According to recent reports, more and more Canadians are choosing to file a consumer proposal to alleviate their debt instead of going into bankruptcy. In Bebec , consumer proposal filings increased by 1.8% between February 2016 and February 2017. Even if a consumer proposal can be an effective alternative to bankruptcy, it is important to remember that this debt solution also affects your finances, especially your credit rating. It is however possible to restore your credit afterwards. Here are some strategies to get there.
How does a consumer proposal affect my credit rating?
A consumer proposal is a legal agreement between you and your creditors that most of the time you will only have to repay a portion of the total amount of your debts. You will also have a better repayment term which will not exceed five years. Unlike bankruptcy, your unsecured creditors cannot claim your property when you file a consumer proposal; however, as in the case of bankruptcy, your credit rating will be affected.
When you file a consumer proposal, you get an R7 credit score, which tells your creditors what action you have taken. This rating will remain in your credit report for three years after your proposal is completed. In comparison, declaring bankruptcy results in an R9 credit rating, the worst possible rating, which will appear in your credit report for six years after your discharge.
So how do I get my credit back?
To restore your credit following a consumer proposal, it is important to adopt healthy financial behaviors that will demonstrate to your creditors your ability to repay your debts on a regular basis.
Establish a budget first
One of the first healthy financial behaviors to adopt is to establish a monthly budget. A budget will help you ensure that you are spending your money wisely and staying on track in financial matters. If you’ve never budgeted before, don’t worry. The process is relatively simple, and there are many online tools, such as the budget calculator, available to make your job easier.
The secret to establishing an adequate budget is to be realistic. This means that you will need to be honest about your spending and the amount of money you make. By establishing a realistic budget that reflects all of your financial needs and goals, you can more easily stay on track.
How can a secured credit card help restore my rating?
In addition to establishing and using a personal budget, you may also want to request a secured credit card as a way to restore your credit rating after submitting a consumer proposal. A secured credit card is similar to all other cards except that it requires a security deposit. The money you deposit becomes your credit limit. Once you have obtained a guaranteed credit card, you can use it to make small purchases and then reimburse your balance immediately to help restore your rating.
The consumer proposal is a good solution to debt and a good way to start over from a financial point of view. However, it is important to take the appropriate steps to restore and regain control of your finances once the process is complete.