Orderly Payment of Debts or Alberta Bankruptcy?

Posted by: Krista McDonald on 08/01/2011

In our experience, one of the main reasons so many Albertans refuse to consider an Alberta bankruptcy as a way to get out of debt and start over is what it might do to their credit rating. The other principal reason is asset loss. As a result, most residents first search for non-bankruptcy solutions to their debt problems, believing they will be better for their future ability to get credit once they are back on their financial feet.

One alternative solution available to Alberta residents is an Orderly Payment of Debts (OPD.) As an alternative included in the Bankruptcy and Insolvency Act of Canada (BIA), an OPD has a significant advantage over other credit counseling solutions like debt management plans. An OPD comes with legal protection against creditor collection activity.

But what does an OPD do to your credit rating and how does that compare to bankruptcy?

What few Albertans realize is that any debt solution involving restructuring the way you repay your creditors will negatively affect your credit rating. The real question is how much and for how long.

If you have searched the Internet for debt solutions, you know that non-bankruptcy alternatives like an OPD, a debt management plan, or a consumer proposal all involve an R7 rating assigned to each of your unsecured credit accounts. R7 means the debt is under a settlement program. With a declaration of personal bankruptcy, the rating is an R9, indicating write off or bankruptcy filing. While an R9 is certainly worse than an R7, the practical impact is the same for all these debt solutions – you cannot apply for credit until you successfully complete the program.

It is true that the R7 from an OPD, a consumer proposal, or a debt management or settlement plan falls off your credit history in 3 years instead of the 6 years for the R9 bankruptcy rating. However the time the rating stays on your credit report has no impact on your ability to get credit. The more important issue to consider is how long it takes you to complete the program. The moment you successfully complete the program you are in, you can begin rebuilding your credit rating.

Consumer proposals and settlement plans typically last 5 years, while an OPD plan lasts 4 years and a debt management plan lasts for 3 years. On this measure, an OPD is clearly superior in that you can start rebuilding your credit rating in only 4 years while enjoying the legal protection it provides. However, you should know if you declare bankruptcy and it is your first filing, you will be discharged in anywhere from 9 months to 21 months, much sooner than any non-bankruptcy alternative.