Part 1: Getting a Mortgage After Bankruptcy or Consumer Proposal

November 13, 2018 | Posted by: Kelleway Mortgage Architects

PART 1

How to Get a Mortgage After Bankruptcy or Consumer Proposal

by Glen Kelleway and Heather Francis

First off, let’s define a few things here.

Bankruptcy vs Consumer Proposal, what’s the difference in Canada?

In Canada, bankruptcy and consumer proposal are legal processes governed by federal law under the Bankruptcy & Insolvency Act.  In bankruptcy you must surrender your assets to be discharged from your unsecured debts.  This may mean that the assets are not actually taken; just used in the calculations to compute your bankruptcy payment.  If, however, you cannot afford the payment, then you may be forced to sell assets to reduce the payment to something you can manage to pay.  Different provinces allow differ exemptions.  (For example, in Alberta, the equity you can retain from your property is $40,000 compared to up to only $12,000 in Greater Vancouver or Victoria, BC.)  Under a consumer proposal, you make an offer to your creditors to settle your debts for less than what you owe.

Choosing which insolvency path to take often requires some guidance from a knowledgeable source.  Before approaching a trustee, it is vital to get proper debt consultation to know the rules of bankruptcy vs consumer proposal.  Both solutions impact your credit score, you household budget and your assets.  However, comparatively, a consumer proposal tends to be less harsh than a bankruptcy proceeding.  Be aware, though, that a consumer proposal requires more skillful negotiations to reach a satisfactory arrangement with your creditors.  Unique situations call for unique solutions as well.

Before making your decision, explore the impact of the following:

Cost of process

Usually your monthly payments to settle a consumer proposal are less than that for a bankruptcy and your monthly payments do not change. Under bankruptcy, if your income increases, your monthly payments may also increase, or you may be required to make surplus payments as well.

Length of option

A bankruptcy is quicker, from 9 months to 21 months, but the monthly cost is higher. Consumer proposals can spread payments over a period of up to 60 months and thus reduce your monthly payments.

Surrendering Assets

Under bankruptcy, you are required to surrender your assets except for some exemptions for household belongings and a car below a certain dollar value. Under consumer proposal you are not required to surrender your assets.

Credit Rating

With bankruptcy, an R9 (the worst rating) appears on your credit bureau and stays on your credit report for 7 to 14 years. The rating for a consumer proposal appears as an R7 and remains there for 3 years after you complete your payments.

Monthly Reporting and Duties

Both insolvency paths require attending at least two credit counselling sessions. However, throughout the bankruptcy period, you are required to complete a monthly income and expense budget as well as prove your monthly income to a trustee. As well, in bankruptcy, unlike consumer proposal, you forfeit any tax refunds or credits.

No matter which course of action you choose, REBUILD YOUR CREDIT as soon as possible. With a bankruptcy involving debt over $1000, you are required to wait until after your discharge date to rebuild your credit. With a consumer proposal you can start improving your credit score right away using the tips described at the end of this article.

Manage your Expectations

Very few lenders will approve a mortgage if the applicant is less than two to three years past their bankruptcy or consumer proposal discharge date.

Questions that lenders will ask about the credit history of mortgage applicants are:

1. Why did the applicant end up in bankruptcy or consumer proposal?
2. Was there real estate property involved that ended in foreclosure?
3. How effective has the applicant been in re-establishing two or three reporting accounts to the credit bureau (i.e., car payments, secured or unsecured credit cards, unsecured lines of credit, student loans, mortgage payments, etc.)?
4. Have all payments since the discharge date of the bankruptcy or consumer proposal been paid on time?
5. Has there been a minimum of two years clean reporting since the discharge?
6. Post-discharge, have the applicants reviewed their credit history to ensure all outstanding balances that were included in the insolvency are now reported as zero?

Showing consistent behaviour over time in saving and debt repayment will strengthen an application for a lender to approve a new loan or mortgage. The more proven you are in repaying debt and building savings post-discharge, the more likely you are to be offered better terms and rates from lenders.

After your bankruptcy or consumer proposal, you may still have some assets with equity. Find out how much equity you have in any property you own before refinancing. With property appreciation, you may be surprised how much equity you have for converting to a down payment towards your next property purchase. It will matter to the lender how much of the down payment is a gift, from savings, or from the sales proceeds of an asset, such as your existing property.

How stable is your current household income post-discharge? It is never too soon to start offsetting the stigma of a bankruptcy or consumer proposal and improving your credit worthiness. Ask us about embarking on a credit literacy program as soon as possible.

Helpful Links

Bankruptcy Exemptions 

Credit Counselling Society 

Bankruptcy vs Consumer Proposal 

Canadian Government Definition

Refresh Financial link to secured credit cards 

Read Part 2 of 'How to Get a Mortgage After Bankruptcy or Consumer Proposal' here. 

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