If you’re struggling with bad credit after filing for a consumer proposal, you’re not alone. Thousands of Canadians file for debt relief every year and are forced to take a hit to their credit score, which can make it more difficult to borrow money in the future. Keep reading to find out more about how consumer proposals work, including how they can help you recover from debt and what you can do to get loans after consumer proposal filing.
What is a consumer proposal?
A consumer proposal is a legal agreement that you enter into with a legal representative (also called a Licensed Insolvency Trustee). It’s meant to modify the terms of your debt to make it more manageable, either by lowering the amount of your payments or extending the time you have to pay off your debts.
The agreement is designed to protect you (the consumer) from creditors trying to collect on your debt by garnishing wages, threatening assets or contacting you relentlessly. It also provides creditors with a guarantee that they’ll receive partial repayment, even if it means forgiving part of your balance.
Proposal payments can be spread out over a maximum of 5 years and are interest-free, which can result in a big reduction of your outstanding debt. The downside of the agreement is that your credit score will take a hit, which can take years to recover from.
Will a consumer proposal affect my current mortgage?
Filing for a consumer proposal typically won’t cause any issues with your current mortgage if you managed to get approved for financing when your credit was in good standing. The silver lining is that most lenders won’t check your credit in the middle of your term or when it comes time to renew your mortgage as long as you’ve made all of your payments on time.
This means that you probably won’t experience any negative effects (like mortgage cancellation) because your current lender won’t know your credit score has dropped. That said, you may have difficulty getting approved if you decide to switch lenders or refinance your mortgage with your current lender since this will prompt them to check your credit report.
Will I be able to apply for a new mortgage with a consumer proposal?
You may have more difficulty applying for a new mortgage if you’ve recently filed for a consumer proposal. This is because any lender that’s going to assess your application for a loan will check your credit score. If they see that your score is hovering between an R9 and R7, they will be much less likely to want to finance you.
If you want the best chance of getting a mortgage, you should apply with a private lender or B-list lender as most big banks won’t lend money to customers with bad credit. Your best bet to get started is to approach a mortgage broker that can curate a list of lenders that might be willing to finance you.
What do lenders consider when financing your mortgage?
Lenders will typically look at three main factors when deciding whether they want to qualify you for a mortgage.
Income. Your lender will usually take your income into consideration when assessing your eligibility for a mortgage. If you have a high income and a long history of consistent employment, you’ll be more likely to get approved.
Debt-to-income ratio. The amount of debt you carry in relation to your income will also factor into your loan decision. You’ll be more likely to get financing if you carry a low balance on your credit cards and don’t owe a lot for loans and other forms of credit.
Credit score. One of the biggest factors in whether you get approved for a mortgage will be your credit score. The higher your score is, the more likely you’ll be to get approved.
Can I get loans after consumer proposal filing?
You can still get approved for a loan after a consumer proposal, although you may need to apply through a private or online lender. Some bad credit lenders will offer higher-interest loans without a credit check. Others may approve you for a bad credit or credit builder loan designed to help you rebuild your credit.
The main thing most lenders care about when they approve you for a loan is how much money you have coming in and whether or not you’ll be able to handle repayments. You’ll usually need to show them you’re making your consumer proposal payments on time every single month and have money left over to cover the cost of the loan you want to take out.
How is a consumer proposal different from declaring bankruptcy?
Many people choose to file a consumer proposal instead of declaring bankruptcy because it’s a safer financial choice in the long run. The main difference between filing for a consumer proposal or bankruptcy has to do with the way you pay the money back.
Consumer proposal. Payments are made based on a set payment schedule which won’t fluctuate even if your income goes up. You won’t be required to hand over any assets to cover the costs of your debts and your credit score will go down less (and affect your credit rating for less time) than if you declare bankruptcy.
Bankruptcy. Payments are made based on your income (which means if you earn more, you’ll pay more) and your assets will often be sold off to pay back your debt. You’ll also end up with the lowest credit rating possible (R9) once you file, and this black mark will stay on your credit rating for up to 6 years (as opposed to 6 for a consumer proposal).
How can I improve my credit score after a consumer proposal?
There are a number of actions you can take to help improve your credit score after you pay off your consumer proposal:
Make on-time payments. You can help improve your credit score quickly by making all of your payments on your outstanding loans and credit cards on time.
Apply for a credit-builder loan. You might be eligible to get a credit-builder loan, which will report all your on-time payments to the credit bureau to build your score faster.
Get a secured credit card. You can secure your credit card with a cash deposit so that you can start to build credit when you make everyday purchases. Compare secured credit cards here.
Keep your old accounts open. If you have a solid repayment history on a credit card or loan, you should keep your account open to build up your score.
Review your credit report. It pays to check your credit report for errors to make sure that you’re not getting points deducted for incorrect data.
Access credit counselling. It could be a good idea to book an appointment with a credit counsellor if you want to find a more sustainable debt solution.
Advantages and disadvantages of a consumer proposal
Advantages
Partial repayment. You’ll only have to repay a percentage of your debt owing and you get to decide what you can afford to pay.
Manageable payments. Consumer proposals are designed to make payments more manageable and they won’t increase if your income goes up.
No loss of assets. You won’t have to surrender assets like your home or vehicle to cover the costs of your unpaid debt.
No garnished wages. Creditors will need to stop garnishing wages as soon as the consumer proposal is in place.
No more collection. Once you sign the agreement, collection companies and creditors can no longer contact you for payment.
Disadvantages
Damage to credit score. Your credit score will decrease as a result of filing for a consumer proposal.
Maximum debt limit. The most you can owe to qualify for a consumer proposal is $250,000. Anything over this amount will require you to file for bankruptcy.
What are the qualifications to file a consumer proposal?
If you want to file a consumer proposal, you may need to meet the following criteria:
Owe less than $250,000. The maximum amount of debt you can carry to qualify is $250,000 (not including your mortgage).
Earn a high income. You’ll need to be gainfully employed with enough income to cover your payments each month.
Be unable to qualify for debt consolidation. You’ll need to be able to prove you can’t manage your debts using a debt consolidation loan.
Have more debts than assets. The amount of your debts should be greater than the value of any assets you own.
How can I get approved for loans after consumer proposal filing?
If you’ve decided that a bad credit or no credit check loan is the right fit for you, then you’ll need to follow a couple of simple steps to apply.
Compare lenders. Compare 3 to 4 lenders (at least) to find the best interest rates and terms for your loan after consumer proposal as well as the lender most likely to approve you.
Fill out your application. When you’re ready to apply, most places will ask you to provide your personal and banking info through an online or in-person application.
Show proof of proposal payments. You’ll want to show your lender you’ve made on-time payments to your consumer proposal debts so they know you’re taking steps to remedy your financial situation.
Submit budget outlining income and debts. You should make an effort to show the bank that your debt-to-income ratio is manageable and you have enough money to take out the loan.
Bottom line
If you’ve filed for a consumer proposal but need to be approved for a loan, you still have options. Although it may be difficult to qualify for traditional loans after consumer proposal from a bank, you may be eligible for a credit builder loan or a no-credit check loan. Make sure you compare your options and asses you eligibility before apply.
Frequently asked questions
Even though they have to agree to write off some of your debt, most creditors stand to recover more of their money with a consumer proposal than they would if you were to declare bankruptcy.
If you want to file a consumer proposal, you’ll typically need to owe less than $250,000, earn an adequate income, be ineligible for debt consolidation and have more debts than assets.
How much you’ll pay will depend on the agreement you sign with your creditors. Whatever amount you settle on, your payments will be fixed for the entire length of your contract (so they won’t change if your income goes up).
If you file for a consumer proposal, your credit score will go down and you’ll receive a credit rating of R7. This will signal to banks and other lenders you were unable to repay your debts without resorting to a consumer proposal.
You can re-apply with changes to your proposal. If it’s still not accepted after being modified, you may need to look into other options for solving your financial problems, which could include declaring bankruptcy.
You can, but it will be more difficult. Once you file a consumer proposal, your credit score will drop significantly. This can affect your chances of getting approved for a mortgage with a new lender because they’ll want to check your credit report before giving you money.
If you are approved, it will typically be by a B-lender or private lender, and you may have to pay much higher rates than you would without a consumer proposal.
It can take many years to recover from a consumer proposal, depending on how long it takes you to pay it off. You’ll usually have to wait three years after you complete your payments to get your credit score back to normal.
No. Your mortgage is a secured debt, so you can’t fold it into your consumer proposal. This means that you’ll still have to make regular payments on your mortgage while you pay off your consumer proposal.
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, and 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. In her spare time, Claire enjoys rock climbing, travelling and drinking inordinate amounts of coffee.
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