Keeping a Credit Card During a Consumer Proposal: What You Need to Know

Filing a consumer proposal can be a practical way to deal with overwhelming debt while obtaining relief from creditors. This legal process allows you to pay back a portion of what you owe over a period, under new terms negotiated with your creditors. However, one common concern among individuals considering this debt solution is the impact on credit cards. Can you keep a credit card during a consumer proposal? Here’s what you need to know.

The Fundamental Rules

Upon filing a consumer proposal, Canadian law requires that you surrender all your credit cards to your Licensed Insolvency Trustee (LIT). The rationale behind this rule is straightforward: the intent of the consumer proposal is to work towards paying off your debts without accumulating new ones. By surrendering your credit cards, you mitigate the risk of falling into further financial trouble while working through your proposal.

Is Keeping Any Credit Card Possible?

While the baseline requirement involves surrendering your credit cards, there are scenarios where obtaining or retaining a credit card is possible during a consumer proposal:

Prepaid Credit Cards: These cards can be reloaded with cash and used like a regular credit card. Since you are essentially using your own money that you’ve loaded onto the card, acquiring a prepaid credit card is generally permitted.
Secured Credit Cards: Secured credit cards are another option. To get one, you deposit a certain amount of money with the issuer as collateral. This amount usually determines your credit limit. Having a secured credit card can help you build or rebuild your credit score during a consumer proposal, as long as payments are made responsibly.

However, it is crucial to remember that any new credit acquired during a consumer proposal – including secured or prepaid cards – should be discussed with your LIT. They can provide guidance on how best to manage new credit without jeopardizing your consumer proposal.

Why Might You Need a Credit Card?

Even though getting into further debt is not advisable, there are practical reasons for needing a credit card during a consumer proposal:

Emergency expenses
Booking travel arrangements
Security deposits, such as for car rentals or hotel bookings
Online purchases

In these instances, having a prepaid or secured credit card can be incredibly useful, enabling you to make necessary transactions without risking financial stability.

Rebuilding Your Credit

Another point worth noting is that maintaining a secured credit card during your consumer proposal and using it responsibly can aid in rebuilding your credit score. Credit scores are affected by your ability to manage credit over time, so consistently making timely payments on a secured card can demonstrate financial responsibility to creditors. This positive financial behavior is reported to credit bureaus and can improve your credit rating over time.

Conclusion

While a consumer proposal necessitates the surrender of traditional credit cards, it doesn’t entirely prohibit you from having a credit card. Opting for secured or prepaid credit cards offers a way to manage your day-to-day spending and can help you gradually rebuild your credit score. However, it’s crucial to approach this with caution and under the guidance of your LIT to ensure that it aligns with your overall goal of achieving a debt-free life.

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Keeping a Credit Card During a Consumer Proposal: What You Need to Know