Unfortunately, filing a consumer proposal will damage your credit, there is no way around it. Choosing to file a consumer proposal is a serious but necessary step for any Canadians struggling with debt. Furthermore, a Licensed Insolvency Trustee (a professional who administers consumers proposals) will not allow those who do not need the help of a consumer proposal to file. While a consumer proposal will negatively impact your credit, the benefits of dealing with your debt typically out weight this.
What Is A Consumer Proposal?
A consumer proposal is a legal process, overseen by a Licensed Insolvency Trustee, that helps Canadians deal with their debt. It is a type of debt settlement which means your creditors agree to accept a percentage of what you owe and in return will fully forgive your debts.
Your LIT will create a plan based on what you can afford and your creditors must accept it. Then you will make your agreed upon payments and attend two credit counselling sessions. Once you’ve completed all your payments you will receive your Certificate of Full Performance and your debts will be eliminated.
Your Credit Rating After Filing A Consumer Proposal
When you file a consumer proposal in Canada it will affect your credit as it will be reported on your credit report.
First, the credit bureaus will be notified that you filed a consumer proposal and that will show up in the section of your report that lists legal and public records.
Second, each of the credit accounts that was included in your proposal will be reported as such, this means they will be given a credit rating of R7.
North American Standard Account Ratings
Your Canadian credit score, the credit ranking you’re probably the most familiar with, is a 3 digit number that represents the likelihood that you’ll make your payments on time. Each of your individual 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 | Stands for “installment”, meaning that your loan is being repaid in fixed installments over a certain period of time, such as a personal loan or car loan. |
| 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 | 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. |
| M | Stand for “mortgage”, while not all mortgages show up on credit reports, if they do, they may be represented by an M. Mortgage may also be represented by an I for installment. |
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. |
| 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 bureaus has its own 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 3 years from the date you successfully completed your proposal. Or, 6 years from the date your defaulted on the account. Whichever dates is first.
Equifax
Your consumer proposal will be removed from your credit report 3 years from the date you successfully completed your proposal. Or, 6 years from the date your proposal was filed. Whichever date is first.
How To Rebuild Credit After A Consumer Proposal?
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 towards 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?
One of the most frequently asked questions that we get, concerning consumer proposals and credit ratings, is whether or not you should worry about how your rating is affected. Unfortunately, there isn’t a straightforward answer to this. Technically, the answer is yes as you should always be worried about how your financial decisions affect your credit rating. But, sometimes filing a consumer proposal is the right decision even if it may negatively affect your credit, as it can help you get back on track financially.
Additional Reading
Consumer Proposal FAQs
Will a consumer proposal be a permanent record on my credit report?
Can I get a loan after a consumer proposal?
Should I file for a consumer proposal?
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. Having a plan in place to get your debt under control and finances back on track will, in the end, be worth it. If you’re still worried that a consumer proposal is not the best option for your situation or are concerned about the effect it will have on your credit, you should seek the expert advice of a credit counsellor.
