A consumer proposal is a legal process where a Licensed Insolvency Trustee works with you to produce a “proposal” — an offer to pay your creditors a percentage of what you owe to them or to extend the time to pay off the debts, or both.
The best way to find out if a consumer proposal is the right choice for you is to talk to a Trustee to discuss your situation.
Consumer proposals are not a cookie-cutter solution and the Trustee will evaluate your finances and explore various options with you to help determine what debt-relief option is best for your situation.
As you explore various options while addressing your struggles with debt, it’s important to be mindful of how your credit will be affected.
When it comes to consumer proposals, your credit score will be negatively impacted – at first. But following a legal process such as a consumer proposal to pay off your debts will allow you to start quickly rebuilding your credit.
Let’s look at how consumer proposals affect credit ratings and how you can start boosting your credit rating:
How Does a Consumer Proposal Affect My Credit Rating?
When you file a consumer proposal, your credit score is negatively affected right away. However, it is impacted in the same way if you were to simply cease making payments on your debt.
The difference being that the quicker you finish your consumer proposal, the quicker it will cease to impact your credit rating, letting you improve your credit score without being hindered by debts being reported that you cannot reasonably pay.
Filing a consumer proposal typically puts you in an R7 credit rating (R9 being the worst, which refers to a bankruptcy) for 6 years from the date the proposal is filed or 3 years from the day the proposal is complete – whichever comes first.
Unpaid debts can remain on your credit report up to 7 years from the day they are sent to a collections agency.
After six years or three years, Transunion and Equifax will remove the consumer proposal notation from your credit report.
After you have completed the consumer proposal, you will receive a “Certificate of Full Performance” that you can send to TransUnion or Equifax to ensure that your credit rating is updated as quickly as possible.
While there is no way to shorten the length of time that your consumer proposal affects your credit rating, you can begin to improve your credit score right after you file a consumer proposal.
How Can I Rebuild My Credit While in a Consumer Debt Proposal?
1. Keep An Eye on Your Credit Score
Keeping an eye on your credit score gives you an overall picture of your financial health. It also gives you an opportunity to see any fluctuations in your score and spot any errors that could be negatively affecting it.
Errors can happen and — while you’re in a consumer proposal — you’ll want to make sure your credit score is accurate. You can report any errors directly to Equifax or Transunion.
But how do you monitor your credit score? Equifax and Transunion will allow you to request one free copy of your credit score per year. However, many banks will also let you check your credit score regularly through an online account.
2. Stay On Top of Your Bills
In addition to your consumer proposal payments, you have to stay on top of your other monthly bills.
When a Trustee compiles a proposal on your behalf, they take into account your spending patterns and financial obligations. This means that your consumer proposal payment is calculated in a way that allows you to pay your bills regularly.
Making regular payments will improve your credit score.
3. Get a Credit Card
We recommend that you tread these waters very, very carefully.
Although it may be difficult for you to qualify for a credit card while in a consumer proposal, it is possible. There are companies that will offer you an unsecured, low-limit card with a high-interest rate despite your credit score.
You should try to stay away from these.
Relying on a credit card and not being able to afford to repay it is going to put you in the same situation you found yourself in when you filed your consumer proposal.
Instead, consider a secured credit card.
These work exactly like a regular credit card but you are required to place a deposit on it before you can use it. Basically, it works like a debit card – except a secured credit card is reported to the credit bureau and can help you rebuild your credit.
This means that if you have a secured credit and make your minimum payments on time, you can begin to reestablish your credit.
Keep in mind that boosting your credit score, especially after or during a consumer proposal, doesn’t happen immediately. The credit bureau wants to see responsible use of credit over a long period of time.
4. Make a Plan
Before you apply for a secured credit card, it’s important to have a plan. Because your credit score is built month over month and year over year, you need a long-term plan to complete your consumer proposal and rebuild your credit.
Now is the time to make a realistic plan when it comes to your budget and lifestyle.
Everybody’s situation is unique but something occurred that created your financial struggle. Now that you have a consumer proposal in place to manage your owing debts, it’s a good time to look at your overall financial health and make positive changes.
Apart from looking at what you make versus what you spend, also create some short-term financial goals such as cutting back on expenses or tucking away some money into a savings account.
Can a Consumer Proposal Really Improve My Credit?
By eliminating your debts more quickly than doing it on your own, it certainly can!
Plus, if you take this as a learning opportunity to improve your finances, you can rebuild your credit and keep it in the higher numbers.
If you’re ready to tackle your struggle with debt, we are ready to listen. Contact Frederick & Company Ltd. to discuss your options and get you on the right track to improving your credit and your finances.