If you’ve already done some reading about consumer proposals, you’ve seen that there are several differences between a consumer proposal and bankruptcy. Although both debt relief options allow those who are in a significant amount of debt to get out from under what they owe, the consumer proposal is far less disruptive to their lives. For instance, a consumer proposal does not require you to hand over any of your assets to your trustee for distribution to your creditors. Bankruptcy, on the other hand, requires that you surrender assets such as excess household furnishings, vehicles, personal possessions like jewelry, non-RRSP account balances, and even your home to the trust administered by your licensed bankruptcy trustee. Even though there are exemptions in bankruptcy, the value and quantity of what you have to surrender to make sure your creditors get something will likely be significant.
The fact that there is no direct financial cost in a consumer proposal like there is in bankruptcy does not mean that you will make it through the consumer proposal unscathed. If your consumer proposal is accepted, your credit will be impacted significantly. In fact, a consumer proposal damages your credit rating as much (or nearly as much) as bankruptcy does.
Your Credit Rating in Canada
Your creditors report the status of your accounts to the major credit bureaus on a regular basis. Based on your payment history and current loan status, they assign your debt a number from one to nine and inform the credit bureaus accordingly. These numbers are recorded on your credit report, which gives a snapshot of your current ability to pay your debts on time to creditors who are considering whether or not they should extend a loan to you.
As the numbers on the scale increase, your prospects of getting low interest rates decreases. A creditor will report R1 if you are making your payments on time. An R9 indicates that you are in bankruptcy, and creditors will not likely extend you credit except at very high interest rates. After you file for bankruptcy, you can take steps to rebuild your credit that will eventually get creditors to look more favorably at your application. However, the record of bankruptcy will still remain on your credit report for seven years.
If you file a consumer proposal, a rating of R7 will be applied to your credit report. That rating is only two points lower than an R9 — the worst rating possible — so your credit will be significantly damaged by the consumer proposal. In certain cases, the debt will be scored R9, making it indistinguishable from a bankruptcy.
The credit rating you earn from a consumer proposal will remain on your credit report until your proposal is paid in full. It will not drop off immediately at that point, however. A note that you were once bound by a consumer proposal will be placed on your credit report, and it will remain there typically for three years or more after your proposal is paid in full. So, for example, if you have a four-year consumer proposal, creditors will be able to see that you filed a proposal for seven years past the date of filing.
Should a Bad Credit Rating Keep Me from Filing a Consumer Proposal?
The answer to this question depends on your circumstances and the amount of debt that you are carrying. You will want to look into all available debt options to make sure that you are not harming your credit unnecessarily. An affordable debt settlement program, for example, may help you get out of debt without having such a severe affect on your credit.
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Your situation is unique. Fill out the debt relief form for more information about the consumer proposal and other debt relief options.
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