Will Filing a Consumer Proposal Ruin My Credit?

Consumer Proposal & Your Credit Rating

The question, “Will filing a consumer proposal ruin my credit?” is an important one to consider when examining debt relief options. This article will delve into the impact of consumer proposals on credit ratings, how to rebuild credit after a consumer proposal, and the steps you can take to improve your financial situation.

Understanding Consumer Proposals

Before we can answer the question, “Will filing a consumer proposal ruin my credit?”, let’s first understand what a consumer proposal is. A consumer proposal is a legal arrangement, negotiated through a Licensed Insolvency Trustee (LIT), which allows you to settle your unsecured debts for less than the full amount owed. This agreement is made between you and your creditors and is legally binding.

The Impact of a Consumer Proposal on Your Credit Rating

The impact of a consumer proposal on your credit rating is significant. When you file a consumer proposal, your credit report is updated to reflect this action. It is marked with an R7 credit rating, which signifies that you are making regular payments through a special arrangement with your creditors.

The Credit Rating System in Canada

To understand the impact of a consumer proposal on your credit rating, it’s important to understand the credit rating system in Canada. Credit ratings in Canada are represented by a letter and a number. The letter represents the type of credit you’re using, while the number indicates how well you manage that credit.

The letters used in the credit rating system are:

 

“I” for Installment Credit

“O” for Open Status Credit

“R” for Revolving/Recurring Credit

“M” for Mortgage Loan

The numbers in the credit rating system range from 0 to 9, with 0 being too new to rate and 9 indicating bad debts, debts sent to a collection agency, or bankruptcy.

Understanding R7 and R9 Ratings

As mentioned earlier, a consumer proposal results in an R7 credit rating. This is only two points away from the worst possible rating, R9, which is assigned to bad debts, debts sent to a collection agency, or bankruptcy. Thus, a consumer proposal does significantly impact your credit rating. However, it’s important to note that the R7 rating is temporary and will be removed from your credit report once the consumer proposal is completed and a certain period has passed.

Duration of Consumer Proposal on Your Credit Report

The duration of a consumer proposal on your credit report varies based on the credit reporting agency. For Equifax, a consumer proposal stays on your credit report for three years after it’s completed or six years from the date it was filed, whichever comes first. TransUnion, on the other hand, removes the consumer proposal from your credit report six years from the date of filing or three years after it’s paid in full, whichever comes first.

Rebuilding Your Credit After a Consumer Proposal

While the question, “Will filing a consumer proposal ruin my credit?” may seem daunting, it’s important to remember that you have the power to rebuild your credit after a consumer proposal. There are several steps you can take to improve your credit rating after a consumer proposal, including:

 

  • Regularly monitoring your credit report for errors and contacting the credit bureaus to correct any mistakes.
  • Applying for new credit, such as a secured credit card, and making regular, on-time payments.
  • Keeping all bill payments current and ensuring you pay off all credit card balances in full each month.
  • Working with a Licensed Insolvency Trustee or accredited credit counselor to create a budget and learn healthy credit and debt management habits.

The Road to Financial Recovery

Understanding the impact of a consumer proposal on your credit rating is the first step on the road to financial recovery. While a consumer proposal does impact your credit, it also provides an opportunity for you to resolve your debts and start fresh. By taking proactive steps to rebuild your credit and adopting healthy financial habits, you can improve your credit rating over time.

Conclusion

In conclusion, while a consumer proposal does impact your credit rating, it doesn’t mean that your credit is ruined forever. With the right approach and financial habits, you can rebuild your credit and improve your financial situation. So, if you find yourself asking, “Will filing a consumer proposal ruin my credit?”, remember that the answer is nuanced. It’s a temporary setback on the path to financial recovery and, with diligence and discipline, one that you can overcome.

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