In Ontario, the most effective way to obtain relief from debt problems without filing for bankruptcy is through a Consumer Proposal.
A Consumer Proposal is a legally binding agreement with your creditors to negotiate more favorable debt repayment terms.
Every year since the financial crisis of 2008 thousands of Canadians are choosing to file a Consumer Proposal as it presents many benefits to people who are facing financial difficulty – lower monthly payments, no interest rate charges, 60-month payment plans, and many others.
However, because a Consumer Proposal is considered a “settlement with creditors” – which means the debtor had trouble paying the debt off and is seeking a change of terms; it is reported on the credit file as an R7 for the duration of proposal, plus 3 years after it is paid off.
Credit Bureau Ratings:
- R1 – You pay everything on time.
- R2 – Your payments are 30 days late.
- R3 – Your payments are 60 days late.
- R4 – Your payments are 90 days late.
- R5 – Your payments are 120 days late.
- R6 – Not generally used.
- R7 – You are in a consumer proposal, consolidation order, or debt management plan.
- R8 – Only used in cases where there’s been repossession by a secured creditor (foreclosure, car taken back by the financing company, etc.)
- R9 – A bad debt in collection, considered un-collectible, or you are declared bankrupt.
How It Usually Works
Once the Credit Bureau is notified that you filed a proposal your credit file will be marked with an R7 rating. It will remain in this state for the duration of the proposal (24, 36 or 60 months for example) plus 3 years after the completion of the proposal.
Technically, the shorter the repayment plan the less time your credit rating reflects an R7.
Taking Everything Into Consideration
Obviously, an R7 is not an R1. And if you have been making your minimum payments on time you’re credit is still not that bad.
However, if you don’t have a proper plan to pay the debts off, eventually your credit score will be lowered as there is no progress being made and your debt to available balance ratio remains elevated for a prolonged period of time (your available credit compared to how much you already owe).
From that standpoint it’s better to make the jump and get your financial house in order, as the sooner you start the faster you can begin rebuilding your credit.
If you’re already late with your payments, then you could already be in R9. This means that a Consumer Proposal will actually improve your rating – it will actually be increased to an R7.
The last item to consider is that under bankruptcy your credit file will be marked with an R9. From this perspective an R7 with a functional debt repayment plan is not such a bad option after all.
The Next Steps…
Hopefully this article has answered your questions about Consumer Proposal and its implications to your credit score. As every situation is different we suggest that you take us up on a Free Consultation offer and speak with a licensed trustee or proposal administrator to find out the best option for your particular case.