Are you thinking about signing up for a consumer proposal? This agreement can be a good option if you want to avoid filing for bankruptcy while still preserving your financial health. This is because it will often forgive a portion of your debt and set you up with more manageable monthly payments.
That said, filing for a consumer proposal can also negatively affect your credit score and it will stay on your credit report for three or more years. That’s why it’s important to think about whether this is the right debt solution for you before you get started.
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A consumer proposal is a legal agreement that you enter into with a designated trustee to help resolve your debt. It allows you to work with your creditors to reduce the amount of money you owe. You’ll also typically be able to renegotiate your monthly payments so that they’re a better fit for your budget.
Once your proposal is accepted, you won’t have to worry about debt collection from your creditors anymore. You also won’t be charged interest on the amount you owe, which can save you a ton of money in the long run. The major downside of this type of agreement is that it will push your credit score down and make it difficult to apply for future loans.
When you file for a consumer proposal, your credit score can go down to an R9 while you’re paying it off. This is the lowest possible score you can have and is the same score you’ll get if you file for bankruptcy.
Once you pay your consumer proposal off, your score will go up to an R7 and this rating will stay on your credit report for up to three years. This means that if you take five years to pay off your consumer proposal, you’ll have a less than optimal credit rating for up to eight years.
This is why many people choose to pursue alternative debt solutions like debt forgiveness or consolidation before filing for a consumer proposal. Others apply for a consumer proposal to get their debt load reduced, and then pay it off with a loan so they can start rebuilding their credit as soon as possible.
What does my credit score mean?
Your credit score will be calculated by the credit bureau based on a complex formula that considers all of your debts and the frequency of your payments.
R1: If you have a credit score of R1, it means you have excellent credit and you make all of your payments on time.
R2-R6: You’ll get a rating between R2 and R6 if you’ve made several late payments or have a history of missing payments.
R7: This rating is typically used to identify people who have entered into consumer proposals or are working to resolve unmanageable forms of debt.
R8: You’ll get a rating of R8 if a lender has claimed whatever collateral you put up against a secured debt (such as repossessing your home or vehicle).
R9: An R9 rating is the lowest rating you can get and is typically used to identify people who have filed for bankruptcy or, in some cases, a consumer proposal.
What are the benefits of a consumer proposal?
Consumer proposals can help you save money because they can reduce the overall amount of money you owe and extend the time you have to make your repayments. They also allow you to retain your assets, which you would typically lose if you filed for bankruptcy.
You won’t have to pay any interest on your debts while your consumer proposal is in place. You’ll also get some relief from your creditors, who won’t be able to garnish your wages or bring legal action against you as soon as your proposal is accepted.
Why would I want to avoid a consumer proposal?
You might want to avoid a consumer proposal if you don’t want your credit score to go down. This could be the case if you’re planning to purchase a home in the near future, or you want to get optimal rates on a loan. A consumer proposal can make it difficult to get financing because it brings your credit rating down to an R9, and it stays on your credit report for up to three years after it’s paid off.
You might also want to avoid a consumer proposal if you don’t think that you can make your payments on time. This is because if you miss three payments in a row, you’ll lose any money you’ve paid towards your outstanding balance. You’ll also be charged all of the penalties and interest that you would have had to pay on your debt if the consumer proposal hadn’t been put into place.
How can I rebuild my credit after a consumer proposal?
If you want to build up your credit after filing for a consumer proposal, there are a number of steps you can take:
Make your payments on time. The best way to improve your credit score is to make all of your bill payments on time, even if you can only afford the minimum payment.
Review your credit report. Report any errors on your credit report to Canada’s major credit bureaus as these are common and can bring your score down.
Reduce your existing debt. Throw any extra cash you have onto your existing debts to try to pay them down so that you don’t have such a high debt-to-income ratio.
Avoid closing old accounts. Your credit score will be better if you can show that many of your credit accounts are long-standing.
Apply for secured credit. Build up your credit by providing a “security deposit” as a means to qualify for a secured credit card or a credit-builder loan.
Mix up your credit types. Build up your score by mixing and matching various types of credit (including loans, lines of credit, credit cards and more).
What other debt solutions might work for me?
If you’re not sure that a consumer proposal is a good fit for you, there are plenty of other options to consider.
Debt settlement. This option lets you work directly with a debt settlement company to resolve your debt, which will have less negative impacts on your credit score.
Debt consolidation loan. You can use a debt consolidation loan to pay off all of your outstanding debts so that you only have to make one payment each month.
Credit counselling. This service allows you to work with a counsellor to plan out your budget and tackle your debt strategically.
Borrowing from loved ones. You might be able to ask for a no-interest loan from a loved one if they’re willing to help you get back on your feet.
Bankruptcy. Your last resort is to file for bankruptcy, which will bring your credit score down and could require you to forfeit your assets to pay off your debts.
Consumer proposals can help you pay off your debt and cut down on the amount of money you owe. That said, they can also negatively impact your credit score and should only be used when other debt solutions have failed to produce results. Use this post to learn more about how a consumer proposal can affect your credit and get some tips to improve your credit score.
Frequently asked questions about consumer proposals
You won’t have to pay any upfront fees to take out a consumer proposal.
You’ll typically need to owe between $1,000 and $250,000 to file a consumer proposal. This debt must be unsecured, and you’ll need to pay it off in five years or less.
If you don’t make your payments, your consumer proposal may be cancelled. If this happens, you’ll lose all the money you put down on it already and your creditors can resume collecting fees and interest on your debts.
The most important way to build up your credit is to make all of your payments on time. Even one missed payment can wreak havoc on your credit score.
Claire Horwood is a writer at Finder, specializing in credit cards, loans and other financial products. She has a Bachelor of Arts in Gender Studies from the University of Victoria, along with an Associate's Degree in Science from Camosun College. Much of Claire's coursework has focused on writing and statistics, with a healthy dose of social and cultural analysis mixed in for good measure. She has also worked extensively in the field of "Blended Finance" with the Canadian government. In her spare time, Claire loves rock climbing, travelling and drinking inordinate amounts of coffee.
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