Around the age of four years old, most of us begin attending school. We’ll remain there until the age of 18, when we may choose to continue our studies in college. Given we spend roughly 10 months of each year in an institute of learning, you’d think there’d be ample opportunity to teach kids about personal finances, budgeting, loans, investing and savings. But while these are topics most people say they’d love to learn more about, they are rarely touched on in school.
As we continue to learn about life, this lack of financial literacy can come back to haunt us. We learn our parents cannot pay our way forever. Here is where we enter the world of car loans, personal lines of credit, and credit cards, relationships, travelling, and consumer goods. We use credit cards to spend money we really don’t have. We use them again, and again and again, and so on.
Debt begins to pile up; the job just isn’t paying enough, the minimum payments cannot be made, items go to the collectors, the phone stops working, and now you are in serious trouble. So what do you do?
For some, a consumer proposal or bankruptcy are the only options. But what is the difference between these methods – and how will they impact your chances of buying a home later on?
The Difference Between a Consumer Proposal and Bankruptcy
A consumer proposal pays off a portion of the total debts through a trustee. There are agreed-upon payments over a set payoff timeline, and the creditors stop calling. You can breathe now – but your personal credit bureau history is in shambles until the debt is finally discharged.
A bankruptcy is a Federal court legal proceeding involving a person or business, with the condition of financial failure: not having the money required to pay debts.
The term bankruptcy is from the Italian phrase banca rotta, meaning ‘broken bank’, which stems from the custom of breaking a moneychanger’s bench to signify his insolvency.
What’s noteworthy is that student debt is very unlikely to be part of bankruptcy; similar to a consumer proposal, you agree to make payments through a trustee for a particular time and your personal credit is negatively affected until the time the bankruptcy is discharged.
Is it Possible to get a Mortgage after Bankruptcy?
The answer is yes – but you’ll face additional restrictions. Depending on your credit agency, a bankruptcy will remain on your credit report between six and seven years. Once a bankruptcy or consumer proposal is discharged, many lenders require an additional two years’of time with two active trade lines such as credit card, loans, line of credit, another credit card, etc.; plus no late payments and liabilities that are in good standing.
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Doing so can regain the A-credit status needed to access the best mortgage rates, and make a minimum of 5% down payment;
If a late payment has been made, but the borrower has two active trade lines, they can make a 10% minimum down payment with higher rates;
If the borrower has only one trade line, had made late payment(s), has a low credit score, etc., they’ll need to pay at least a 35% down payment, and will only be able to access high mortgage rates, short terms, additional fees, possible ‘private’ financing with even higher rates and additional fees.
Before You Try to Borrow Again
It’s important to assess the reasons for claiming a consumer proposal or bankruptcy in the first place. If it was for reasons such as overspending, a marital split, business breakdown, illness, death in the family, etc., be prepared to take some time to get your life back in order. Try to save some extra cash, and to adjust your spending habits to avoid credit trouble in the future.