March 21, 2024
We look at ways to re-establish credit, how to use being debt-free to your advantage and keep on track after a consumer proposal.
Completing a consumer proposal is an achievement. Going through that process takes a lot of discipline, as well as courage to even reach out for help with debt in the first place.
What’s it actually like to start over once it’s completed, though? It’s a question the thousands of Canadians who file one each year wonder. We spoke to Adam Cardwell, a Licensed Insolvency Trustee at BDO, to find out what can be expected and his tips for moving forward in life.
Consumer proposals are by far the most popular legally protected form of debt relief in Canada, handling over 79% of consumer insolvencies in December 2023, according to Statistics Canada.
Consumer proposals allow someone to reduce their unsecured debt by up to 80%, meaning they pay back a portion of their debt and have the rest forgiven. A Licensed Insolvency Trustee is the only person who can file a consumer proposal on your behalf, and it can last up to five years.
A proposal allows you to retain your assets and stop creditors from taking legal action against you or garnishing your wages. It also stops debt collectors from calling you.
You must make your monthly payments on time and in full for the agreed-upon time to complete a consumer proposal. You must also go through two credit counselling sessions before the end of the proposal.
“Those two credit counselling sessions start to prepare you for the end of the proposal because they focus on things like budgeting and re-establishing credit,” says Adam Cardwell, a Licensed Insolvency Trustee at BDO.
When a proposal is completed, you receive a Certificate of Full Performance. This certifies are now cleared of any unsecured debts. You can then send your Certificate of Full Performance to Equifax and TransUnion.
“Once those two credit agencies have the Certificate of Full Performance, it speeds up the process of rebuilding and re-establishing credit,” notes Adam.
Many people avoid reaching out for help with their debt, fearing how it will impact their credit score and rating. They worry they’ll never be able to live the same life once they seek professional debt help.
A consumer proposal can actually help people grow their credit, though.
“Assuming they’ve taken steps to re-establish credit since filing the proposal, most people are able to use credit like anyone else once it’s completed,” says Adam.
“Many people have told me they can do all the same things they could before they filed the proposal. Things like renewing a mortgage, getting a car, and using their credit card—and now they’re doing it without debt.”
Adam adds that while Equifax and TransUnion keep records of your proposal for at least three years after it’s completed, that can work in your favour.
“It tells the creditors you had issues years ago, but now you’ve completed the proposal and are debt-free. Creditors want to lend someone to someone who’s debt-free, and completing the proposal shows you’ve been responsible with credit for some time already.”
The biggest benefit to a consumer proposal is that when you finish, you have no unsecured debt.
Unsecured debt is debt that is not backed by an asset. Credit cards, payday loans, student loans, and personal loans can all be covered by a consumer proposal.
“Once the proposal is completed, they’re free from that debt, so their debt-to-income ratio is probably the best it’s ever been because they don’t owe anything,” Adam notes.
Adam explains that this can be a huge advantage for people who complete a proposal.
“During the proposal, you have to make monthly payments. When it ends, so do those payments. You can then take the amount of money you were using for those payments and put it into a savings account each month. Talk to your bank about what might be best for you and your goals.”
There’s lots of ways someone can begin to re-establish their credit after completing a consumer proposal. Some people will have already been doing it while going through the proposal by paying for a secured asset.
Secured debt, which is backed by an asset, can’t be included in a consumer proposal. So, car loans and mortgages can’t be included in a proposal because the car and home are physical assets.
“Anyone who has been paying for a mortgage or a car while going through the consumer proposal is already ahead of the game,” says Adam.
Even for those who haven’t been paying for a secured asset during the proposal, it’s not hard to build credit, Adam explains.
“Getting a cell phone contract can help you start rebuilding your credit. Starting small like that helps.”
Upon completing the proposal, some worry they will fall back into debt. Adam has some tips for people who complete the proposal and want to remain on the right side of the ledger.
“The most important thing is to have a healthy budget that allows you to live within your means.”
When it comes to credit, Adam says a simple approach is best.
“You only need one credit card that you should use just if you know you can pay it off. If you’re supplementing your income with credit, it’s a warning sign, and you should reach out for help.”
For those who do end up struggling, Adam says to draw on your past experiences.
“Think about what caused you financial difficulty in the first place—any bad habits, any events—and remember those triggers and do what you can to avoid those risks. If you see those warning signs, act to stop them.”
Adam urges anyone who feels themselves struggling again to self-evaluate their position and re-examine their budget to see where things are going wrong.
“And if need be, talk to a Licensed Insolvency Trustee so they can help you. Don’t wait until it’s too late again,” he says.
March 21, 2024
We look at ways to re-establish credit, how to use being debt-free to your advantage and keep on track after a consumer proposal.
