Choosing to file a consumer proposal is a serious but necessary step for many Canadians struggling with debt. Unfortunately, filing a consumer proposal will damage your credit, there is no way around it. While a consumer proposal will negatively impact your credit, the benefits of dealing with your debt typically outweigh this.
Key Points
| Consumer Proposal Effect On Credit | When you file a consumer proposal, you’ll receive an R7 credit rating which may negatively affect on your credit scores. |
| How Long Does A Consumer Proposal Stay On A Credit Report? | A consumer proposal will remain on your credit report for 3 years from the date of proposal completion, or 6 years from the date you defaulted on the account. |
What Is A Consumer Proposal?
A consumer proposal is a legal agreement between consumers and creditors to settle debts. With the help of a Licensed Insolvency Trustee (LIT), you can renegotiate what you owe through the proposal. If your creditors agree, you can repay a portion of your original debt amount based on what you’re able to afford.
Once you’ve completed all your payments, you’ll receive your Certificate of Full Performance and your debts will be eliminated.
Note: A Licensed Insolvency Trustee will not allow those who do not need the help of a consumer proposal to file.
Does A Consumer Proposal Affect Your Credit Score?
When you file a consumer proposal in Canada, it will affect your credit score because it will be reported on your credit report.
Firstly, the credit bureaus will be notified that you filed a consumer proposal. That will show up in the section of your report that lists legal and public records.
Secondly, the credit accounts that were included in your proposal will be reported as such. More specifically, a consumer proposal is coded as R7 on credit reports. This note means you had to settle your debt with your creditors, which will impact your credit score.
Canadian Standard Account Ratings
Your credit score is a 3-digit number that represents your creditworthiness, or the likelihood that you’ll make your payments on time. Each of your credit accounts is also given another type of credit rating, represented by a letter (I, O, R, or M) and a number (1-9).
Letters
| I | “I” stands for “installment”, meaning that your loan is being repaid in fixed installments over a certain period, such as a personal loan or car loan. |
| O | “O” stands for “open”, meaning you have opened credit, such as a credit card bill that you pay at the end of the month. |
| R | “R” stands for “revolving”, meaning your credit payments are contingent on your account balance. This is the most common type of credit account among borrowers. A good example is a credit card. |
Numbers
| R0 | Too little credit history or, credit unused. |
| R1 | Account paid within 30 days of due date or one or fewer payments late. |
| R2 | Account paid more than 30 days past the due date, not more than 60 days late, or two or fewer payments late. |
| R3 | Account paid more than 60 days past the due date, not more than 90 days late, or three or fewer payments late. |
| R4 | Account paid more than 90 days past the due date, not more than 120 days late, or four or fewer payments late. |
| R5 | Account paid 120 days late or more, but had not yet received an R9. |
| R6 | Not assigned a value. |
| R7 | Account holder is making agreed-upon payments through a debt relief program (ie. consumer proposal). |
| R8 | Repossession |
| R9 | Account in collections or bankruptcy. Account holder moved and did not provide a new address. |
How Long Will A Consumer Proposal Stay On Your Credit Report?
In Canada, there are two credit reporting bureaus: TransUnion and Equifax. Each bureau has a policy for how long information stays on a credit report.
TransUnion
Your consumer proposal and all your accounts that were reported as satisfied via the proposal will be removed from your credit report in one of the following scenarios, whichever comes first:
- 3 years from proposal completion
- 6 years from the date you signed your consumer proposal
Equifax
Your consumer proposal will be removed from your credit report in one of the following scenarios, whichever comes first:
- 3 years from proposal completion
- 6 years from the date your proposal was filed
How To Rebuild Credit After A Consumer Proposal
It may be easier to start rebuilding your credit after your consumer proposal is complete and removed from your credit report. However, there are things you can do both while you’re in a consumer proposal and after that can help you improve your credit score:
Apply For A Secured Credit Card
Accessing credit after a consumer proposal can prove challenging. Instead, you can apply for a secured credit card, which almost guarantees approval. To qualify for a secured credit card, you simply need to be able to provide the minimum security deposit, which also acts as your card credit limit.
Every payment you make with your secured credit card will be reported to one or both credit bureaus, which can help you build a positive payment history. This, in turn, may increase your credit scores.
Monitor Your Credit
Mistakes on your credit report may negatively impact your credit scores, so monitoring and correcting any errors on your credit report is another way to help build your credit. To ensure the information being reported about your consumer proposal is accurate, you can send a copy of your “certificate of full performance” to the two major credit bureaus.
Can You Build Credit Faster By Finishing A Consumer Proposal Early?
Once your consumer proposal has been paid off or completed, you can begin building your credit. As such, if you pay off your consumer proposal early (by taking out a consumer proposal loan or by borrowing money from friends or family), the earlier it will be removed from your credit report. Moreover, you can work toward building your credit once your consumer proposal is paid off by paying down your consumer proposal loan.
Is A Consumer Proposal Worth The Negative Impact On Credit?
Technically, a consumer proposal may be worth the ding to your credit rating. If you don’t have a handle on your debt and it continues to worsen, your credit score might also continue to be negatively affected. The sooner you deal with your debt — including filing a consumer proposal — the sooner you can get back on track with your finances.
When To Consider A Consumer Proposal
A consumer proposal can have a major impact on your credit ratings. However, there may be certain circumstances in which filing a consumer proposal is worth considering:
- You can’t manage your current debt on your own
- You’ve tried other debt-relief options and none have helped
- You want to avoid bankruptcy
- You have unsecured debt worth no more than $250,000
- You can afford to at least cover a portion of your debt
Pros And Cons Of A Consumer Proposal
There are several perks and drawbacks to a consumer proposal to consider before filing:
Pros:
While a consumer proposal can hurt your credit scores, it does offer some important benefits:
- Relief from mounting debt. If you’re unable to handle your debt, a consumer proposal can help you alleviate your debt and avoid the risk of bankruptcy.
- Fixed payments. To repay your consumer proposal, you must make installment payments. These payments are fixed and will not increase, making them relatively easy to budget for.
- Potential reduction in amount owed. If you can negotiate with your creditors, they may reduce your original debt amount as part of the proposal.
Cons:
There are some notable downsides of a consumer proposal to consider:
- Your credit score will suffer. As mentioned, your credit scores will take a hit when you file for a consumer proposal.
- You may have trouble obtaining new credit. While your credit report shows an R7 rating for a consumer proposal, you may have difficulty applying for loans and credit products.
- Only unsecured debt is typically covered. Generally speaking, a consumer proposal will only deal with unsecured debts (ie. credit card debt, personal loans, etc)
Bottom Line
Debt can affect all aspects of your life. Taking the necessary steps to deal with it is always the best choice, even if that means filing a consumer proposal. Remember that your credit will likely take a hit when you file a consumer proposal. To ensure this is the right choice, consider speaking with a credit counsellor.
