Understanding the Credit Impact of Different Debt Relief Programs

credit report impact of debt relief in Canada

In a previous article we compared the cost of 4 different debt relief programs and determined that in most cases a consumer proposal offers the lowest possible monthly payment, significantly better even than a debt management plan. Inevitably when we do this comparison the question comes up – but what about the impact on my credit score? A bankruptcy or consumer proposal will affect my credit so isn’t that bad?

There is a misconception that credit counselling, or a debt management plan, will not affect your credit score. In fact it will.

A debt management plan will appear as an R7 on your credit report for 2 to 3 years after completion.

To help clarify the confusion, below is a summary of how the various debt relief programs will appear on your credit report.

How does a debt management plan appear on your credit report?

  • A debt management plan will be listed as an R7 on your credit report
  • Each debt included in your debt management plan will be marked as part of a scheduled repayment plan.
  • This rating will remain on your report for 2 to 3 years after completion of the program.

How does a consumer proposal appear on your credit report?

  • A consumer proposal will be listed as an R7 on your credit report.
  • It will be reported as a formal procedure to repay you debts.
  • The rating will remain on your credit report for 3 years after completion of the proposal.

How does bankruptcy appear on your credit report?

  • A bankruptcy is listed as an R9 credit rating.
  • A first bankruptcy will remain on your credit report for 6 to 7 years after discharge.

If we combine payment periods with the maximum time each program will remain on your credit report, we can now consider how long until each is removed.

how long debt relief appears on credit report

Debt Management Plan: 5 year program + 3 years = 8 years

Consumer Proposal: 5 year program + 3 years = 8 years

Bankruptcy:

  • First time bankruptcy, no surplus income: 9 months + 7 years = just under 8 years
  • First time bankruptcy with surplus income: 21 months + 7 years = just under 9 years

As you can see there is little different in the credit reporting of any debt relief program.

There is however a substantial financial difference that can affect your ability to rebuild your finances and your credit. A bankruptcy and a consumer proposal cost significantly less than a debt management plan if you are dealing with all of your unsecured debts. In many instances the monthly payments are less than half what they would be in a debt management plan. If you put that difference into savings, which can be used for a down payment, or use this money to pay down other secured debts like your mortgage or car loan, your financial situation will improve that much sooner and your credit score is also likely to improve that much quicker.

Choosing a debt relief program is about getting out of debt in the best possible way. While the impact on your credit score may worry you, the determining factor should be which program makes most sense for you financially.

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