On this Trustees Talk site we attempt to comment on items in the news, and items of interest to Canadians. As we have discussed previously, in June 2010, the Office of the Superintendent of Bankruptcy (OSB) initiated a Review of the Trustee Licensing Regulatory Framework . One of the items up for discussion was whether or not credit counsellors should be permitted to act as consumer proposal administrators.
On June 28 we published the thoughts of a trustee from Edmonton, Barton Goth, who asked the question: Consumer Proposals: A need for more administrators or a slippery slope? He concluded that the expertise of a licensed trustee is very valuable to anyone in financial trouble. While credit counsellors offer debt management plans, a consumer proposal is a legally binding, court approved procedure, so a higher standard of care is required.
We have reported on Debt Management Plans, and we encourage everyone to “run the numbers” to determine if you are using the proper solution to deal with your debt problems.
CACCS mistakenly refers to the trustee community operating as a monopoly; with 1,017 practicing trustees in Canada competing for work, nothing could be further from the truth. In essence the position of CACCS is analogous to a position that dentists have a monopoly over fixing teeth and surgeons have a monopoly over performing surgery, again these are not monopolies, but regulated (or self-regulated) professions, with a goal to have the most qualified professional provide the service to achieve the most desirable and predictable result. The dentist, surgeon and trustee all fit into this category;
CACCS mistakenly believes there is an access constraint within the consumer debtor market that fundamentally must be addressed by adding capacity. The issue, however, is not capacity, but quality; currently only trustees embody the depth of knowledge, breadth of experience and professional standards to meet the needs of consumer debtors within a Court-supervised restructuring process. As for capacity, we are dumbfounded by this CACCS assertion given that the economy has just experienced the worst economic downturn since the Depression and yet no consumer debtor went without access to a trustee to meet their needs through the provision of quality services;
CACCS asserts that its members are uniquely qualified to service the consumer debtor market. The very principle of a profession is that the individuals within it maintain a distinct expertise that allows them to perform a service to benefit an individual or entity—a service that is superior to that offered by all other providers. In the case of consumer debtors, it is trustees who have proven their ability based on depth of knowledge, breadth of experience, adherence to strict standards and oversight and ability to deliver a complete suite of services that differentiates them as the market leader in servicing the needs of financially distressed Canadians;
CACCS asserts that Debt Management Plans (DMP) and consumer proposals have many of the same characteristics. The truth is that DMP and consumer proposals are more dissimilar than similar. DMP are not Court-supervised restructuring proceedings; they do not require an administrator to balance the competing interests of the stakeholders; they do not require the administrator to opine on the reasonability of the Plan; they do not require an assessment of realization under alternative proceedings; they do not require consideration of all aspects of the Bankruptcy and Insolvency Act, provincial legislation, jurisprudence and, most importantly, professional judgment; and they are not subject to regulatory oversight by the OSB and supervision of the Court; nor are the administrators subject to the strict standards of professional practice, code of conduct and by-laws of CAIRP. Are they the same – not really!
CACCS believes that the consumer debtor is a client for the purpose of a consumer proposal, in which CACCS articulates a role for negotiation with creditors based on a client’s ability to repay their debt, according to their situation and the best of their ability. Unfortunately, CACCS fundamentally misunderstands the role of an Officer of the Court, a trustee, and the conceptual requirements of the BIA, that while preserving the principles of rehabilitation and a fresh start for the consumer debtor, must also respect the responsibility of the consumer debtor to his or her creditors. The role of the trustee is complex, as it requires a balancing of the competing interests to achieve equity through the facilitation of an arrangement between a consumer debtor and his or her creditors, having regard to the personal circumstances of the consumer debtor. Is the fundamental mindshift easy? No. Is it a requirement? Absolutely.
CACCS asserts that, by granting credit counsellors status as administrators of consumer proposals, the current referral system between credit counsellors and trustees will be unnecessary in the future. CACCS asserts that such a referral stream is “problematic and very inefficient while presenting a major disservice to the Client. Specifically, once the Client’s trust has been gained and the clinical relationship has formed”. CAIRP asserts that the referral system remains a necessary and important aspect of the insolvency process, irrespective of the status of creditor counsellors to provide consumer proposal services. The assertion lacks situational recognition that consumer proposals are not the answer for all financially distressed individuals; it fails to recognize that the seeds of success are not embedded within every consumer proposal filed; it fails to recognize that client referrals from trustees to credit counsellors should be equally common based on an assessment of an individual’s personal circumstances; it fails to recognize that specialized counselling may be required to meet a consumer debtor’s needs, counselling beyond the ability of a trustee or a credit counsellor. CAIRP is concerned, based on the assertion of CACCS, that its members will see the consumer proposal legislation as the sole alternative to a DMP. Is the real risk referrals? No, it is practitioner perception; and
CACCS presents survey results that are at best self-serving, at worst libelous. The survey makes bold statements pertaining to trustees failing to meet their statutory duties in performing adequate assessments (in accordance with Directive 6R3). The survey presents a tainted picture, but lacks transparency and substantive and objective correlation between the methodology and results; it lacks any source reference or verifiable basis on which to conclude whether any comments are substantively supportable. It is the position of CAIRP that the entirety of the survey results is inappropriate for a public consultation by the OSB as to the Licensing framework. CAIRP will in the coming weeks hold CACCS to account.
Wow. Sounds like a war of words between CAIRP (the trustees) and CACCS (the credit counsellors).
I have already provided my thoughts on this issue, so I will not belabor the point further here, other than to say this: if you are experiencing financial trouble, who do you want to assist you? If you want a credit counsellor working for a not for profit credit counselling agency, then see a credit counsellor. If you want a consumer proposal administrator or a bankruptcy trustee, go see them. You have the choice.
I work with many excellent credit counsellors, and I regularly refer people to credit counsellors when I believe they are best able to provide a solution. In many cases a credit counsellor can provide a solution; in other cases a bankruptcy trustee’s services are required. I pride myself on always looking out for the best interests of the people who seek my help. If all advisors (trustees, credit counsellors, lawyers, accountants) focus on providing advice that is in the best interests of the person in debt, everyone will get the professional assistance they deserve.
The idea behind a debt management program is simple – your debts are pooled together (they are not paid off like with a loan) by a not for profit agency so that you only have to make one monthly payment. In most cases, there will be no new interest charged to the debts included in a debt management plan. Instead your payments go directly towards reducing the debt.
Debt management plans are an excellent solution for people that can afford to repay their debt in full, but need relief from the interest they are being charged. They are not really an alternative to bankruptcy, but rather it is an option to consider while you still have the ability to make payments.
If you compare a debt management program to a consolidation loan what you will find is that the consolidation loan costs you more (since you will still be paying some sort of interest on the debt), but the consolidation loan is also better for your credit report. If you file a debt management plan your debts will be reported as an R7 – this designation simply means you have entered into a plan to repay your debts at less than the full amount of your original contracts (i.e. less or no interest). With a consolidation loan your credit might be rated an R1 – the highest possible rating, assuming you make all of the loan payments on time as required.
Interestingly, a consumer proposal receives the same credit rating as a debt management program, an R7. A consumer proposal is a legal procedure (administered by licensed trustees in bankruptcy) where you repay a portion of your debts. Like the debt management program there are no interest charges, but unlike the debt management program, in a consumer proposal you usually only repay 30 to 50% of the debt. Also unlike the debt management plan, consumer proposals are a direct alternative to bankruptcy.
So which should solution should you be considering?
Well, if you can afford to repay your debt in full and you qualify for a consolidation loan then this is probably the correct solution for you to use.
If you can afford to repay the debt, but the interest charges are killing you, or if you have applied for a consolidation loan and been rejected then a debt management program might be the place to start.
If repaying the debt in full will be difficult, or you know that you cannot afford to repay the debt in full, then a consumer proposal is likely the best route for you to consider.
The trick with all of these solutions is to consider each option carefully and then make a decision based on what you can realistically afford to repay. If after you “run the numbers” none of these options make any sense then you may have to consider personal bankruptcy, which is discussed in detail on this site.
The Office of Superintendent of Bankruptcy is a special operating agency associated with Industry Canada, part of the federal government. The “OSB” regulates bankruptcy trustees (the people who administer bankruptcies and proposals, and ensure they comply with all aspects of the Bankruptcy and Insolvency Act). As the regulator, the OSB will often seek the input of various stakeholders to determine if changes to their regulations of trustees are required, and they have just announced a “Trustee Licensing Consultation” to review various aspects of insolvency regulation in Canada.
One of the items being considered is whether or not to allow non-trustees to serve as administrators of consumer proposals. As our regular readers will be aware, a consumer proposal is a legally binding settlement negotiated between a debtor and their creditors, with the assistance of a consumer proposal administrator. With the exception of the province of Nova Scotia, where provincial representatives may administer consumer proposals, all consumer proposal administrators in Canada are licensed bankruptcy trustees.
The issue being considered is this: should the OSB allow non-trustees to serve as administrators of consumer proposals?
Ms. Ross presented the argument that accredited credit counsellors (in addition to licensed trustees) should also be permitted to administer consumer proposals. She gave three main reasons:
To eliminate the “monopolistic approach that limits access to the consumer proposal”, since only licensed trustees can act as administrators;
To “provide Canadians with equality of access”; and
To increase OACCS member agencies revenue to allow them to provide their other services.
What’s my opinion?
First, let me start by stating my bias: I am a licensed bankruptcy trustee, and my firm files many thousands of bankruptcies and consumer proposals each year, so obviously I have a vested interest in maintaining the status quo; it’s what I do for a living.
Second, let me also say that I have personally met Ms. Ross on a number of occasions, and I have a great deal of respect and admiration for her, and for her organization. On a daily basis I interact with many credit counsellors who work at OACCS member agencies. I refer debtors to credit counsellors when I believe a credit counsellor can best solve their problems, and I refer debtors to OACCS member agencies for the counselling required when they file a bankruptcy or a consumer proposal.
In my twenty plus years in the insolvency business, I can honestly state that the accredited, not for profit credit counsellors I have worked with have all worked very hard in the best interests of their clients, and I would never question their competence or integrity.
I agree that these are difficult times to be a not for profit credit counsellor. As Ms. Ross correctly points out, many years ago the government provided funding directly to not for profit credit counselling agencies. When that funding stopped, as Ms. Ross eloquently stated:
Some agencies were forced to close, others narrowed their service operation and the larger agencies continued to operate by finding alternative revenue streams. Revenue came from voluntary fair-share contributions from creditors, educational seminars for employee groups, the sale of educational material and the bankruptcy counselling that we do.
Over the years not for profit credit counsellors began to offer Debt Management Plans, or DMPs, where creditors (like the banks and credit card companies) would agree to make a “fair share” contribution to the work of the counselling agency to fund their efforts. In a DMP the creditors are paid in full, without interest, so a successful DMP is good for the banks, because they get back all of their money, and it’s good for the debtor, since they don’t have to pay interest, and they are given time to pay.
Unfortunately a DMP is generally not as good a solution for most people as is a consumer proposal. Again, to quote Ms. Ross:
The debt management plans, DMPs, available through credit counselling provide consumers with a workable option to repay debt. Most people who undertake DMPs are technically insolvent, or close to it, but are determined to honour their credit obligations and repay their debt. DMPs are negotiated with creditors to provide full debt repayment over an extended time frame. Upon acceptance by the creditors, member agencies manage and administer these DMPs and are authorized to operate trust accounts to facilitate payments to creditors.
Voluntary DMPs do not provide court protection for consumers, nor mandate creditors to stop charging interest on the debt, nor mandate a specified time frame for creditors to respond to debt repayment proposals. They do not mandate that creditors accept a pro-rated share of the debtor’s ability to repay, nor do they address complex entitlement issues that may require a more formal plan.
On the other hand, consumer proposals are a court-supervised option to repay debt. A consumer proposal is an offer made by a debtor to their creditors to modify their payments in an effort to settle the debt. Under a proposal, a debtor may offer to pay a lower amount each month over a longer period of time or to pay a percentage of what they owe. A significant benefit to consumers of a consumer proposal is protection by the courts from unsecured creditors. This is important because it prevents creditors from taking legal steps, such as seizing property or garnishing wages, to recover debts.
I agree with Ms. Ross. A DMP is not binding on the creditors. If you have five creditors, and only three of them accept the DMP, the other two can still attempt to sue you and garnishee your wages. In a consumer proposal, if the majority of the dollar value of creditors agree, all creditors must accept the proposal. It is legally binding.
It is easy to see the problem faced by not for profit credit counsellors. The government withdrew their financial support many years ago, forcing the closure of many agencies. Debtors who need the services of not for profit credit counsellors generally don’t have the money to pay for those services, so it is difficult for agencies to cover their operating costs. DMPs were a great way for not for profit credit counselling agencies to generate revenue to cover their costs (through the “fair share” contributions made by creditors), but as debtors realize that a consumer proposal is often a superior alternative, the percentage of debtors filing a DMP has fallen, resulting in reduced revenue for credit counselling agencies.
Realizing that consumer proposals are the superior alternative, many not for profit credit counselling agencies began working with trustees to offer consumer proposals to their clients. They would meet the debtor, asses their situation, gather the necessary financial information, determine their debt load, and then prepare the files for the trustee. The trustee then only had to “show up” at the credit counsellors office to witness the debtor signing the paperwork. The trustee would pay the credit counsellor for their work, and it was a “win-win” for everyone. The credit counselling agency earned some revenue, and the trustee had access to a steady stream of clients without having to do very much work.
Unfortunately, the OSB has rules against this approach. Federal law requires a licensed trustee to personally assess the debtor before they file a bankruptcy or proposal. Directive No. 6R3 Assessment of an Individual Debtor, requires the trustee to personally meet with the debtor and review their assets, liabilities and income, and to review all of the options available for dealing with their debt problems.
Section 49 of the Bankruptcy and Insolvency Rules states that:
49. Trustees shall not, directly or indirectly, pay to a third party a commission, compensation or other benefit in order to obtain a professional engagement or accept, directly or indirectly from a third party, a commission, compensation or other benefit for referring work relating to a professional engagement.
Trustees therefore cannot pay a referral fee to a credit counsellor for assessing a debtor, or helping to prepare the file, as described in more detail in the OSB position paper on Referral Agreements between Trustees and a Third Party.
Unfortunately once the OSB realized what was happening, they had no choice but to enforce the rules and stop these practices, as noted by Ms. Ross:
For some time, the larger of the credit counselling services had prepared files for consumer proposals on behalf of certain trustees. This included statutory counselling, interviewing and assessing the debtor, and confirming the debt load. The Superintendent of Bankruptcy has recently determined that it is incompatible with the trustee’s responsibility to outsource this work. This decision has affected our agency’s revenue to the detriment of its ability to provide broader services as well as BIA proposals.
I both sympathize and empathize with the plight of accredited not for profit credit counselling agencies. They are trying to help people deal with their debts. Who else is there to fight for the little guy (which is the reason Ted Michalos and me, Doug Hoyes, went to Ottawa to testify in the first place, as I noted in my opening remarks):
Mr. Michalos and I and our bankruptcy trustees spend each day meeting with people in financial distress. These are real people who, in many cases, have lost their jobs, gone through a marriage breakup or suffered through an illness; and after these personal tragedies, they are faced with insurmountable debt.
These are not bad people. We believe it is important that when parliamentarians draft bankruptcy legislation, they remember that real people are affected.
About 100,000 Canadians file bankruptcy or a proposal each year.
Unfortunately, that group is not organized and so probably will not have anyone to speak on their behalf before this committee. We hope that our testimony will highlight some of the concerns of the average bankrupt.
Banks want you to borrow money on their high interest rate credit cards. Finance companies want you to get a high interest rate loan. Payday loan companies want you to get a very high interest payday loan. They all spend millions of dollars in advertising each year to encourage you to borrow and consume.
Not for profit credit counsellors fight against this onslaught of debt. They spend many hours each day helping people work out a budget. They provide education programs to help the average Canadian understand the world of debt, and how to avoid it. They are the only voice in the wilderness telling you to spend less, not more.
But they can’t pay the rent in their offices, and pay their staff salaries, and pay for the supplies to help you make a budget if they have no revenue.
And that’s one of the reasons why, as Ms. Ross freely admitted, that not for profit credit counsellors want to be given permission to administer consumer proposals. It would give them a source of revenue so that they can continue their good work. Who could argue with that?
I certainly don’t argue with doing good work. I agree that someone has to tell Canadians to spend within their means, and to stop borrowing to consume.
Unfortunately I can’t agree with the notion that credit counsellors should be permitted to act as consumer proposal administrators as a way to increase their revenue.
My main objection to allowing non-licensed trustees to administer consumer proposals is that it is a government requirement that the trustee, as stated in Directive No. 6R3 Assessment of an Individual Debtor, must advise the debtor of all of their options, and the implications of all of their options. That means that as a trustee I must explain to all debtors the ramifications of doing nothing, do a debt settlement, getting a debt consolidation loan, doing a debt management plan through a not for profit or for profit credit counsellor, and doing a consumer proposal or personal bankruptcy. I can explain the implications of a bankruptcy, because I am a licensed bankruptcy trustee. I fully understand the process, so I can explain it. How can a non-trustee have the same level of knowledge as a trustee?
The Directive requires me to explain: “transfers, preferences and settlements of real or personal property of the debtor.” Is that something all credit counsellors understand? Do all credit counsellors understand the new surplus income rules, and how they are calculated in practice? Do credit counsellors understand the discharge process, and the court process, in a consumer proposal or a bankruptcy?
Credit counsellors would argue that they can learn all of those things, and I agree. The best way to become knowledgeable about the entire process is to become a trustee. Currently the average trustee has a university degree, many years of practical experience, and they have passed a series of very complicated courses that take on average five or more years to complete. It takes a long time to become a trustee. But, if a credit counsellor wants to become a trustee, they can find a sponsor, enroll in the program, and become a trustee, and then they can administer consumer proposals.
I believe this discussion is missing the real issue. As Ms. Ross correctly stated, not for profit credit counselling agencies are suffering from declining revenue, which is why they want to administer consumer proposals. The solution is not to make credit counsellors into consumer proposal administrators; the solution is to find a way to increase their revenue, doing what they do best.
What credit counsellors do best is credit counselling. They are highly skilled in providing advice on budgeting and money management. They are excellent educators. They should concentrate on what they do best. But how do they generate the revenue to cover their costs to provide this un-biased money management education?
The most obvious answer is through the revenue they receive from the credit counselling that they provide to individuals that have filed a bankruptcy or consumer proposal in Canada. Every individual that files bankruptcy or a consumer proposal is required to attend two credit counselling sessions, as described in Directive No. 1R2, Counselling in Insolvency Matters. Many trustees in Canada, including my firm, Hoyes, Michalos & Associates, outsource the majority of our credit counselling sessions to external counsellors. We do this because we want our debtors to get the best possible counselling so that they learn proper money management skills, so that they don’t have any future money problems.
Rule 131 of the Bankruptcy & Insolvency Act Rules prescribes the rate that is to be paid for the two required counselling sessions: $85 for each individual session, or $25 per person if the counselling is provided in a group session. In other words, a trustee may “outsource” the counselling requirement to a licensed credit counsellor, and the trustee may pay the credit counsellor, from the funds in the estate, $85 for each individual credit counselling session.
While $85 may sound like a lot of money, it isn’t. Many counselling sessions can take an hour or more, and that $85 must cover the counsellor’s wages, and all other overheads (like rent, administrative costs to book the appointment, training costs, etc.). Even worse, that $85 amount has remained unchanged for many years. $85 in 1994 is the equivalent of more than $115 in equivalent dollars today.
So the first, and most obvious solution, is to increase the amount that is paid for credit counselling sessions. Increasing the rate to $115 per session would bring the tariff back to where it was in 1994. I would go one step further: I would increase the rate to $125, or even $150 per session. Those increased resources would provide greater revenue to not for profit credit counselling agencies, since trustees would have more resources to pay them.
In addition to increasing the rate, I would increase the number of credit counselling sessions required.
Currently the first session must be done in the first 60 days of the bankruptcy or proposal, with the second session completed before the 210th day. That timing makes sense for a bankruptcy that lasts for nine months, but it may not be sufficient for a bankruptcy that lasts for 21, 24, or 36 months, as they often now do under the new bankruptcy rules. It’s also not sufficient for a consumer proposal that can last for up to five years.
So, my second suggestion is that for all bankruptcies that are automatically extended past nine months, a third counselling session should be added, to occur at some point in the second year. In addition, for all consumer proposals that last for greater than twelve months, a third counselling session should be added.
This new third session could focus on a review of the techniques learned in the first two sessions, and could include a review of the budget the debtor should be keeping during their insolvency process. This extra counselling session could be used to review different methods of saving (like the new Tax Free Savings Account), and could cover more advanced budgeting techniques. Perhaps this new counselling session could include an interactive web based component, allowing debtors to track their budget information on line. There are many tools that already do this, such as Calendar Budget, so it would not be that difficult to develop the content for the new third credit counselling session. Credit Canada, a not for profit credit counselling agency, has created a Financial Coaching Series that costs $120 per session for six sessions, so the expertise and content already exists for this extra counselling session. In fact, I would seek the input of the not for profit credit counsellors, including the OACCS, to help design this third session.
By raising the counselling rate from $85 to $125, and by adding a third session, the revenue generated by each personal bankruptcy or consumer proposal would increase from $170 to up to $375. That increase in revenue would go a long way towards helping not for profit credit counsellors help the people they want to help.
Is this the perfect solution? Probably not. I’m sure with further consultation even better strategies can be developed. But with this approach the real problem of reduced revenue for not for profit credit counsellors can be solved, without creating a new problem of having non trustees administering consumer proposals.
Debt consultants and for profit credit counsellors have become very aggressive over the last few years. In some cases they may be able to help you get out of debt, but in most cases they can’t do anything for you that you can’t do for yourself. Here’s how they work:
Douglas Hoyes, Bankruptcy Trustee
They run big advertisements in the newspaper promising to reduce your credit card and other debt by up to 70%. Debt relief sounds great, so you start making monthly payments to them, and they promise to use that money to negotiate a debt settlement with our creditors. I’ve met with many people over the years who assumed that the money they were paying each month was being distributed to the creditors, but that’s not how it works. What’s actually happening is your money is building up in the debt consultant’s bank account, and when they have enough money to propose a settlement, they make the deal with your creditors. Here’s an example:
Joe and Mary owe $30,000 on five credit cards. The debt settlement company promises to settle all of their debts for $20,000, with no further interest. Joe and Mary think that’s a great deal, because if they were to pay off their debts on their own, with interest, it would cost much more than $30,000. They agree to pay $400 per month for 50 months to the debt consultant.
The debt consultant can negotiate a lump sum settlement with the credit card companies, but they can only do it once they have a lump sum of money. The first ten payments Joe and Mary make go directly to the debt consultant for their fees. Once their fees are paid, the money builds up in the consultant’s bank account until they have approximately 40 cents on the dollar to make the settlement. If Joe and Mary owe $10,000 on one of their credit cards, the consultant will wait until they have $4,000, and then approach the credit card company with the settlement offer.
What’s wrong with this strategy? Why are these deals in most cases nothing more than a scam?
First, if the debt consultant wants the first 10 monthly payments for their fee, and then wants another 10 payments for the settlement offer to the first credit card company, it will be 20 months before the first credit card company gets any money. It is unlikely that a lender will sit around and wait for 20 months to get their money. In most cases they will continue to call you, and perhaps even sue you, to get their money.
Second, debt settlements will not work on all types of debts. The government will not accept 40 cents on the dollar, paid 20 months from now, to discharge your tax debt. Credit card companies may accept a plan, but governments won’t.
Third, the debt consultant has no way to force all creditors to agree. He may get one or two of your credit card companies to agree to a deal, but if the others don’t agree and sue you, the deal will fall apart. You need relief for all of your debts, not just some of them.
Fourth, in many cases the debt consultant is not doing anything that you couldn’t do on your own. Accumulating money in a bank account for two years, and then sending it to the credit card company does not take a lot of professional expertise. If you want to wait two years and then make settlements on your debts, you can do it on your own.
Fifth, many debt consultants will meet with you, review your situation, charge you a fee, and then refer you to a bankruptcy trustee or consumer proposal administrator! They don’t actually do anything for you, other than provide an opinion that you need to see a trustee. I’m a big believer in getting a second opinion, but since a trustee or consumer proposal administrator will NOT charge you for an initial consultation, you should start with a free initial consultation, and then get a second opinion if you are not satisfied.
Finally, in most cases debt consultants do all of their work over the phone. That keeps their costs down, but it also means you never get to meet them. Do you really want to turn over your hard earned money to someone you will never meet in person?
Many of you who are reading this will probably be thinking that I am exaggerating the pitfalls of debt settlement. After all, I’m a trustee in bankruptcy, so I’m biased. It’s natural to assume that I think bankruptcy in Canada is the solution to your problems, not debt settlement, because that’s what I do for a living. Fair enough, but let me give you two actual examples. Here are the stories of two people I met with on one day last week. These are not unusual stories. I did not need to go looking through my files to find examples. I personally met with both of these people last week, and I have met with hundreds of other people with the same story. (I have changed the names of the people to protect their privacy).
Case #1: John Smith entered into a debt management plan with a well know debt management company eleven months ago to deal with $27,000 worth of debt, because he wanted to avoid bankruptcy. He has been paying $300 per month for the last eleven months, to deal with his three credit card debts. Two of the credit cards have not bothered him, but one of credit cards, from Bank X, took him to court three months ago and obtained a garnishment order against him. Starting next week they will be in a position to garnishee his wages. When he met with me last week I reviewed his situation, and based on his income he has decided to file a consumer proposal. With the consumer proposal he will be paying $300 per month, and he will be paying for a shorter time period than was proposed under his debt management plan.
Key Message: The lesson here is that a debt management plan is not binding on all creditors, so even though he has paid $300 per month for a year, he has nothing to show for it. If one creditor doesn’t agree, they can garnishee his wages, making it impossible for him to continue with the plan. He will file a proposal, for $300 per month, and had he done that originally he would already have paid for a year, instead of starting over.
A consumer proposal, once accepted by a majority of the creditors, is legally binding on all unsecured creditors. A debt management plan isn’t.
Here’s the second story:
Case #2: Joyce and her husband Fred started a debt management plan with a company for $2,000 per month for 42 months, or $84,000 in total. Their total debts are $70,000, so they are paying $14,000 in fees and interest, since one of their creditors did not agree to a reduced rate of interest during the plan. When I met with them I calculated that based on their income a consumer proposal would cost approximately $800 per month for 50 months, or about half the cost of the debt management plan. The consultant did not explain to them how much they were paying in fees, and they did not realize that one of the creditors, a large bank, is still charging them interest, so they are not getting a deal; they could have negotiated to pay the full amount owing with interest on their own. They have paid for three months in the debt management plan, but they will now stop it and file a consumer proposal.
Key Message: The lesson here is don’t agree to anything unless you fully understand what you are agreeing to.
If all the consultant is doing is charging a fee and then sending the money to your creditors, they aren’t really providing much of a service. You can do that on your own.
Does this mean that all debt settlement companies are bad? Are they all scams?
I have not researched every company in Canada, so I will not make any general statements about all companies. I will tell you this: do your own research. Ask questions. Here are some good questions to ask:
Do I get to meet with anyone in person? If not, where are you located? Are you in my city?
Are you licensed by the federal government? What professional qualifications do you have?
What is the total cost of the service?
When will creditors start receiving money? Does the consultant get paid before the creditors get paid?
Will all creditors agree to the deal? What can I do if one of them doesn’t agree? Can they still sue me?
What will this do to my credit report?
If you are comfortable with the answers you receive, then you can make the decision to hire a debt settlement firm to deal with your debts.
There are cases where debt settlement is the correct solution, such as when you have a small amount of debts, or you have access to a lump sum of money for the settlement, or you are not insolvent. There are lawyers, that are regulated by the government, that can act on your behalf.
However, in most cases if you want to avoid bankruptcy, and you have the ability to make payments each month, a better option is a consumer proposal. In a consumer proposal all unsecured creditors vote on your proposal, and if a majority of the dollar value of your creditors accept it, it is legally binding on everyone. That means you won’t have the same problem that John Smith had, where two creditors agreed and one didn’t, and that one dissenting creditor sued him.
All consumer proposal administrators are licensed by the federal government, and they will all meet with you in person. The cost of a consumer proposal is set by the federal government, so all fees are standard regardless of which consumer proposal administrator you use, and all fees will be explained to you in advance. (All fees are included in your monthly payment; there are no extra charges). Unlike with some debt settlement companies, a consumer proposal administrator receives most of their fees when the creditors get paid, so everyone is working to make the proposal work. A consumer proposal, credit counselling and debt settlement all appear as negotiated settlements on your credit report.
You have options. You can avoid bankruptcy, but you must do your research, understand your options, and make an informed decision.
posted by Doug Hoyes @ 
