What You Need To Know About A Consumer Proposal and Credit Score

Learn everything you need to know about how consumer proposal impacts your credit score

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Is a Consumer Proposal Your Ticket To a Fresh, Financial Start?

There are numerous forms of debt relief options. Some of the ones that you have likely heard of are debt settlement, debt consolidation, and bankruptcy. One debt relief option, that you should look into, is the consumer proposal. However, there are many different debt solutions that can be an alternative to a consumer proposal. Therefore, before deciding to file a consumer proposal or not, you need to know the pros and cons of this legal procedure.

The exact amount of your total debt that will be forgiven depends on your ability to pay the balance. It’s not unusual for consumer proposals to reduce your total debt by 75%, but the outcome varies from case to case.

What Is a Consumer Proposal?

A consumer proposal is a debt relief alternative to bankruptcy. Under a consumer proposal, a debtor will make interest-free monthly payments, for up to five years, to a Licensed Insolvency Trustee (“LIT”). The LIT will then pay the debtor’s creditor using the monthly payments.

How Does a Consumer Proposal Affect Your Credit Score Rating?

Consumer proposals tell all future and current creditors that you could not pay your debts on time. As a result, a consumer proposal negatively affects your credit in two ways. Your credit score will be lowered and you will receive an R7 notice on your credit report. Poor credit rating, in turn, makes it harder for you to receive any loan.  

What does The "R" Rating Mean To Creditors?

TransUnion and Equifax are the two leading Canadian credit bureaus. These agencies assign every consumer a credit rating that ranges from R1 to R9. The R1 rating indicates that you have stellar credit and that you’ve never been late with any payments.  On the other hand, R9, which happens after filing bankruptcy, is the worst rating a consumer can have.

How Long Will Consumer Proposals Stay on Your Credit Report?

Six years, or three years after you have finished the proposal payments, is the maximum that R7 negative rating will show up on your credit report.  

Rebuilding Your Credit Score After a Consumer Proposal?

As stated earlier, an R7 credit rating stays on your credit report for a maximum of six years. So, assuming you do not suffer any financial hardships during those six years, your credit score will automatically be repaired within that time. However, most people do not want to wait up to six years to get a car loan, credit card, or mortgage.

Credit During and After Consumer Proposals

Luckily, rebuilding your credit after consumer proposals is not as bad as it may seem, as you can take several steps to rebuild your credit. These steps can also occur during the consumer proposal and after the proposal is completed. We will now go over the best practices for obtaining credit during and after a proposal.

During the Consumer Proposal

Many debtors are surprised to learn that they can build their credit score up while making proposal payments. Consequently, by following the advice below, you’ll be able to essentially receive a “Fresh Start” right after bankruptcy.

Please Note – Debtors should only attempt step one (getting a car loan and secured credit card) if they can comfortably make both the credit card and auto loan payments.

Four Keys To Rebuild Credit During Proposal

These steps will help you rebuild your credit during the proposal and also after you have finished making all of your proposal payments:

  1. Loans-Get at least two secured credit cards and a car loan during the consumer proposal and make payments for at least two years.
  1. Educate Yourself-Two credit counselling courses are required to file a consumer proposal. Therefore, take these classes seriously and follow the advice.
  1. Minimal Balance-Your Credit card balances need to be kept lower than 50%.
  2. Make All Payments on Time– This should go without saying; you need to make sure you are making all of your payments in a timely manner.
  3. Check for Errors-Regularly check your credit report for mistakes and then fix any errors immediately.

Building Your Credit After the Consumer Proposal is Finished

Being under a consumer proposal indicates that you did not pay all your creditors on time. Therefore, after you finish with the consumer proposal, you need to prove that you are credit-worthy.

One way to rebuild your credit history is to get a credit card, car loan, and mortgage payments. However, as your credit history will be subpar, it will be hard to get any credit. So, you must work to build up your credit score. See below for specific tips on how to build your credit to get a car loan or credit card, car loan, or mortgage.

Credit Loan

One of the first steps you can take to prove your creditworthiness is to get a secured credit card. Unfortunately, a secured credit card does not build up your credit score. Nonetheless, the secured card can help you rebuild your credit if you make all your debt payments on time. Consequently, after making several prompt payments, you will eventually be able to get a credit building, non-secured credit card.

Car Loan

  • Get a Loan From a Private Lender -As you are considered a credit risk; your local bank will likely not give you a car loan. As a result, while your credit score is an R7, you’ll likely only be able to get a car loan from a private lender.
  • Supply Proof Of Proposal Payments – To get a loan, you’ll need to prove to creditorsthat you are now responsible enough to make steady payments to a creditor. A completed consumer proposal and proof that you made proposal payments is an excellent way to prove to a lender that you are indeed credit-worthy.  
  • Low Debt-to-Income Ratio – Debt to income is the relationship to the amount of debt you have versus how much you are earning. The lower it is, the better. Therefore, if you want a car loan, you need to reduce your expenses and only take out necessary loans.

Mortgage After a Consumer Proposal?

Getting a mortgage after the consumer proposal and while an R7 shows up on your credit report will be challenging. It essentially depends upon the lender and if they are willing to give you a chance. So, to have a better chance of getting a mortgage, you need to follow the same procedures that you would use to build your credit score for a car loan, secured credit card, etc.

Final Thoughts-When Should You Consider Filing a Consumer Proposal?

The answer to that question will ultimately depend upon you and your family. The proposal should not be your first option or last option. It is, though, an option that you should at least consider.  

Whether or not you should file depends upon how long it will take you to pay off your debts. A proposal lasts up to six years on your credit report. Therefore, a rule of thumb is that debtors should consider a consumer proposal if it will take them over six years to pay off all of their debts.

Does a Consumer Proposal sound like the right choice for you?

Get a free consultation now to find out whether you are eligible — and how Remolino & Associates can help.

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