If you have been reading information on filing a consumer proposal, then you know there are many differences between bankruptcy and a consumer proposal. Both are drastic options for helping people become debt free and currently have a significant amount of debt, but a consumer proposal is much less severe on a person’s credit report, and their future life.
For example, you will not have to forfeit any of your assets with a consumer proposal to pay off creditors. However, when filing for bankruptcy you will be required to hand over unsecured assets to the bankruptcy trustee, this includes any personal possessions such as jewelry, vehicles, household furniture, non-RRSP account balances, and likely your home to the trust. There are certain exemptions, but the quantity and value of your surrendered assets to ensure creditors are repaid something is typically significant.
A consumer proposal does not have the direct financial cost associated with bankruptcy, but this does not mean you will get through the entire consumer proposal process without some impacts. Your credit report will be greatly impacted if a consumer proposal is accepted. This will damage your credit rating similar to bankruptcy, the key factor being not losing assets.
Your Credit Score in Canada
Creditors regularly report your account status to major credit bureaus. You are assigned a number between 1 through 9 for your debt based on your current loan status and payment history, credit bureaus are informed accordingly. Your credit report shows these numbers, giving a quick view of your ability to successfully make on time payments to creditors. This is used by creditors to determine giving you an extension on your loan period.
With these numbers, lower is better. Therefore, the higher this number increases on the scale, the lower your chance of getting low interest rates. If payments are always made on time, never being late your creditors report an R1. However, if you have filed bankruptcy, your credit report will show a R9, resulting in creditors either rejecting an extension or offering very high interest rates. However, if you have filed bankruptcy there are ways to begin rebuilding credit that helps creditors favor your request later. A bankruptcy continues to show R9 for 7 years.
A consumer proposal filing will show an R7f on your credit report. This is better than an R9, but only by two points. Therefore, a consumer proposal also has a severe impact on your credit score, and in some situations may still show an R9 rating. If this occurs, it will appear like a bankruptcy to creditors.
Credit ratings received by a consumer proposal are shown on your credit report until paid in full. At which time, your credit report will continue showing the previously bound consumer proposal, usually for an additional three years, possibly longer after the debt is paid off. For example, if your consumer proposal agreement was a four-year term, creditors would see the proposal filing for at least 7 years.
I Have Bad Credit, Should I Still File a Consumer Proposal?
For an accurate answer, your total debt and individual situation needs to be reviewed. You always want to consider any other available options first, to ensure you apply for the less aggressive debt relief option in Canada. You may find debt consolidation or debt settlement to available and avoid unnecessary credit damages.
To find out more based on your unique situation, fill out our debt relief form to receive more information regarding consumer proposals or other debt relief programs.
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