Canadians struggling to manage crushing debt loads have several alternative solutions available to them and one of the best is also one of the least familiar – the Consumer Proposal.
With the exception of attempting to manage your unsecured debt by making informal repayment arrangements directly with your creditors, all debt solution alternatives have varying degrees of negative impact on a credit rating. Before we look at what a Consumer Proposal will do to your credit rating both during the life of the proposal and after it is paid off, let’s briefly review what a proposal is.
In Canada, the laws governing bankruptcy and other debt solution options are set out in the Bankruptcy and Insolvency Act (BIA). About 15 years ago, the Act was amended to include a legal alternative to personal bankruptcy – the Consumer Proposal. With this approach, the debtor makes single monthly payments allowing repayment of reduced principal of the debt owed over a maximum of 5 years.
Once you file a Consumer Proposal through a licensed bankruptcy trustee and it has been accepted by more than 50% of your unsecured creditors it becomes legally binding. Notations are added to your credit file indicating you are in a settlement plan. Settlement plans have a more negative impact than debt repayment plans that call for you to pay off all your debt, not a reduced amount. However, a Consumer Proposal has a less negative effect than a personal bankruptcy.
While any of these solutions – debt management or settlement plans, consumer proposals, or personal bankruptcy – are in effect, you can forget about applying for any credit.
But once you complete paying off your Consumer Proposal or other settlement plan, or you are discharged from bankruptcy, the situation changes dramatically.
With a Consumer Proposal, the notation on your credit rating is amended to indicate you successfully paid off the proposal, but the notation will remain for 3 years after you have paid off the proposal. As you know, proposals can last anywhere up to 5 years, which means that negative note will stay with your for up to 8 years.
Concern over credit rating is a major factor influencing the debt solution alternatives that Canadians choose. Yet many fail to appreciate the fact that in almost all cases, if you are in financial trouble, your credit rating is already impaired. The key is to select a solution that will get you back to financial health as quickly and safely as possible.
A second consideration is the impact on your ability to get future credit once you have settled your debts, either through bankruptcy or repaying some or all of them over time. Some Canadians fear a bankruptcy will keep them out of the credit market forever, or at least for a very long time. Consumer proposals also lead debtors to fear they will not be able to get credit until the notation they have filed and completed a proposal disappears completely from their credit reports.
Simply put, for anyone with a verifiable source of income, this is just not true. How can this be? It may be hard to do this if you are currently overwhelmed by debt, but think ahead to the condition you will be in once your Consumer Proposal is paid off in 3 to 5 years. If you’ve been making monthly payments towards the proposal of $750, or $1,000, or $1,500 or more; that amount is now disposable income. What’s more, you have no unsecured debt. You are virtually debt free.
As such, you are actually considered by some lenders to be a reasonable credit risk, since you have no debt and a verifiable source of income. There are a variety of strategies you can use to quickly rebuild your credit rating once your Consumer Proposal is paid off, with some credit repair experts estimating it can be done is as little as 18 months.