Will Filing a Consumer Proposal Affect My Credit Score?

woman checking her credit report after filing a consumer proposal

When faced with overwhelming debt and financial struggles in BC, one solution that offers individuals hope for regaining control is a consumer proposal.

Let’s explore what a consumer proposal is, how it can impact your credit score, the benefits it brings, and why tackling the root problem of debt is more crucial than maintaining a high credit rating.

What is a Consumer Proposal & Why Consider It?

A consumer proposal is a legal process available to individuals in British Columbia who are struggling to repay their debts. It is a formal agreement made between you and your creditors, facilitated by a Licensed Insolvency Trustee (LIT). This proposal allows you to negotiate an affordable payment plan, proposing to pay back a portion of your debt over a period of 5 years. The payments are interest-free and are set based on your financial situation, ensuring the payment is manageable for you and your budget.

Many individuals and families decide to file a consumer proposal because it provides a realistic and practical way to avoid bankruptcy while offering a structured and achievable approach to eliminating your debts. It allows you to keep your assets, provides protection from creditors, and eases the pressure to repay large sums immediately.

How Will a Consumer Proposal Impact My Credit Score?

Before diving into how a consumer proposal affects your credit score, let’s briefly explain what a credit rating is. A credit rating, also known as a credit score, is a numerical representation of your creditworthiness. It is calculated based on various factors such as payment history, credit utilization, length of credit history, types of credit, and new credit applications and it helps lenders assess the risk of lending money to you. In Canada, credit scores range from 300 to 900, with higher scores indicating lower credit risk.

Now, how does a consumer proposal impact your credit rating? When someone files for a consumer proposal, it does have a negative impact on their credit score. The process involves notifying the credit reporting agencies, resulting in a notation on the individual’s credit report. This notation remains on the report for a specific period, typically three years after the completion of the proposal or six years after filing, whichever is earlier.

Does a Consumer Proposal Show Up on My Credit Report?

When you file a consumer proposal, an “R7” rating is assigned to your credit report. An R7 rating indicates that you are making regular payments through a consumer proposal with your creditors. The R7 rating is a specific code used by credit bureaus to indicate that you have entered into a consumer proposal. This code alerts potential lenders and creditors that you are undergoing a debt settlement process. As a result, obtaining new credit during this period may be challenging, as lenders may view you as a higher credit risk due to the ongoing debt resolution. It’s important to remember that the R7 rating is a temporary phase, and once you complete the consumer proposal and fulfill the agreed-upon payments, it will be replaced with an R9 code, indicating the successful completion of the proposal. During this process, it’s crucial to focus on rebuilding your financial habits and demonstrating responsible financial behavior to improve your creditworthiness in the long term.

The presence of a consumer proposal on the credit report may make it challenging to secure new credit or loans during this period and while this may initially seem concerning, it’s essential to understand the full picture.

Benefits of Filing for a Consumer Proposal

Despite the R7 rating, filing for a consumer proposal offers several significant benefits that often outweigh the short-term impact on your credit score:

Debt Consolidation

A consumer proposal consolidates your debts into a single manageable monthly payment, easing financial stress.

Debt Reduction:

You can negotiate to pay back only a portion of your debt, significantly reducing the overall amount owed.

Avoid Bankruptcy:

Filing for bankruptcy should be considered as a last resort due to its severe and long-lasting consequences. A consumer proposal offers a less damaging alternative, allowing individuals to avoid the complete liquidation of assets.

Keep Your Assets:

Unlike bankruptcy, a consumer proposal allows you to keep your assets such as your home and car, preserving your financial stability.

End Harassing Calls:

The proposal process ends the constant harassment from creditors, offering much-needed relief and peace of mind.

Protection from Creditors:

Once the consumer proposal is filed, creditors are legally required to stop collection actions and wage garnishments. This provides the debtor with breathing space to work towards a more stable financial future.

No Interest:

When you file a consumer proposal, the interest that is accumulating on your debt stops.

Prioritizing the Root Problem of Debt

While a drop in the credit score may deter some individuals from considering a consumer proposal, it’s essential to recognize that a credit score is not the sole measure of financial health. Prioritizing the resolution of the root problem – excessive debt – is more crucial in the long run.

Maintaining a high credit score is a great goal to have, but it should never overshadow the importance of addressing the root cause of your financial struggles. Filing for a consumer proposal demonstrates your commitment to responsibly manage and repay your debts, paving the way towards a more stable financial future. With proper budgeting, responsible credit management, and timely payments, you can begin rebuilding their credit score over time.

Improving Your Credit Score after a Consumer Proposal

It’s important to remember that after successfully completing your consumer proposal, you can begin rebuilding your credit score. Building your credit after filing for a consumer proposal is crucial to restoring your financial health. While the process may take time, following these steps can help you improve your creditworthiness:

1. Create a Budget

Begin by creating a detailed budget that outlines your income, expenses, and debt obligations. This will help you manage your finances more efficiently and ensure you can meet your payment commitments.

2. Make Timely Payments

Ensure you make all your payments on time, not just for the consumer proposal but for all your financial obligations. Consistently paying bills and debts promptly shows responsible financial behavior to creditors.

3. Obtain a Secured Credit Card

A secured credit card can be a valuable tool to demonstrate responsible credit use and rebuild your credit.

4. Monitor Your Credit Report

Regularly check your credit report for accuracy and to keep track of your progress. Ensure that the consumer proposal is accurately reported and that there are no other errors on your credit report that could negatively impact your credit score.

5. Keep Debt Levels Low

Aim to keep your credit card balances and other debts as low as possible. High credit utilization can adversely affect your credit score, so try to use only a small portion of your available credit.

6. Diversify Credit Types

Having a mix of credit types, such as installment loans and revolving credit (credit cards), can positively impact your credit score. However, only take on new credit when necessary and ensure you can manage it responsibly.

7. Be Patient & Persistent

Rebuilding credit takes time, so be patient and persistent in your efforts. As you demonstrate responsible financial behavior over time, your credit score will gradually improve.

Some final thoughts. Yes, filing for a consumer proposal in British Columbia may impact your credit score temporarily, but the benefits it provides far outweigh the consequences. It offers a practical and constructive approach to address your debt, protect your assets, and regain financial control. Remember, your credit score can be rebuilt over time, but achieving lasting debt relief and financial stability is the ultimate goal. So, don’t hesitate to seek guidance from a Licensed Insolvency Trustee and embark on your journey towards financial freedom. Book your free, no obligation consultation with a Licensed Trustee now.

Consulting a Licensed Insolvency Trustee for Debt Relief in BC

Every financial situation is unique, and seeking professional advice from a Licensed Insolvency Trustee is crucial. They can assess your situation, explain your options, and guide you towards the most suitable debt relief strategy in British Columbia.

Licensed Insolvency Trustees are licensed and regulated by the federal government. They are the only professional in Canada who can file a consumer proposal or personal bankruptcy for you and will work with you to help determine the best debt relief option for your situation. Licensed Insolvency Trustees must abide by a strict code of ethics and conduct and are required to explain all of your debt-relief options and help you choose the best option for your situation. Other unlicensed debt consultants are not required to abide by these same regulations.