How a Consumer Proposal Affects Your Credit Rating in Canada

What are the possible credit ratings?

On your credit report in Canada, each creditor assigns you a credit score on a scale from 1 to 9. R1 is the best credit rating and R9 is the worst. Here are their meanings:

• R1 - You pay that creditor’s loan 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 - Typically not used.
• R7 - You are in a consumer proposal, consolidation order, or debt management plan (offered through a non-profit credit counselor).
• R8 - It is used to show that a secured creditor has taken steps to realize on their secrity (e.g. repossessed your car). It rarely appears on a credit bureau report as after they take your car they generally commence legal or collection action which is rated R9.
• R9 - A bad debt placed for collection or considered uncollectible, or you are bankrupt.

As you can see, you could have different credit ratings at one time, based on how you handle different debts.

How does a consumer proposal affect my credit rating?

As soon as you file a consumer proposal, your credit rating will be revised to either an R7 or an R9 and it will probably remain at this rating until the proposal is completed.

After you complete your proposal payments, a note indicating you have filed a consumer proposal will appear in your credit record, typically for three more years. That means that your consumer proposal affects your credit record for up to eight years from the date that you filed the proposal to creditors, depending on the length of your payment period.

For example, if you make a proposal where you are making monthly payments for three years, the proposal remains on your credit report for a total of six years.

Should I worry about the effect on my credit rating?

Obviously, an R7 rating in a consumer proposal is much worse than a perfect R1 credit rating, so that is an obvious disadvantage of filing a consumer proposal.

However, if you are considering filing a consumer proposal, you probably already have less than perfect credit. You are probably are either worried about falling behind on your payments, or you are already behind and worried about collection calls and wage garnishments. Your credit has already deteriorated to the point that you don’t qualify for a debt consolidation loan.

While a consumer proposal has a negative effect on your credit score, it also means that you have dealt with all of your debts. You have a plan in place to deal with your creditors. You are no longer worried about collection calls and wage garnishments. You can sleep at night.

A consumer proposal is a great solution for many Canadians, so we strongly suggest you contact a trustee to arrange for a no-charge initial consultation to review your options.

Return to part 2 of overview: Consumer Proposals Explanation.