20-year financial veteran Paul Murphy breaks down a common question from our clients: should you use things like consumer proposals bankruptcy or debt consolidation or preserve your credit score?
I recently sat down with David Moffatt from 4 Pillars’ Halifax office and Ryan Brown from 4 Pillars’ Muskoka & Parry Sound offices on our 4 Pillars’ podcast Beating the Debt Game.
I’ve summarized what we talked about below. If you prefer to download and listen to the podcast episode, you can listen here.
Here’s the typical client we see.
First, they struggle for years with making credit payments.
They live with crushing stress. Little emergencies become major, horrible crises. They know things like consumer proposals, consolidation loans, and bankruptcy exist.
They aren’t sleeping. And when they sit in our office, you can see the tension (and space) between a couple.
Our clients aren’t irresponsible. They are real people living in our community. Real people living day-to-day. They are loved by their families. They are working hard to provide for their family.
Often, debt began with life events out of their control, debt by a thousand cuts, a series of events and circumstances that causes their finances to fall apart.
It might take them years to finally get the courage to call a 4 Pillars office.
And now they are thinking about some serious techniques: debt consolidation, consumer proposals, bankruptcy.
While our clients are ready for change, they also fear damaging their credit rating.
4 Pillars has helped thousands and thousands of families and businesses navigate these situations.
I promise you: your credit rating doesn’t matter when debt levels are high.
Cash flow is better than your credit rating.
Money in the bank will give you more security than another credit card.
And taking drastic action that changes your future is better than trying and trying to shuffle around debts.
The point that I’m making: change your thinking about your credit rating.
We often believe that our credit score is the be-all and end-all and should be preserved at all costs.
This leads to a dangerous path where Canadians carry high debt loads, have poor cash flow, suffer from money stress—all to avoid taking a temporary hit on their credit rating.
This is a flawed way to think.
Yes, debt consolidation will impact your credit rating.
Yes, bankruptcy (called insolvency now) will have a lasting impact.
Yes, consumer proposals will impact your credit rating.
What’s less known are the positive sides of drastic steps like consumer proposals, consolidation loans, and even bankruptcy in some cases.
We see clients in their darkest moments. And get to watch them change, restructure their debt, and get to a life they want much faster than they expected.
They can go from stepping through the door of a 4 Pillars office, struggling, fearful of aggressive action of dealing with the debt. To now thinking about buying a home, seeing a much brighter future. In a much shorter amount of time than you think.
“I can’t tell you how many clients have come into my office after they restructure their debt,” says Ryan Brown from 4 Pillars’ Muskoka & Parry Sound offices. “You can see the physical change in them.”
“You can tell they are sleeping at night, they look like different people, the couples are sitting a little closer together than they were in the first meeting a few months before. And now they are seeing the light at the end of the crisis. Later they’re pushing an excellent 650 credit score in 12 months, and at the 24-month, they’ve got cash in the bank, they’ve paid off their proposal, and now they’re starting to look at them buying a house. It’s a crisis to a new life in 24 months.”
In our experience, it is the fear of the unknown that prevents them from taking this journey sooner.
But once they do, they realize the change is positive.
It’s important to note that consumer proposals or consolidation loans aren’t the only paths you can choose. When we work with clients, we help them decide which options will work for them.
For example, a recent client we worked with had no assets but had several hundred thousand dollars of tax debt.
In this case, bankruptcy was a good option. Most of our clients do not choose bankruptcy. But in this case, this gentleman had no means to pay, so he decided to go with bankruptcy. This helped him get rid of hundreds of thousands of dollars in tax debt, he lost nothing, and it only cost him $1800 and the bankruptcy only lasted nine months.
But you need an expert to review these options with you, look at all the different options, and pick what works for your financial situation.
Any bankruptcy is administrated through a licensed insolvency trustee. As a result, we recommend that all Canadians should also have representation. You need an advocate to protect your interests and not just to agree to the terms that best serve creditors.
A formal consumer proposal is another good option. We believe it is one of the best ways to deal with debt in Canada.
A consumer proposal is a 5-year payment plan. A consumer proposal does NOT have interest. You can pay it off early with no penalties. You pay more than you would than in bankruptcy. But from a credit impact, it’s much better (a maximum of six years or three years from the date of last payment whatever comes first). And you generally pay a greatly reduced amount of debt.
A consumer proposal gives you much better cash flow. You have flexibility in longer payment terms, so you can lower your monthly payments. Plus, you’re paying a reduced amount of debt, which means you’ve taken away all that nasty high interest that is compounding on high debt levels. You have significantly cheaper monthly payments than your current debt payments.
Cash flow is improved. Your debt is now interest-free. And you can not put a price on the benefit that this has on a family’s situation. The debt is now solved. The stress is gone. And they actually have a plan to pay back the debt. They have a much more affordable payment plan as it is over 60 months. If they get a raise or a new job, they can pay the consumer proposal off sooner without any penalty.
And now, as we see in our clients often, they start to see the end of all this. This is not a life sentence. Time is passing. They are watching the consumer proposal amount come down every month. They have a little money in the bank. And now, money is not the dominant thing on their mind when playing with their children or worrying about all the little issues that come up in life.
And they realize a lot of what was holding them back was this fear of damaging their credit rating with a drastic action like getting a consumer proposal.
As Ryan Brown explained on our 4 Pillars podcast, holding onto your credit rating keeps you stuck in the same reality again and again.
“It’s like you’re living in chains. You don’t want to live in chains anymore. But you still fear losing your credit rating. Your keep using the chains of credit to sink further into debt, wrapped in the trap of needing credit to stay afloat.”
While a credit rating is an important tool for building wealth, when debt levels rise to high levels, the tool loses its utility. You need to take drastic action. Break free. And allow a different future to start to emerge.
Ryan also says that once clients are free, often they don’t want to get back into credit.
“They come in my office, their consumer proposal has been accepted, and I start talking about the next step of rebuilding their credit. And they say ‘yeah, we’re not interested in that, we really liking how things are going right now, we got cash in our jeans, and we’re loving this debt-free life.”
We love their new mindset around money management but we also encourage clients to consider credit rebuilding as often in a few years, they’ll want to buy a house and will want that credit history to apply for a future mortgage. So if their situation has stabilized we guide them through the next phase of their new life: building for the future instead of being caught in a never-ending cycle of payments, interest, and misery.
So to recap my point: your credit rating is important. But not when you have high levels of debt. In that case, the focus on not damaging your credit rating is holding you back.
And you might be surprised with the positives of those scary debt techniques like consumer proposals, debt consolidation, and even filing bankruptcy.
Get us to review your debt situation
We specialize in helping Canadian families navigate tough financial times.
To learn more about how we guide you through debt decisions (including consumer proposals, consolidation loans, and navigating insolvency), book a free meeting with one of our 60+ offices in every Canadian city and town. This meeting can be done virtually as well!
Not ready for a meeting? Grab a free copy of my book, Beating the Debt Game, for a fast tour of the debt industry and how any Canadian can make the debt system work for them, instead of against them.