How Will my Credit Rating be Affected by Filing a Bankruptcy or a Proposal (‘Consolidation’)?

A common question Licensed Insolvency Trustees field is “How is my credit rating affected if I file a bankruptcy or a proposal?” Generally by ‘debt consolidation’ they are referring to a Consumer Proposal, which is a form of that. But let’s deal with bankruptcy first.

In Canada, credit bureaus (such as Equifax and TransUnion) will record a bankruptcy as an R9 rating (the lowest), where an R1 is the best (“R” is for “revolving”, or a charge account). Each code from 0 to 9 has a meaning, as follows:

R0: insufficient credit history to garner a rating (someone new to the credit world)

R1: your payments to the creditor in question is on time

R2: You have art least one payment that is 30 days late

R3: You have art least one payment that is 60 days late

R4: You have art least one payment that is 90 days late

R5: You have art least one payment that is 120 days late

R6: Not used

R7: Indicates that you have entered into some kind of written arrangement with your creditors to settle your debts (including a Consumer Proposal, a debt settlement/management plan) and that arrangement has been completed

R8: Indicates action has been taken by a secured creditor to realize on its security (i.e., a repossessed car). Often this is in reality recorded as an R9 instead, as the secured creditor has taken a loss on the security after liquidating it, and has then begun a legal action (lawsuit) to collect

R9: Bankruptcy filing or an uncollectable debt, or written off as a bad debt

The R9 rating for bankruptcy is automatic and is registered for 6 or 7 years on your credit report depending on the credit bureau.

For a proposal, the rating issued is an R7 for 3 years after the completion of the proposal. (some credit agencies register an R9 as a hold until the proposal is completed) Consumer proposals can be up to 60 months in length, but they are also open terms, so you can pay it off any time you like or are able with no penalties. Obviously it is beneficial to do so, as the R7 for 3 years is statutory.

The decision to file a bankruptcy or a proposal is a significant one. Many people struggle with the credit impact of filing either, but in fact, most who are in such a position already have a poor credit score and may not even realize it. Filing a legal insolvency has an impact, true, but the long-term decision to eliminate debt and turn your financial life around should be paramount.