In Quebec, insolvency is a legal process that allows individuals and businesses to eliminate their debts and start fresh. However, this process has a significant impact on your credit score and credit history. Understanding how insolvency affects your credit score and credit history is crucial if you are considering this option.
What is insolvency?
Insolvency is a legal process that allows individuals and businesses to eliminate their debts by making a proposal to their creditors or filing for bankruptcy. In Quebec, there are two main types of insolvency: consumer proposals and bankruptcies.
A consumer proposal is an agreement between the debtor and their creditors, in which the debtor offers to pay a portion of their debt over a period of time. If the creditors accept the proposal, the debtor can avoid bankruptcy and keep their assets.
Bankruptcy, on the other hand, is a legal process in which the debtor surrenders their assets to a trustee, who sells them to pay off the creditors. In exchange, the debtor is released from most of their debts.
How does insolvency affect your credit?
When you file for insolvency, it is recorded in your credit history and can stay there for several years. In Quebec, a consumer proposal stays on your credit report for three years after you complete it or six years after you sign the proposal (whichever comes first), while bankruptcy stays on your credit report for seven years after you’re discharged, depending on whether you have filed for bankruptcy before. However, it is important to note that it can also have some positive effects on one’s credit.
A fresh start
Insolvency can offer individuals a fresh start and a chance to rebuild their credit. While it is true that insolvency can stay on one’s credit report for up to seven years, it is not the end of the world. By taking steps to improve their credit habits and behaviours, such as paying bills on time, reducing debt, and establishing a budget, individuals can gradually rebuild their credit and improve their credit score. Moreover, they can use the lessons learned from their insolvency experience to make better financial decisions in the future and avoid the mistakes that led to their insolvency.
Insolvency can provide individuals with legal protection and relief from creditors. When individuals file for bankruptcy or make a proposal to creditors, they are protected by the law from further collection actions or legal proceedings. This can help them reduce their stress and anxiety, and focus on getting their finances back in order. In turn, this can have a positive impact on their credit, as they are less likely to default on their debts or miss payments.
Access to financial counselling
Insolvency can also provide individuals with access to financial counselling and education. Many insolvency professionals offer counselling and education services to help individuals understand their finances, improve their budgeting skills, and develop a plan for the future. This can be invaluable for individuals who may have lacked financial literacy or support in the past and can help them develop the skills and knowledge they need to make informed financial decisions and improve their credit in the long term.
Steps to rebuilding your credit
While insolvency can have a significant impact on your credit score and credit history, it is not the end of the world. There are several steps you can take to rebuild your credit score and credit history after insolvency.
Firstly, you can make sure to pay all your bills on time and in full, as payment history is the most important factor in calculating your credit score. You can also keep your credit utilization low by paying off your balances in full each month and avoiding taking on too much debt.
Secondly, you can open a secured credit card or a credit builder loan, which are designed for individuals with bad credit or no credit history. These products can help you establish a positive payment history and improve your credit score over time.
Finally, you can check your credit report regularly and dispute any errors or inaccuracies, as these can negatively impact your credit score. By keeping an eye on your credit report and taking steps to rebuild your credit score and credit history, you can gradually improve your creditworthiness and financial standing.
It is important to seek professional advice from a Licensed Insolvency Trustee (LIT) before filing for insolvency, as they can provide you with guidance on the best course of action for your specific situation.