How Does Debt Consolidation Affect Your Credit Rating?

How Does Debt Consolidation Affect Your Credit Rating?

Debt consolidation can be an effective way to avoid declaring bankruptcy. Through a consumer proposal you can consolidate your debt effectively with a minimal effect on your credit history if you are already in a debt situation to begin with.

What is a consumer proposal?

A consumer proposal is a form of debt consolidation that is an alternative to declaring personal bankruptcy. It exists in the form of an agreement that’s negotiated between you, your creditors and a Licensed Insolvency Trustee called a consumer proposal administrator. This agreement is legally binding and affords you protection from your debt collectors so you can often pay back only a portion of what you owe without letters and reminders.

In essence, consumer proposals allow you to only repay a portion of the total amount owing while your creditors agree to forgive the balance.

What happens when you file for a consumer proposal?

When your consumer proposal is filed wage garnishments stop and interest ceases on your debts. Unsecured creditors and collection agencies are not allowed to contact you for payment anymore which helps you keep up to date with important payments such as your car our house.

If you are a homeowner, this is especially good news. Your repayment period begins, but unlike with traditional credit cards or a mortgage, you only are often only a paying a portion of your debt owing instead of the whole thing. Additionally, if your income increases, your payments will not increase since the repayment amount was agreed upon in your proposal. This repayment period can be up to five years. You have the option to pay the portion owing in one lump sum or over the course of the five years.

Does this proposal influence your credit rating?

The answer is yes. When you file a consumer proposal, you are awarded an R7 credit rating. An R7 means that you have settled or compromised your debts and creditors have been prevented from taking any legal action or collection plans.

R7 credit ratings remain on your credit report for three years after your proposal is paid in full. When you file for bankruptcy you are given a rating of R9 which is the lowest rating that can be given. Whether you file for bankruptcy or a consumer proposal, you will be recieve a blemish on your credit report however if you are already in debt and having trouble paying your accounts in full your credit is already compromised and a proposal will allow you to clean up the situation and move forward in a much shorter period of time.

For more information about debt consolidation and your credit rating, contact the Kevin Thatcher team today.

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