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One of my clients gave permission to seek opinions on her debt options. She is up to her eyeballs, and, 3 big cheers to her, is taking charge of the situation. She has a solid income and has a lot of equity in her home. She doesn’t want to go the bankruptcy route – in fact, was told she couldn’t – so is considering using a debt consolidation firm. It would result in an R7 on her credit report.

Her mortgage is up for renewal in a year.

I’m a money coach – helping on the day-to-day money stuff like controlling spending, setting savings objectives, learning how to interpret your mutual fund statements etc – and this particular question is slightly out of my domain and expertise.

Any informed opinions out there?


About the Author

Imagine if Canadians were known for being all over their money. Engaged. Proactive. Getting out of debt. Savvy. Saving. Generous. Nancy wants to help. Nancy started her own journey with money over 15 years ago, and formed her company “Your Money by Design” in 2004 to help others along the same path. It’s not the usual financial advising/investment stuff. It’s about taking control of day-to-day finances –managing monthly cashflow effectively, spending appropriately, getting out of debt, saving. If you're ready to take control over your finances, pop by her business site, YourMoneybyDesign.com


  1. Nancy,

    Here are what the ratings mean:
    From: http://www.equifax.com/EFX_Canada/consumer_information_centre/faqs_e.html
    Rating What it Means
    R0 Too new to rate; approved but not used
    R1 Pays (or paid) within 30 days of payment due date or not over one payment past due
    R2 Pays (or paid) in more than 30 days from payment due date, but not more than 60 days, or not more than two payments past due
    R3 Pays (or paid) in more than 60 days from payment due date, but not more than 90 days, or not more than three payments past due
    R4 Pays (or paid) in more than 90 days from payment due date, but not more than 120 days, or four payments past due
    R5 Account is at least 120 days overdue, but is not yet rated “9”
    R7 Making regular payments through a special arrangement to settle your debts
    R8 Repossession (voluntary or involuntary return of merchandise)
    R9 Bad debt; placed for collection; moved without giving a new address

    R7 is Making regular payments through a special arrangement to settle your debts

    When you settle your debts, using a debt settlement company, the creditors aren’t very excited about that. Obviously they want to recover the full amount of their money with the full amount of interest.

    What happens with R7 is that all debts included in the debt settlement will go to R7. This is very harsh on your credit score. The reprocussions of this will be felt for 6 years +

    Actually, this will be reported for the amount of time that it takes to fully paid the debt settlement agreement, and then six years from the very last payment. So it could be on your report for 3 + 6 = 9 years. (3 years to complete the debt settlement agreement.)

    The point is: If you don’t need to apply for alot of credit in the next 9 years, then this is an alright option. It’s VERY limiting, however, if you’re going to need any type of credit in that time period.

    If you try to borrow money for a car purchase in that time period, you’re going to pay very high interest rates. You could pay as high as 29.99% for a car loan. Especially if you’ve done a debt settlement agreement. This is because you’re considered very high risk.

    Finally, I’ve consulted with many people who have declared bankruptcy, and they’ve all said the same thing: “If I had of known the amount of crap that I would have to go through in order to do this, I never would have.” !!

    While debt settlement and bankruptcy seem like easy and painless short term options, they are extremely limiting and expensive in the decade to follow!


    Sep 30, 2007
  2. Hello Nancy,

    Many of the above statements are inaccurate. The above person is confusing several industries. Debt Consolidation, Credit Counseling and Debt Settlement are all separate industries.

    Nothing can stay on your credit report for nine years. It is 6 years. Only a bankruptcy can go past that. Debt settlement is paid out in ONE LUMP SUM. Not over three years with an added 6 years. Credit Counseling includes a payment arrangement that occurs over time and is therefore rated as an R7. Debt Settlement is classified as “settlement made” on the credit report, without the amount that the account was settled at being revealed. Debt Consolidation is also a payment arrangement that occurs once all of your debts are lumped into one single debt. Payments are then made on that one debt.

    The definition of R7 refers to “regular payments”. Under TransUnion it is “making regular payments under a consolidation order or similar arrangement.” Under Equifax it is “making regular payments through a special arrangement to settle your debts.” Debt Settlement does Not include regular payments or anything similar. There is a ONE lump sum payment that is less than what the person owes and then the account is then closed.

    It is important that the term Debt Settlement not be used when referring to a payment program. Debt Settlement is not the same as Credit Counseling or Debt Consolidation, which ARE in fact payment programs. This is clearly shown when someone receives their credit report following a Settlement and it states “settlement made.” This does not appear when someone completes a payment program.

    I do not argue that a credit report is important, but when we get calls from people who’s marriages are falling apart, or their is depression, or even suicidal. Our main goals to relieve the stress and eliminate the problem. Most people who are struggling this bad do not care as much about their credit report as it can be rebuild over time. Purchasing a car is not more important to them than saving their marriage. Creditors may not like receiving less than what is owed to them, but they also do not like getting “nothing” from a bankruptcy. They also recoginize that with compound interest , over many years, they have been paid out many times over.

    Debt Settlement is much less debilitating than the other services. Education in this new industry is vital. Most people have no idea what it is. When looking in to Debt Settlement, people should clarify whether it is Credit Counseling trying to perform the payment plan or if it is actually a Debt Settlement Company. The above party should look at the Mtro 2 Layout (the credit reporting resource guide industry standards for credit reporting p.6-6 question #18). There is so much more that needs to be addressed in the above persons comments, but not enough time for me to address them all.


    Oct 02, 2007
  3. As a Mortgage Broker I have to deal with people’s current credit report when helping them buy or renew or refinance. From experience I have found it harder to get good interest rates when the person’s credit is bruised.
    Since you have a lot of equity why not do a refinance now while your credit is still good and pay off your debts? You will have to pay the penalty to break your mortgage and the legal fees but it would get you on the right track and allow you to start a new system with your personal finances.

    Another thing to keep in mind, when your mortgage is up for renewal the financial institutions usually doesn’t do a credit check. Financial Institutions usually check your credit bureau if you are doing a purchase or refinance of your home. The banks usually send you a renewal form 30 to 90 days before you renew. Look closely at the rates before signing off on it. Banks notoriously offer Posted rates instead of Discounted rates when it comes to renewal. (Please note there is no guarantee they won’t check your credit. It is more likely that they will check it if you are late with your mortgage payments)

    Good luck with your decision.

    Beatrice Scott AMP
    Mortgage Broker.


    Oct 02, 2007
  4. Brian Pybus

    Hello Nancy:

    Regarding the options available to debtors in general, and the discussion around debt settlements in particular, here’s my two cents worth.
    For debtors in trouble there have only been three avenues open to them to resolve their financial problems. One is by combining all the problem debts, be they credit cards, lines of credit, signature loans and overdrafts into a consolidation loan. You’ll usually need to put up some collateral & you will need to destroy the credit cards and close the lines of credit to make this work (70% of those who fail to cancel/close their cards & LoCs at the time of the consolidation loan are back in the soup within two years). There are also credit/debt counselling (also known as debt/credit management) programs available. Under these, creditors agree to reduce or eliminate further interest charges in exchange for getting regular monthly payments which, over time, will eliminate the debts. For those who can’t get a loan and who don’t qualify for credit/debt counselling, the only remaining option has been to visit a bankruptcy trustee. Bankruptcy itself will wipe out pretty much all of your debts (with some exceptions such as Court orders and family maintenance, etc.) while a consumer proposal – available to those whose income is above a certain guideline – will pay the creditors something each month over a period of perhaps three or four years. Proposals typically total something like 20% or so of the outstanding debts.

    What has not been considered – at least until recently – are those with no other option being forced into bankruptcy, yet they want to pay their creditors and they have the access to financial resources with which to make settlements. These ‘third party’ funds – from parents, siblings, a spouse, a co-signed loan, etc. – would never figure into a bankruptcy, and are usually not nearly enough to pay out the creditors in full. But if a creditor is willing to accept something less, then a settlement can be negotiated and the debtor avoids the ‘baggage’ of bankruptcy.

    Independent Debt Arbitrators have pioneered the idea of debt settlement. They do all of the preliminary work – finding such debtors; qualifying them by seeing if any other solution is available; gathering all the information such as a current credit bureau report, a copy of the last income tax return, recent income stubs; completing a budget; examining all of the outstanding debt; ensuring the availability of at least some third party funds in order to offer a settlement proposal. They present the offers, negotiate the settlements and ensure the settlement funds are delivered.

    Debt Arbitrators who do this kind of work negotiate for a living. They know the rules of the game and how to apply them to achieve the best result. As well, they most probably deal with the same creditors many times over in their careers. This encourages the creditor to treat the Arbitrator and what he or she does with professional respect.

    For the creditor, the benefits are obvious. Debts that were considered unrecoverable are now being resolved. Unnecessary bankruptcies are being avoided. Instead of getting settlement funds spread over three or four years – as is the typical consumer proposal – the creditor gets it all immediately. Virtually all of the preliminary work is being done by a third party – the Debt Arbitrator – and at no cost to the creditor: in fact, there’s nothing in the entire process that costs the creditor, the funds being delivered free of charge. Similarly, the creditor doesn’t have to ship off an account to a collection agency and pay a commission of between 25% and 50% on the amount recovered. And the individual creditor has the assurance of being treated on an equal pro-rata basis with all the other creditors. All of this goes a long way to improve a creditor’s bottom line.

    There’s also an added bonus for the creditor, one that’s difficult to measure but critically important. It’s what I call simply the ‘goodwill factor.’ After being pounded by a collection agency (which frequently uses aggressive tactics and sometimes says inappropriate things to debtors which can reflect badly on the good name of the creditor), it’s only reasonable to assume that the debtor will never again be doing business with that firm. Now maybe the debtor is a deadbeat or a crook anyway, and so the creditor is certainly better off. On the other hand, the overwhelming majority of consumers who find themselves in trouble get there, as said earlier, through circumstances beyond their control. (Debt Arbitrators can usually determine who’s a deadbeat and who genuinely needs help). Handing a lifeline to someone who’s drowning is pretty powerful and not likely to be forgotten. The debtor’s already going through a hard patch: the inability to meet his or her financial obligations is a huge blow to someone’s self esteem. Being treated with respect and dignity while arbitrating a settlement is something a debtor remembers. And a debtor is not a debtor forever, but he or she is always a consumer: somewhere, sometime, somehow down the road the empathetic creditor will be repaid in kind.

    In the world of consumer debt collection, yes, Debt Arbitration makes it possible for both creditor and debtor to emerge as happy, smiling winners.


    Oct 05, 2007
  5. Nancy,

    As founder of one of Canada’s first Debt Settlement Companies I am sad to see someone representing themselves as a “money coach” missed an opportunity to study up on what an R7 is. Straight from Equifax a R7 is defined as: “making regular payments under a consolidation order” Debt Settlement is not a consolidation order.

    Debt Settlement companies are private and not required to report anyting to a credit report. Only Credit Counseling or a Consumer Proposal would show a R7 and have this negitive effect you discribe on a credit report. I think others have covered the inaccuracies in their replies so I’ll leave it at that. If you ever need commentary on Debt Settlement facts feel free to contact me as you have my email address now.



    Oct 17, 2007
  6. Thanks, all, for your contributions, from varied perspectives.
    Richard – no need to be sad: anyone could easily have looked up “R7” – (and my question wasn’t specifically ‘what is R7’ so much as “to what extent would this impact a mtg refinance) but from time to time I like to share space with others, and give others, such as yourself, the opportunity to contribute.
    If you can contribute without feeling sad in future, please do.


    Oct 19, 2007
  7. Thanks for the article! Very helful and practical. I really appreciate it! Also thanks to eveyone who commented.

    Scott Hannah
    Credit advice


    Aristotle Demedici Reply:

    Whatever arrangement is made. Clients need to also factor in what it costs to get help. While the origional debt might be reduced, a credit counseling agency might themselves have high fees and demand them on monthly payments on a period that varies between customers. What is of concern then, is the following fact: Credit card companies calibrate fees not just on risk but also according to how much they can squeeze out of a customer before the customer gives up. Likewise credit counseling agencies may squeeze as much administration fees as they think the customer can be encouraged to pay.
    from the complaints I have heard, this fact seems to be central, rather than the later efforts to obtain credit. People are simply paying too much to get out of debt.


    Jun 02, 2009

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