Filing a consumer proposal will affect your credit rating as well as your financial health; there is no doubt. Anything but regular payments on time to your credit accounts will negatively affect your credit rating and taint your credit report. New creditors or potential lenders will see these black marks on your report and your approval may be affected.
While this may seem extreme, a consumer proposal administrator will not allow someone to submit a proposal if they do not need to submit a proposal. In general, the impact of such a request would affect your credit rating more than the benefits you would get.
Standard ratings of credit accounts in North America
Your Canadian credit rating, the ranking you are most likely familiar with, is a 3-digit number that represents your borrowing habits and overall financial health. Each of your credit accounts is also assigned another type of rating, represented by a letter (R, O or I) and a number (1-8).
R = Revolving credit, for example a credit card.
O = Open credit account, such as a line of credit.
I = installment credit, for example a car loan.
1 = Your loan payments are always on time
2 = Your loan payments are late by 30 days
3 = Your loan payments are 60 days late
4 = Your loan payments are 90 days late
5 = Your loan payments are 120 days late
6 = This figure is not used usually
7 = Your credit account is the subject of a consumer proposal
8 = This means that a secured creditor has taken steps to recover the asset that was used as collateral. This rating rarely appears on credit ratings
9 = You are bankrupt
Your credit rating after submitting a consumer proposal
Each of your credit accounts included in a consumer proposal will be assigned the worst credit rating, an R-7. As soon as your Consumer Proposal Administrator submits your proposal and it is accepted, the credit rating of these accounts will change to an R-7. Once you have completed your consumer proposal, meaning that you have completed your payments, a note stating that your consumer proposal is completed will remain on your credit report for 3 more years. This means that a consumer proposal negatively affects your credit as well as your financial health up to 8 years, depending on the duration of your payments (usually you have a maximum of 5 years to complete a consumer proposal) .
Should you be worried?
One of the most requested questions regarding consumer proposals and credit ratings is if you should be worried about the impact of such a proposal on your credit rating. Unfortunately, there is not really a clear answer to give. Technically, the answer is yes since you should always be worried about the extent of your financial decisions on it. But we do not want it to stop you from filing a consumer proposal when it comes to the right decision. Seek the help you need
If the idea of filing a consumer proposal is gnawing at you, it surely indicates that you are trying to handle important financial problems. Finding the help you need to manage or improve these issues should be your primary goal, even if it means filing a consumer proposal and negatively affecting your credit rating for a few years. In most cases, getting help to get back on track is worth more than a bad rating.
Manage your debts
Debts can and will affect every aspect of your life. Taking the necessary steps to better manage them is always the best choice, even if it means filing a consumer proposal. Having a plan in place to put your debts under control and your finances on the right track will ultimately be beneficial.
Seek the help of a professional
If you are still concerned about filing a consumer proposal in your respective situation, or are concerned about the impact it may have on your credit rating, you should seek the assistance of a professional. In Canada, a consumer proposal must be filed by a registered agent (sometimes called a trustee in bankruptcy); therefore, it is in your interest to contact an agent and arrange a first appointment to discuss your options.