How does a consumer proposal affect my credit?

What is a consumer proposal?

A consumer proposal is a debt solution that results in legal debt forgiveness for a portion of your unsecured debts, such as credit card debt, payday loans and income tax debt. A Licensed Insolvency Trustee (LIT) negotiates a debt settlement between you and your lenders/creditors which details how much debt will be forgiven, what you must repay and how long you will have to repay it. You won’t pay any additional interest on your debts and you aren’t required to surrender any of your assets. Collection calls will also stop.

What is a credit rating and how does a consumer proposal affect my credit?

In Canada, the two major credit reporting agencies are TransUnion and Equifax. Each agency maintains a credit report for you that includes information about your credit behaviour such as your credit applications, your outstanding debt and whether you make your payments on time. Your credit report also includes a rating for each type of credit you use.

• “I” means installment credit: You make payments on a fixed amount loan, like a car loan, personal loan or student loan.
• “O” means open-end credit: You can make repeated withdrawals and repayments, like a line of credit.
• “R” means revolving or recurring credit: You make regular payments and you can borrow up to a credit limit, like a credit card.
• “M” means a mortgage loan.

Your credit rating for each type of credit will be based on a scale of 1 to 9.  For example, R1 is the best possible credit behaviour for revolving credit types, and R9 signifies that your debts are uncollectable or you have filed for bankruptcy. Filing a consumer proposal results in an R7 rating, which means you are making regular payments using a debt management option.

Once your LIT files your consumer proposal with the Office of the Superintendent of Bankruptcy Canada (OSB), the OSB will notify the credit reporting agencies of your consumer proposal. The date of the filing will appear in the legal or public records section, and when you complete your obligations under the proposal (repayment and counselling), that completion date will be updated in your record.

If you have been unable to meet all of your payment obligations, it’s likely your credit rating has already been impacted. While a consumer proposal will initially impact your credit rating, one of the benefits of a consumer proposal is that you will be able to resolve your debts more quickly vs paying them off on your own. Then, you can begin the process of rebuilding your credit.

How long will a consumer proposal remain on my credit report?

A consumer proposal will remain on your TransUnion credit report for six years from the date of your consumer proposal filing or three years after you’ve completed the proposal, whichever comes first. Your Equifax credit report will keep record of a consumer proposal for three years after your proposal is completed.

What are the short-term effects of a consumer proposal and an R7 credit rating?

A consumer proposal only includes your unsecured debts, or those debts that aren’t backed by an asset. As long as you’re able to keep up with your mortgage and vehicle loan payments during the consumer proposal process, you’ll be able to keep your house and your car.

While you’re in the process of completing your proposal, it can be more difficult to be approved for a credit card. An LIT can speak to you about how to initiate a modest secured credit card with a bank. A secured credit card requires you to first pay a security deposit, typically about $500. If approved, you’ll have a credit card with a small limit that allows you to make a few small purchases each month. If you pay your balance in full and on time each month, you will slowly but surely rebuild your credit. Secured credit card may have a higher service fee than a standard credit card, so make sure you fully understand your secured credit card agreement beforehand.

3 steps to rebuild your credit after filing for a consumer proposal

Once you have a plan in place and the stress of overwhelming debt is off your mind, you can focus on rebuilding your credit. Here’s how.

1. Work with an LIT

During your two credit counselling sessions, your LIT or an accredited credit counsellor will help you create a workable budget that includes all of your monthly expenses, debt obligations and savings goals. You’ll also explore tools and resources that will help you maintain healthy credit and debt management habits.

2. Apply for and establish new credit

Credit is one of those strange, circular things: to be approved for new credit you need to show you have a positive credit history, and to achieve a positive credit history you need to be approved for new credit. After your proposal is complete, start by applying for a small amount of credit, two different credit sources at most. For example, a car loan (installment credit) and a credit card (revolving credit) with a small maximum limit can be useful. If you meet all your payment obligations, your credit rating will reflect that. Over time, you can build a history of good borrowing behaviour.

3. Make all payments on time and in full

Consistently keeping up with your payments, such as utility and cell phone bills, is important. If you accidentally miss a payment, consider calling your provider or creditor and asking whether the missed payment will be reported to the credit bureau. Some companies report a missed or late payment immediately, some wait until it occurs more than once. A creditor may work with you and agree to hold off on reporting.

It’s also important to regularly monitor your credit report for errors, and to report any mistakes to the credit reporting agency. You’ll need to show proof of payment for the agency to remove an error, so keep your bills or any other proof of payments. If you’re thinking of buying a home in the near future, good credit behaviour in the two to three years following the completion of your consumer proposal shows lenders that you may be a good candidate for a loan.

If you want to learn more about a consumer proposal, or the differences between a consumer proposal vs bankruptcy, it’s important to do your research. And, if you decide a consumer proposal is the right debt solution for you, be sure to make rebuilding your credit a top priority once your proposal is completed. Your future self will thank you.

Rebuilding your credit after a consumer proposal is possible. Meet with a Licensed Insolvency Trustee to learn more.

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