How does a consumer proposal affect credit?
I wrote in my article about whether a consumer proposal can be rejected that the most frequently asked question I receive is in relation to if a proposal can be accepted. The second most frequently asked question by far is how does a consumer proposal affect credit? There is a lot to this question but put simply:
A consumer proposal affects credit by rating the individual accounts included in the consumer proposal a R9 for the duration of the proposal and an R7 for 3 years after you have finished paying your proposal, or 6 years from the date of filing – whichever comes first. Rebuilding your credit is possible during this period if a proper credit rebuilding plan is followed. During this period of time, you will have limited ability to obtain access to credit.
Equifax recently changed the reporting rules for consumer proposals from them impacting your credit from 3 years past the date of your last payment, to now adding a time limit of 6 years from the date of filing. This makes a consumer proposal a much more attractive option than bankruptcy in most instances.
What are the real-world credit impacts of a consumer proposal?
Quite frankly, the real-world impacts for the average client are very minimal. In most instances the credit state of people who first see us is poor. Because of this, they would actually see a substantial benefit in filing a consumer proposal.
The three most common items people want to retain their credit are:
- Buying a house – The truth is that credit is rarely the reason people cannot buy houses. Most of the time it has to do with income levels, debt service ratios, and most importantly a down payment. When filing a proposal you generally have to wait 2 years after paying off the proposal before you can purchase. This also assumes you have a good income, keep your debt service levels down, and have an adequate down payment.
- Purchasing a vehicle – This one is actually a non-issue. Obtaining vehicle financing, if required, is very easy. However, if you have been in your consumer proposal for less than a year then it will be substantially more expensive. Once you have been in a proposal for at least a year financing rates tend to drop to more reasonable levels.
- Everyday purchases online – Things like Amazon, booking flights, renting a car, etc are always items people cite when wanting to retain credit. This is addressed by having a proper credit rebuilding plan after you file. We discussed in our guide to Consumer Proposals that obtaining a secured credit card (when you are ready!) is simple.
What question should I be asking about my credit when filing a consumer proposal?
The real question that most people should be asking about their credit is whether or not affecting their credit matters. The reason for this is because most people ask how a consumer proposal affects credit because they don’t want to file if it does. But the reality is by the time most consumers are looking to file a consumer proposal their credit is already affected.
The real question that should be asked is if you can do whatever you are looking to with credit now, before filing. The answer in most instances is no. The biggest objection I see to people taking life-changing positive decisions about their debt has to do with them not wanting to affect their credit. What most people do not realize is their credit is already affected. What we often ask our clients is ‘Could you buy the house/car now, in your current situation?’. The answer is almost always that they could not.
Because of this tough reality it usually makes sense to take 1 step back (Affect credit) for a life-time of forward steps.
It often makes little sense to not take a step in the right direction simply due to credit. It can seem like it is a big deal, but I assure you that at the end of the day your life will be significantly better.
One of the most unfortunate aspects of the entire credit system, as it pertains to insolvencies, is that most insolvency firms do not actually know anything about credit. This leads consumers to make uneducated decisions which is when people start regretting their decisions.
As always, we’d love to be your trusted debt professional and assist you in making the right decisions. However, if you go elsewhere we are always available for a second opinion.
This article was written by David Moffatt. A Senior Debt Relief Specialist with 4 Pillars Halifax. 4 Pillars has assisted in creating plans that have helped save Canadians over $1 Billion dollars of consumer and tax debt since 2002. We believe that no consumer should have to struggle with the stress of overwhelming debt. Our debt restructuring plans can help you cut your debt by up to 80% with less than 3% of our clients ever getting into deep financial difficulties again. If you are struggling with debt please reach out. It hurts to continue to suffer financially.