Debt Help – What Solution is Best for Your Credit?

Posted by: Shawn Stack on 11/28/2011

One of the first things creditors do when you get behind in your payments is remind you how important credit is and how you are shooting yourself in the foot for the future.  Canadians everywhere listen.  When it comes time to seeking debt help, one of their principal concerns is what impact the solution they adopt will have on their credit rating.

The worst thing you can do to your credit is declare bankruptcy.  At least that is what you read and what you may be told.  The truth is, that is not always the case.  There are two things to keep in mind when evaluating debt help and what it will do to your credit.

The first is what your credit rating is right now.  The second is the time required to restore your credit rating to good health.

If your credit rating is still reasonably good it makes some sense to look for a debt consolidation loan as it has minimal impact on your rating.  However, they can be hard to get without stable income and assets to use to collateralize the loan. 

Debt management plans where you repay all you owe over a three year period have the least negative impact on your credit.  However, while you are in the plan you may not be able to apply for new credit until you complete the program. 

Debt settlement plans, where you repay a portion of the total you owe usually over a five-year period, have a more negative short term impact on your credit.  In addition, you’ll be blocked from new credit for the five years you are in the plan.  Both management and settlement plans remain on your credit history for 3 years after you complete the plan.

In personal bankruptcy you do get the worst short term credit rating possible.  However, as a first time filer, you will only be in bankruptcy from 9 months to 21 months and the notation will remain on your credit for 6 years after discharge.

If your credit rating is already in sad shape, the thing you want to do is get back in the game as soon as possible.  Once you are out of any of these plans – including bankruptcy – you can begin to rebuild your credit rating.  Do the math and you’ll see bankruptcy gets you to that point in less than 2 years while you will be in a DMP for 3 years and a DSP for 5 years.  That’s something to think about before you make up your mind.