If you’re overwhelmed by debt and exploring solutions, you may be wondering: How will debt settlement affect my credit score? The answer depends on how the settlement is done.
In Canada, a safe and effective way to settle debt is through a formal, legally binding process called a Consumer Proposal, administered only by a Licensed Insolvency Trustee.
A Consumer Proposal will temporarily lower your credit score, already low due to chronic non-payments, and assign an R7 rating on your credit report. However, it offers legal protection from creditors, stops interest and collections, and allows you to settle your debts for less than you owe.
While your credit score takes an initial hit, most people begin rebuilding it during the proposal and fully recover within a few years.
What Is Debt Settlement?
Generally speaking, debt settlement means negotiating with creditors to pay less than you owe. We can help you achieve this via a Consumer Proposal.
- Informal debt settlement companies: Unregulated, often charge upfront fees, do not offer legal protection, and creditors are under no obligation to accept agreements.
- Consumer Proposal: A legally binding, government-supervised debt settlement available only through Licensed Insolvency Trustees. Creditors must accept the proposal once it meets majority approval.
What Is a Consumer Proposal?
A Consumer Proposal is a federally regulated debt relief process overseen by a Licensed Insolvency Trustee. It lets you settle unsecured debts, like credit cards or lines of credit, for less than owed. Some key features include:
- Legal protection: A formal stay of proceedings halts collection calls, garnishments, and lawsuits.
- Structured: Payments are made monthly over up to five years.
- Federally regulated: Licensed Insolvency Trustees manage the process from start to finish.
How a Consumer Proposal Affects Your Credit Score
Filing a Consumer Proposal will have a temporary impact on your credit score, but it is often less damaging than continuing to miss payments or declaring bankruptcy.
Once filed, a Consumer Proposal is reported to Canada’s major credit bureaus and assigned an R7 credit rating, which means you’re repaying your debts through an authorized, structured program. This rating is a step above bankruptcy (rated R9) and indicates that you’ve taken formal action to resolve your financial situation.
While your credit score will drop initially, many individuals begin rebuilding their credit during the proposal itself by maintaining steady payments, budgeting wisely following credit counselling overseen by trustees, and using tools like secured credit cards. Over time, consistent financial habits can lead to a stronger credit profile, often within two to three years after completing the proposal.
Informal Debt Settlement vs. Consumer Proposal
Feature | Informal Debt Settlement | Consumer Proposal |
Legal binding? | No | Yes |
Stops creditors? | No | Yes |
Debt relief? | Uncertain | Federally approved |
Fees structure | High upfront, unregulated | Regulated, included in payments |
Oversight | None | Trustee-led |
Rebuilding Your Credit After a Consumer Proposal
To set yourself on the path toward financial recovery, consider these vital steps:
- Pay bills on time: Make timely payments for all current bills and obligations. Consistent on-time payments will gradually enhance your creditworthiness over time.
- Maintain low credit utilization: Keep the balances on your credit card or line of credit significantly below the approved limit. A credit utilization rate under 30% is ideal for improving your score.
- Use secured credit cards or credit-building loans: Apply for a secured credit card or a credit-building loan from a trusted lender like your local bank or credit union. These tools can help establish new positive credit data on your report.
- Check your credit report for errors: Request your credit report regularly to ensure its accuracy. Dispute any errors or inaccuracies you find, as this could help improve your score.

Make an Informed Choice with Protection
A Consumer Proposal offers a safe, structured, and legally recognized approach to settling debt. While your credit will take a short-term hit, the path to recovery is clear and supported.
Ready to take back control? Book a consultation with the team at A.C. Waring & Associates today. We’ll explain your options and create a debt relief roadmap that protects your rights, rebuilds your credit, and brings financial peace of mind.