debt and credit issues three years ago… and they made three different choices about how to resolve those credit problems: 1) Credit Counselling; 2) Consumer Proposal; or 3) Bankruptcy. I want to take you through each scenario and show you how long each of these three options affects your ability to finance a home. I bet the results will surprise you!

1) Credit Counselling. I pull a credit report and see that the clients approached a credit counselling company three years ago. There are R-7 ratings on the credit report. R-7 means you’re making regular payments through a special arrangement (usually indicating you’re paying less than what you actually owe). Most arrangements last for five years. You did the honourable thing and are paying as much as you can without filing for bankruptcy. Good for you… except, this will negatively affect your overall credit rating. In fact, this stays on your credit report for three years after the completion date. ‘A’ lenders (those offering the best rates) won’t entertain your application while you’re in credit counselling. They want to see re-established credit for at least two years. So, with credit counselling, it could take up to seven years before you qualify for a mortgage offering fully-discounted rates.

2) Consumer Proposal. This is one step below bankruptcy, but the net affect is the same for your credit rating. Your credit report will show as an R-7 and some may even show as R-9 (meaning they have been written off). A bankruptcy trustee is used to file a proposal to creditors where someone earns good income but can’t afford to make all the monthly payments. This option is used when you have other assets that you don’t wish to lose or sell. If you have equity in those assets, you may have to choose this option or come up with a better plan to protect those assets, if possible. Unfortunately, the consumer proposal will stay on your credit report for three years after your final payment. And if you want to buy a house, you must re-establish your credit for at least two years after the consumer proposal expires. Buying a home may have to wait for 5-7 years.

3) Bankruptcy. This one is fairly simple to understand… If you don’t earn enough income to satisfy your payments, and if your assets are equal to or less than your total liabilities, you could be eligible to file for bankruptcy. Bankruptcy is a dirty word to most of us, but it should not be ignored as a possible option. A bankruptcy will stay on your credit report for seven years after discharge. It takes around nine months to be discharged. Here’s the big surprise and little known fact: After your bankruptcy has been discharged, you only need to re-establish your credit for two years before you can apply and qualify for a mortgage with as little as 10% down.

That’s right, in just three years, you could eliminate your debt, start saving for a down payment, re-establish your credit and buy a home… with fully-discounted ‘A’ rates!

So, although I personally respect someone who tries to make good on their debts, it’s not looked upon that way by creditors, banks or other lenders. Two years after your bankruptcy is over, you can apply for a mortgage with as little as 10% down and get fully-discounted ‘A’ rates – the same as someone who has had perfect credit all their life and never missed a payment! I bet most people didn’t know that?!

For me, bankruptcy is the best option… it eliminates your debts immediately, reduces your financial burden immediately and allows you to get back on the road to financial recovery sooner.

To be certain about your best options, speak with a trusted Bankruptcy Trustee… or feel free to contact me for more information.

Your best interest is my only interest. I reply to all questions and I welcome your comments. Like this article? Share with a friend.

Steve Garganis: 416-224-0114; steve@canadamortgagenews.ca