How Does a Consumer Proposal Affect My Credit Rating?

When you file a consumer proposal, you are telling your creditors you can no longer make the required payments on what you owe them. And, yes, filing a consumer proposal will affect your credit rating – but there’s more to the story.

If you file a consumer proposal, your credit score will be negatively affected, just as it would be if you simply ceased to make your payments.

• Filing a consumer proposal will typically result in an R7 rating for 6 years from the date the proposal is filed, or three years from the day the proposal is complete, whichever comes first.

However, keep in mind that if you’ve been experiencing financial stress, your credit score may already have been damaged by unpaid, late or delinquent accounts on your file. Before we explore how a consumer proposal affects the credit rating, let’s briefly examine the meaning of consumer proposal and how it works.

• It is important to remember that filing a consumer proposal is a positive step, and the effect on your credit rating can be temporary.

Questions about consumer proposal? A Licensed Insolvency Trustee can answer your questions and help you explore your options. Contact a Trustee today for a free consultation.

What is a Consumer Proposal?

Definition of consumer proposal – It’s a negotiated debt settlement plan that offers consumers debt relief while avoiding bankruptcy.  In the vast majority of cases,a consumer proposal results in the unsecured creditors being paid a percentage of what is owed without interest. 

But how does a consumer proposal work in Canada? The repayments are typically scheduled on a monthly basis, over a period of up to 5 years. A Licensed Insolvency Trustee can help you negotiate the amount and other terms of repayment with your creditors in the most cost–efficient manner, after reviewing your income, assets, debts and other financial parameters. 

Since the payments are free of interest, consumer proposals in Canada can lead to considerable savings for the debtor while offering relief from many types of unsecured debt such as bank loans, credit card debts, payday loans, income tax debts, and some types of student loan debts. It would be worthwhile to note that mortgages and secured loans generally cannot be compromised by filing a  consumer proposal in Canada without resulting in foreclosure and/or seizure of the secured assets.

Why Consider Opting for a Consumer Proposal?

If you have the capacity to make partial payments towards your debts, opting for a consumer proposal is an advantageous option for a number of reasons. It not only helps you avoid bankruptcy but can also relieve you of a significant proportion of your debt without interest. In addition, it consolidates your debts into one reasonable and affordable monthly payment, the terms of which can be negotiated with the guidance of a federally Licensed Insolvency Trustee. Moreover, there is no loss of assets in a consumer proposal, so assets like home equity investments, and secondary motor vehicles can be retained while stopping collection calls and legal action from creditors. Proposals filed by Licensed Insolvency Trustees are the only debt settlement plans sanctioned by the Government of Canada. The Office of the Superintendent of Bankruptcy is the section of the Government of Canada that regulates the bankruptcy and consumer proposal processes in Canada. 

It is important to remember that filing a consumer proposal is a positive step, and the effect on your credit rating will be temporary. Questions about consumer proposal or how does a consumer proposal affect your credit score? A Licensed Insolvency Trustee can answer your questions and help you explore your options. Contact a Trustee today for a free consultation.

The Meaning of Credit Reports

On Canadian credit reports (from Equifax and TransUnion), each credit account is assigned a credit score on a scale from R1 to R9. R1 is the best credit rating and R9 is the worst. The “R” stands for revolving credit – accounts that can carry a running balance, on which you are required to pay only a portion each month.

Here are the credit score meanings:

• R1 – You pay that credit account on time
• R2 – Your payments are 30 days late
• R3 – Your payments are 60 days late
• R4 – Your payments are 90 days late
• R5 – Your payments are 120 days late
• R6 – (typically not used)
• R7 – Typically used for consumer proposals, consolidation orders, or debt management plans (offered through a non-profit credit counsellor)
• R8 – Shows that a secured creditor has taken steps to realize on their security (e.g. repossessed your car); rarely appears on a credit report as after repossession the creditor typically initiates legal or collection action, which is rated R9
• R9 – Typically used when an account is placed for collection or considered un-collectible, or if you are bankrupt; R9 can also appear in consumer proposal

How Long Does a Consumer Proposal Stay on My Credit Report?

The Financial Consumer Agency of Canada states that Transunion and Equifax will remove the notation of a consumer proposal from your credit report three years after the proposal has been completed or six years from the proposal filing date, whichever is earlier.  In other words, the maximum length of time a consumer proposal will affect your credit report is 6 years. So, for example, if your consumer proposal takes you four years to pay off, your score will be affected for 6 years in total (as 6 years is less than 4 years plus 3 years).  In an alternative example, if you were to pay off your proposal in 2 years, your credit rating would be affected for a total of 5 years (2 years plus 3 years). As you can see, if you are able to pay off your proposal more quickly, your credit rating will improve in less time.

When you have completed your consumer proposal, your Trustee will mail you a “Certificate of Full Performance.” It is recommended that you send a copy of this document to TransUnion and Equifax along with a list of your debts included in the proposal, to make sure your credit record is updated as quickly as possible. They will process the new information as soon as they receive it.

It’s also necessary to maintain a copy of the Final Statement of Receipts and Disbursements, which includes a list of your creditors alongside the amounts that each received as a part of the debt settlement and key dates.

Mistakes on Credit Reports after Completion of a Consumer Proposal

Unfortunately, it is not uncommon to find mistakes on your credit report after you’ve completed the consumer proposal. It’s advisable to get the inaccuracies resolved as soon as you can, so your credit report reflects the correct and most updated picture. After all, upon completion of a consumer proposal, you’re looking forward to a fresh and optimistic start and rebuilding your credit. Both Equifax and Transunion have processes in place to correct erroneous information on your credit report in Canada. 

So be sure to examine your credit reports and check whether creditors are reporting any previously owed figures as fulfilled or still pending. If you find any discrepancies, you can initiate a rectification by submitting a correction request to Equifax or TransUnion (or whichever agency published the incorrect report). The request must include a completed Credit Investigation Request Form along with any pertaining documents as evidence to substantiate your request.

Is the Effect Of Consumer Proposal on My Credit, Permanent?

Although there is no way to shorten the length of time your proposal affects your credit rating, you can still improve your credit score significantly with careful use of new credit within 2-3 years after completion of your consumer proposal.

Tips for Credit Rebuilding

Ironically, the only way to fix your credit score is to start borrowing money again. If you are in a consumer proposal, think carefully about the purpose of this process, and how to avoid new problems with your credit. Even though it feels good to be offered new credit, or be accepted for a new card, be sure not to overextend your ability to make regular payments. Go slowly. You do not need to borrow large amounts to rebuild your credit. Making all your payments on time is the key.  In addition, pay attention to the interest rates and fees charged on credit products you apply for as there are some lenders who may not have your best interests in mind.

Here are some tips for rebuilding your credit.

#1 – Set up a budget

If you have filed a consumer proposal, your Trustee will have put together an income and expense statement with you and will discuss your budget with you as part of the financial counselling process. It is important to know how much you are spending. The key to budgeting is to set aside money for your fixed and variable costs every month. You should also set aside at least $1,000 for emergencies. Once you have this money put aside and your budget is working, you can begin credit rebuilding.

#2 – Establish Two or More New Lines Of Credit

There are two main types of credit available to consumers:

• Revolving Credit. Revolving credit is credit that is constantly available to use, and includes credit cards, lines of credit, and store cards. Lenders typically update your payment history on these sources of credit every month.
• Installment Credit. Installment credit is defined as a payment arrangement with a lender over a set period of time. This type of credit includes mortgages, car loans, chattel loans, and other types of loans. Unlike revolving credit, there is no capacity to borrow on demand, like there is with a revolving credit product. Installment credit can be pricey, as rates are based on your credit score.

An example of installment credit is a car loan, where the lender will approve a loan and record the car as collateral. The set payment of the loan will be reported to the credit bureau every month, and your credit score will begin to improve.

RRSP loans are also installment credit. Banks or lenders are often very approachable regarding these, as they get a good interest rate and their money is secure.

It is recommended that you open two or three credit accounts to rebuild your credit rating. Some sources state that at least one account should be installment credit, but it is possible to rebuild your credit with credit cards alone – as long as your new payment history is perfect!

#3 – Keep Payments Current

Once you have done the hard work of establishing new credit and beginning to improve your credit rating, it is imperative that you keep all of your accounts up to date. This includes not only your credit card and loan payments, but also your utilities, cell phones, and any other accounts.

Can I Get Credit While in a Consumer Proposal?

You may wish to ask your Trustee about this. While in a consumer proposal, you can apply for a “secured” credit card through select financial institutions. With a secured card, you make a small security deposit, and then utilize the credit card to make purchases and then promptly pay them off. By doing this, the credit card company will report that you are utilizing the credit and paying as agreed and note the account as an R1.  Check the cost of the card, as service charges are greater than with standard cards. Also, do not confuse secured credit cards with “pre-paid” VISAs and MasterCards – prepaid cards have no effect on your credit report and do not help you rebuild.

Using a secured credit card and making regular payments on it while in a consumer proposal can cause a slight improvement in your credit rating, but you will see quicker improvements once your consumer proposal is paid off. Also, you will have access to better interest rates on borrowed money after your consumer proposal is completed. Becoming debt-free by successfully completing your consumer proposal will have a significant impact on your capacity to obtain credit.

How much does it cost to check my credit report?

By law, Canada’s two credit bureaus must provide you with a free copy of any information about you they have collected from your creditors. However, this free version is only available if you request it by fax or by mail, and it is mailed out to you, which takes a little time. Alternatively, if you visit Equifax’s or Transunion’s website, you can pay for a quick version and see your current credit report. For a small extra payment, you can also see your aggregate credit score, which is a number between 300 and 800 (see this page from the Financial Consumer Agency of Canada for more information on credit scores).

Credit reports can be very informative. It is recommended that you get copies of your reports after you complete your consumer proposal, so you can see what is being reported and make sure the information is updated correctly.

Can I pay to fix my credit?

The short answer is no. As outlined above, fixing your score takes some effort, and some time. Some companies offer paid services to help you with the process, but you can get the same results yourself by following the steps above. You’ll soon be on your way to getting your credit report back in good shape.

As your credit improves, you will be allowed to borrow more money and get better interest rates. But be cautious about accepting credit increases: keep in mind that it was debt that caused your troubles in the first place!

Learn More About Consumer Proposal

We hope our guide to “how does a consumer proposal affect my credit rating” was helpful. As can be seen, a consumer proposal can be a good solution for many income-earning Canadians struggling to get out of debt. However each situation is different, so why not contact a Licensed Insolvency Trustee to arrange for a no-charge initial consultation to review all of your options including bankruptcy and consumer proposal in Ontario or anywhere else in Canada?