A consumer proposal is one of the most popular debt relief solutions that a licensed insolvency trustee can administer.
The consumer proposal is designed to settle an unsecured debt by offering total forgiveness for the full debt against repayment of a portion of the money that is owed.
For debtors who struggle to make payments on time, the consumer proposal is the ideal debt reduction solution, as you could obtain up to 80% reduction.
Additionally, it’s worth mentioning that 99% of consumer proposals at Bankruptcy Canada are approved by creditors, which means that debtors are almost guaranteed to sort out their financial troubles with a proposal.
However, for all its qualities, the consumer proposal cannot settle mortgage debts.
Your mortgage debt qualified as secured debt, as the mortgage is ultimately secured against the property.
If you can’t pay, the money lender can seize the property to recoup the losses.
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Alternatively, filling a consumer proposal will not change your mortgage agreement if you have been making payments on time and as agreed by the terms.
So when should a homeowner worry about the consequences of a consumer proposal on their mortgage?
Renewing your mortgage or finding a new mortgage is not the same thing as keeping an existing mortgage.
How does a consumer proposal affect your mortgage renewal?
Here, our Bankruptcy Canada experts explain which elements to consider.
Does a consumer proposal put your home at risk?
Filling a consumer proposal doesn’t affect your home.
The main advantage of a consumer proposal is that it is the only legally-binding debt relief solution that protects your assets.
Personal bankruptcy could put your home at risk, and by extension, your mortgage too.
When you file a consumer proposal, your money lender is obliged to maintain the terms of the existing mortgage until completion.
More often than not, the proposal makes it easier to repay your mortgage, as it frees up money.
However, if you don’t make payments on time, the bank or the financial institution is authorized to foreclose.
Indeed, secured debts are not included in the proposal because creditors can use the collateral – aka the security – to repay themselves.
Unfortunately, the foreclosure would happen regardless of the consumer proposal if you fail to pay your mortgage.
What happens to your mortgage after your consumer proposal?
Nothing happens to your mortgage.
But when it comes to renewing your mortgage, you will need to consider how the proposal affects your credit score and report.
A consumer proposal can last up to 60 months, during which it appears on your credit report.
The proposal also affects your credit rating, as it gives you a rating R7, which could be worse than what you used to have.
If you wish to renew your mortgage or sign a new mortgage, your R7 rating will affect your eligibility and the agreement.
You may not be able to borrow as much as you need.
You also could receive higher interest rates than you currently have.
Additionally, it’s also important to understand that the consumer proposal doesn’t disappear from your credit report at its completion.
It will remain visible on the report for another 3 years after its end.
In other words, your credit proposal could affect your mortgage renewal for a maximum of 8 years.
On the other hand, personal bankruptcy could put your home and mortgage at risk, unless you own below a certain amount of equity – in which case you can keep your home.
When you file for bankruptcy, you receive the worst credit score, R9.
You will keep this score for the duration of the bankruptcy process, which could be as short as 9 months.
Once you’ve fulfilled the bankruptcy criteria, you can rebuild your credit score.
Mentions of the bankruptcy, though, stay in your report for 6 years after completion.
Some money lenders refuse to sign up a renewal with you if you’ve had a consumer proposal or a bankruptcy.
But they are obliged by law to carry on with the current mortgage unless you miss payments.
Can you get a new mortgage after a consumer proposal?
While it can be complicated to renew your mortgage after a consumer proposal, it isn’t impossible.
Your priority is to rebuild your credit score, which you can start doing after the completion of the proposal.
You can work closely with a credit counsellor to understand how to create a credit score friendly budget.
When you file a consumer proposal, you are allowed to keep credit cards that have no debt.
You can focus your effort on keeping your credit utilization below 75% to make yourself a trustworthy borrower in the eyes of money lenders.
Reducing your credit utilization below 50% will improve your chances as a borrower.
The less credit you use, the more likely you are to boost your credit score.
Remember that your punctuality in making payments also affects your rating.
Small credit utilization and late payments are not a winning combination to convince money lenders.
Besides, you need to have realistic goals after a consumer proposal.
It’s best to focus on a short-term mortgage renewal for a couple of years, as it allows you to improve your credit score.
You are likely to get a high-interest mortgage at first; therefore, keep the term short to reduce the financial burden.
Money lenders may be more likely to trust you if you agree to make a significant down payment of 20% or more.
What are alternatives that don’t affect your credit rating?
All debt management and debt relief solutions affect your credit, and therefore your mortgage renewal.
Personal bankruptcy gives you the worst rating.
A credit counselling solution will appear as a debt management plan in your report.
You will receive the same rating as with a consumer proposal
For debtors who choose to reach out to their creditors to negotiate a debt settlement, you will need to make credit reporting part of your negotiation.
More creditors are unlikely to correct reports of late payments, even if they agree to your settlement schedule.
In conclusion, filing a consumer proposal will never affect your current mortgage agreement.
However, it can make it difficult to get a new mortgage or to renew your mortgage.
Our trustees can help you secure the best mortgage deal after your consumer proposal with budgeting tips and debt forgiveness.
Information on Consumer Proposals
Consumer Proposals in Canada – An Alternative to Bankruptcy
What is a Consumer Proposal?
What are the Benefits of a Consumer Proposal?
What are the Steps in a Proposal?
What Debts Are Erased in a Consumer Proposal?
Is There Life After a Proposal?
Consumer Proposal Eligibility
How to Amend a Consumer Proposal