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When debt becomes overwhelming, a consumer proposal may offer a solution. A consumer proposal allows you to negotiate your debts to pay off less than what’s owed to help you get back on track financially.
However, consumer proposals can affect your credit score, but the impact may be less severe than filing for bankruptcy. If you’re considering a consumer proposal to deal with debt, it helps to know how your credit score might be impacted.
How a consumer proposal works
A consumer proposal is a legal arrangement in which you agree to pay off a reduced amount to clear your debts with creditors. You’ll draft the proposal terms with the guidance of a Licensed Insolvency Trustee (LIT). Your LIT then negotiates with your creditors on your behalf.
Assuming your creditors approve, you’ll pay an agreed-upon amount each month. It can take up to 60 months to finish a consumer proposal. Once you complete it, you’re done paying off the debts.
Consumer proposals and credit reports
Your credit report is a collection of information about your debts, including how much you owe, the types of debt you have and your payment history. Equifax and TransUnion are the two main agencies responsible for creating credit reports in Canada.
When you file a consumer proposal, it will likely appear on your credit reports. Specifically, anyone authorized to check your credit report will be able to see:
The date you filed
Your consumer proposal completion date
Which debts were included in the proposal
Once you have a consumer proposal on your credit report, it can remain there for up to three years after making the final payment to the plan or six years after you sign the proposal, whichever is sooner.
How a consumer proposal affects your credit score
The details in your credit report are used to generate your credit score. Using credit responsibly helps your score, while mismanaging debts can hurt it.
Debts in a consumer proposal are coded as R7 on a credit report, meaning you’ve agreed to settle them with your creditors. For some perspective, a rating of R1 is considered to be perfect credit, while bankruptcy is recorded as R9. R9 is essentially the lowest rating someone can have.
Can you get new loans or credit cards with a consumer proposal on your credit report? It’s possible, though your options might be limited. Lenders may see you as being high-risk. If you can get approved, you may pay higher interest rates or fees for any loans or lines of credit you qualify for.
Get your credit back on track after a consumer proposal
Filing a consumer proposal may hurt your credit scores, but the damage likely isn’t permanent. It’s possible to recover your score by practicing good financial habits, including paying bills on time and sticking to a budget. As your score begins to improve, you may consider getting a secured credit card or small personal loan, which could help you re-establish a positive payment history.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.