When it comes to consumer proposals, there are inevitable and understandable questions about the impact on your credit score.

While there is damage to your credit, it is not permanent. You can resolve your debts and improve your credit score over time.

Let’s look at how a consumer proposal affects your credit score and what you can do to recover.

How does a consumer proposal affect your credit score?

A consumer proposal lowers your credit score, but it also gets rid of any outstanding debts that are dragging it down.

It may be more difficult to obtain credit for a period of time, but addressing your financial situation should be your top priority.

If you have negative payment history or debts in collections, this information appears on your credit report for six to seven years. Therefore, your credit score is already damaged or at least declining, so a consumer proposal won’t cause much further harm.

In fact, dealing with your debts is the first step to rebuilding your credit.

What does a consumer proposal credit score look like?

A consumer proposal can lower your credit score by around 150 points on average but you can rebuild it by paying your bills on time and using credit wisely.

Creditors and collection agencies often tell people that a consumer proposal will damage their credit score forever, but this is not true.

How does a consumer proposal affect credit rating?

On Canadian credit reports, every record is assigned a credit rating through a series of codes to describe the credit accounts you pay towards every month. Lenders use these codes to send information to the credit bureaus about how you make payments.

These codes include a letter that shows the type of credit you’re using and a number that shows when you make payments.

The best credit rating possible is 1, which happens when you make payments on time. The worst is 9, which can occur if you have collections or declare bankruptcy.

When you file a consumer proposal, each credit account included in the agreement will be given a 7 credit rating to tell lenders that you are making regular payments through this agreement.

7 credit rating for credit accounts in a consumer proposal

Consumer proposal credit rating examples

If you file a consumer proposal, the credit ratings on your accounts will change.

For example, a credit card account in a consumer proposal is marked as R7 on your credit report. The R is used because it’s a revolving credit account. A loan account in a proposal is marked as I7 on your credit report because it’s an installment account.

How long does a consumer proposal stay on credit report in Canada?

So how long does a consumer proposal stay on your record? In return for debt forgiveness and a clean slate, a consumer proposal is recorded in your credit report for at least three years after completion.

Your consumer proposal on an Equifax credit report

A consumer proposal will be removed from your Equifax credit report three years after you’ve completed your consumer proposal or six years from the date you filed your proposal — whichever comes first.

Your consumer proposal on a TransUnion credit report

On TransUnion credit reports, a consumer proposal disappears three years from the date you satisfied the proposal or six years after the date you defaulted on the account, whichever date comes first.

Where does a consumer proposal appear on a credit report?

A consumer proposal appears in the public records section of your credit report, alongside the date it was filed.

This information is sent from the Office of the Superintendent of Bankruptcy to Canada’s two major credit bureaus: Equifax and TransUnion.

Upon completion, you will receive a Certificate of Full Performance, officially releasing you from your obligation to repay the remaining balance of your debts outlined in your proposal.

At this stage, any record of a consumer proposal and your bad debts are removed from your credit report. New lenders will only see unsecured debts that you have accrued since filing.

How to remove a consumer proposal from your credit report

The only way to remove a consumer proposal from your credit report is to complete it sooner.

The faster you pay off your consumer proposal, the quicker you’ll be able to improve your credit score. You can take steps to repair your credit as soon as you file, regardless of how long it takes to complete.

Some example scenarios

Five-year proposal: If you complete a consumer proposal over five years, your consumer proposal drops off your credit report one year after you complete your proposal, which is a total of six years.

One-year proposal: If you complete a proposal in one year, your consumer proposal drops off your credit report three years later, which is a total of four years.

Lump-sum proposal: If you pay a lump sum to complete a consumer proposal, your consumer proposal drops off your credit report three years later. This is the fastest way to remove a consumer proposal from your credit report.

Your credit score after a consumer proposal

Once you’ve eliminated your debts through a consumer proposal, you’ll be able to take steps to improve your credit score.

Potential lenders see your consumer proposal on your credit history for three years after completion (or six years from the date you filed your proposal, whichever comes first).

The faster you complete your proposal, the faster you can repair your credit.

Can you get credit while in a consumer proposal?

You can access credit in a consumer proposal but it depends on a number of factors, including your income. You’ll likely find it challenging to obtain credit. When you do, you’ll pay higher interest rates and fees.

Decide whether credit at a higher rate is worthwhile or needed, and consider waiting until you can benefit from better rates.

What’s important to note here is a consumer proposal allows you to start again with no debts, sometimes at a reduced amount. So, embrace the second chance and be patient when repairing your credit.

Take immediate steps to improve your credit score through sensible financial management and showing your creditors that you can responsibly borrow money and pay it back when due.

Remember that you are starting with a clean slate, so it takes time to re-establish your credit. A sure way to get credit and rebuild credit in the process is to apply for a secured credit card.

Good to know: credit repair companies cannot remove a consumer proposal from your credit report.

A consumer proposal affects your credit score but not forever

The bottom line is that most debt solutions affect your credit score.

A consumer proposal affects your credit score and appears on your credit report for up to three years after you make your final payment.

However, after the proposal ends, you will be debt free and can begin rebuilding your credit by paying new creditors on time.

It does not impact your credit forever. You will recover, and you can enjoy life without the burden of debt.

You must prepare and file a consumer proposal with a Licensed Insolvency Trustee. To learn more, connect with a trustee today for a free consultation.

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