Ontario Government Seeks Feedback Concerning Proposed Regulations for Debt Settlement Industry

November 13th, 2014 by Mark Silverthorn

photodune-1779111-toronto-parlaiment-building-at-queens-park-s

Toronto Parliament Building at Queens Park

The Ontario government intends to change the law regulating the debt settlement industry.  The stated purpose of these reforms is to substantially increase protections afforded to Ontario consumers who choose to hire companies to resolve debts on their behalf.   If, however, the draft regulation becomes law some industry observers speculate that there might not be any debt settlement firms or for-profit credit counselling agencies carrying on business in Ontario within a few years.

In October of 2014 the Ontario Ministry of Consumer Services made public a document titled, “Promoting Fairness in Debt Settlement Services Draft Regulation”.  The Ontario Ministry of Consumer Services is inviting members of the public and interested parties to make comments on the draft regulation.  According to the ministry website, once the new regulations become law debt settlement service providers will have six months to prepare for the new rules.


What is debt settlement?

Debt settlement occurs where a consumer owing money to a creditor negotiates repayment of their debt.   The draft regulation identifies two distinct scenarios for repayment of a debt as follows.

One-time lump sum payment:  A creditor might be willing to accept a one-time payment—typically for an amount less than the current balance owing—as settlement in full.

Series of fixed monthly payments:  A creditor might be willing to accept a series of fixed monthly payments from the creditor totaling a pre-determined amount as full satisfaction of an overdue account.  As a general rule, where a debtor is repaying an outstanding account by making a series of fixed monthly payments the debtor will likely be repaying one hundred percent of the current outstanding balance over a period not to eighteen months.

There are certain types of debts where a creditor will typically refuse to enter into an agreement where a debtor can resolve his debt by making either a discounted lump sum payment or a series of fixed monthly payments over a period not to exceed eighteen months, including the following:

  • Secured debt (such as mortgages and car loans)
  • Monies owing to the government
  • Child support or spousal support obligations

Unsecured consumer creditors, however—including credit cards, personal loans other than student loans, lines of credit, and utilities such as monies owed to telephone, cable and internet service providers—are often willing to negotiate some kind of payment arrangement.  Creditors typically will not consider accepting a one-time payment for less than the full balance owing where the account is less than six months overdue.

There are a number of reasons why a consumer might not be able to resolve an outstanding debt by negotiating a one-time payment or a series of monthly payments with creditors:

  • Creditor might not be willing to resolve outstanding debt for anything other than immediate repayment of hundred percent of current balance owing
  • Consumer and creditor might not be able to agree on the terms of a negotiated settlement
  • Consumer and creditor might be able to negotiate a mutually acceptable debt repayment arrangement but the consumer fails to make the necessary payment(s)

A creditor is under no legal obligation to resolve a consumer’s outstanding account using debt settlement.  If you owe money to a creditor then the creditor has the right to commence a lawsuit against you.  If your creditor does sue you, however, it might still be possible to negotiate a settlement with your creditor.

It is common for consumers who find themselves in the position of owing money to one creditor might also owe monies to other creditors as well.  Consumers hiring firms to assist them with resolving their debts often do so in circumstances where they have multiple debts.


Who is subject to regulatory regime under the draft regulation?

It would appear that the draft regulation applies to debt settlement firms and “for-profit” credit counselling agencies.  Debt settlement firms attempt to negotiate a one-time payment for less than the one hundred percent of the current outstanding balance.  “For profit” credit counselling agencies negotiate repayment arrangements in which a debtor makes fixed monthly payments—over a period of several months—to pay off hundred percent of an outstanding debt.

It would appear that the draft regulation does not apply to the following:

  • Non-profit credit counselling agencies
  • Lawyers
  • Individuals negotiating settlement of their own debts
In Ontario today there is nothing preventing a consumer seeking to negotiate a one-time payment or a series of monthly payments with his creditor or the creditor’s agent. The draft regulation published by the Ontario Ministry of Consumer Affairs does nothing to limit a consumer’s ability to resolve his debts through a negotiated settlement. The stated purpose of the draft regulation, however, is to protect consumers who hire either debt settlement firms or “for profit” credit counselling agencies.

Contents of draft regulations for debt settlement service providers

The Ontario Ministry of Consumer Services draft regulation with respect to debt settlement providers currently being circulated for comment has four major themes, as follow:

Consumer’s rights under an agreement with debt settlement service provider
Duties owed by debt settlement service provider to clients
Regulatory regime for debt settlement service providers
Prohibited practices for debt settlement service providers


The impact of the draft regulations

The draft regulation circulated by the Ontario Ministry of Consumer Services would have a dramatic impact on the debt settlement industry in Ontario as we know it today.  There is no question that the enactment of the draft regulation would provide a significant amount of protection for consumers seeking to hire debt settlement firms or for-profit credit counselling agencies.  It would appear, however, that the impact of some of the provisions in the draft regulation would mean that debt settlement firms and not-for profit credit counselling agencies would no longer be able to operate in Ontario as viable businesses.

  1. Draft regulation contains significant protections for consumersThe draft regulation provides a substantial amount of protection for consumers.  Consumers will be better informed prior to entering into a debt settlement agreement.  Furthermore, consumers will have an opportunity to terminate their agreements.  Finally, consumers will not have to deal with debt settlement service agreements where the consumer pays a significant amount of fees during the first six to 18 months of the agreement in circumstances where no settlements take place.
  2. Devastating financial impact on “for profit” credit counselling firmsIn Ontario there are two categories of credit counselling firms—those which are registered as a non-profit charitable corporation, and those which are not.  The former are referred to as “non-profit credit counselling agencies” and the latter are known as “for-profit credit counselling agencies.  From the perspective of the debtor, the services offered by a credit counselling agency, regardless of whether or not it is a non-profit or for-profit, arguably are the same.Non-profit credit counselling agencies offer consumers Debt Management Plans in which a debtor can repay one hundred percent of their outstanding debts over a 60 month period.  The draft regulation recently circulated by the Ontario Ministry of Consumer Services only applies to for-profit credit counselling agencies and not to non-profit credit counselling agencies.  One of the provisions in the draft regulation is a restriction that debt settlement agreements not be longer than 18 months.If the draft regulation is enacted it will create a two-tiered credit counselling industry in Ontario.  Non-profit credit counselling firms will be permitted to offer Debt Management Plans in which a consumer can repay monies owing to creditors over a period of sixty months.  In comparison, for-profit credit counselling firms will be restricted to offering Debt Settlement Plans in which a consumer can repay monies owing to creditors over 18 months.  Most consumers experiencing financial difficulties choosing credit counselling would prefer a Debt Management Plan sixty months in length compared to one 18 months in length because their monthly payments would be substantially lower.

    The draft regulation’s requirement that Debt Management Plans for for-profit credit counselling agencies be no longer than 18 months might very well result in the disappearance of for-profit credit counselling agencies operating in Ontario within a relatively short period of time.

  3. Devastating impact on debt settlement firms negotiating one-time settlementsDebt settlementThe draft regulation recently circulated by the Ontario Ministry of Consumer Services would have a devastating impact on those debt settlement firms attempting to resolve their client’s debts by making one-time payments.   A debt settlement firm would not be entitled to charge a client a penny in fees until a settlement actually takes place.  This means that a debt settlement firm could incur significant expenses providing services to a debt settlement client without ever earning a penny in fees.

In a consumer proposal a consumer pays a portion of their unsecured debt—typically somewhere around 30 percent—over a period not to exceed sixty months.  As noted earlier, a consumer who enters into a Debt Management Plan with a non-profit credit counselling agency can be 60 months long.  The draft regulation limits the lengths of debt settlement agreements to 18 months.  The fact that debt settlement agreements cannot be more than 18 months in duration are going to mean that some people, who would otherwise choose a debt settlement plan, would choose not to do so.  Some consumers might not be able to accumulate sufficient settlement monies to fund one-time settlements within an 18-month window of time.


Consumer’s rights under an agreement with debt settlement service provider

Under the draft regulation consumers have a number of rights.  These can be summarized as follows:

  1. Right to receive a written copy of debt settlement agreementUnder the draft regulation a consumer has a right to receive a written copy of his debt settlement agreement.
  2. Right to receive one-page written “cautionary” document
    Under the draft regulation a consumer must receive a debt settlement agreement and the first page of such agreement must contain language specified by the Registry available on the Ministry of Consumer Service’s website. For those consumers interested in entering into an agreement for settlement of a debt(s) by way of making a one-time payment the first page of their debt settlement agreement must contain a first page titled “Settling Debt”. For those consumers interested in entering into an agreement to resolve their debts by way of making multiple payments then the first page of their debt settlement agreement must contain a first page titled “Repaying Debt and Credit Counselling”.

    These two documents, which comprise the first page of a debt settlement agreement, contain a number of elements:

    • Caution about the disadvantages of resolving one’s debts using this method
    • Statement about when a debtor can be charged fees by debt settlement service provider
    • Statement that the debtor has the right to terminate the agreement within ten calendar days of receipt of written agreement
    • Contact information for the debt settlement service provider
    • Acknowledgement that the debtor has read the document
    • Requirement that the debtor must date and sign the document
  3. Consumer’s right to terminate contract with debt settlement providerA consumer has the right, for any reason whatsoever, to terminate a debt settlement agreement within 10 days of receipt of his debt settlement agreement.  A consumer also has the right, for any reasons whatsoever, to terminate an amended debt settlement agreement within 10 days of receipt of his amended debt settlement agreement.  Furthermore, debt settlement service providers are prohibited from entering into more than one debt settlement agreement with a consumer.
  4. Consumer’s rights that specific information be included in a debt settlement agreementThe draft regulation requires that certain information must be included in a debt settlement agreement.  To learn more about what information must be included in a debt settlement agreement agreements seeking: multiple payments,one-time payments,debt settlement contracts.
  5. Consumer’s rights with respect to how debt settlement services are providedA consumer has several rights relating to the provision of debt settlement services on his behalf.  To learn more about a consumer’s rights as it relates to how debt settlement services are provided click here.
  6. Consumer’s right that monies provided to debt settlement service provider to be deposited into trust accountWhere a consumer does provide a debt settlement provider with trust funds then a consumer has the right to have his trust monies deposited into a debt settlement firm’s trust account.
  7. Consumer’s rights with respect to obligation to provide security for feesThe draft regulation imposes significant restrictions as to when a consumer must provide payment or security for payment of fees to a debt settlement service provider.  To learn more about a consumer’s rights as it relates to their obligation to provide payment or security for payment of fees to a debt settlement provider click here.
  8. Limitation with respect to fees charged by debt settlement service providersThe draft regulation on debt settlement firms contains a number of restrictions regarding the fees charged to consumers by debt settlement firms.  To learn more about the restrictions on fees debt settlement firms can charge  their clients click here.

Debt settlement


Duties owed by debt settlement service providers to clients

The duties owed by a debt settlement service provider mirrors a client’s rights under a debt settlement agreement and are summarized below:

  • Duty to provide client with a written copy of debt settlement agreement in a form authorized by Ontario law
  • Duty to provide client with contact information for debt settlement services provider during regular business hours
  • Duty to contact client’s creditors and advise creditors that debt settlement service provider has authority to negotiate repayment of debtor’s within 15 days of such authorization
  • Duty to inform a client of a creditor’s refusal to accept a repayment proposal within 15 days of such refusal
  • Duty to respond to communications from client within a reasonable time
  • Duty to provide client with a written report as to the progress on debts included in a debt settlement agreement within 15 days of such request
  • Duty to deposit any monies received from client into debt settlement service provider’s trust account
  • Duty to maintain client’s records in compliance with record keeping obligations under Ontario law

Regulatory regime for debt settlement service providers

  1. Registration requirements under Ontario lawThe regulatory regime contained in the draft regulation circulated by the Ontario Ministry of Consumer Services apply to both debt settlement service providers as well as “for profit” credit counselling agencies.  Under the draft regulation the current Act regulating these firms, the Collection Agencies Act is to have its name changed to the Collection and Debt Settlement Services Act.  Three distinct types of businesses—all of which are involved in resolving outstanding debts on behalf of others–must be registered as a “collection agency” under the Collection and Debt Settlement Act:
    • Debt settlement firms
    • for-profit credit counselling agencies
    • Collection agencies

    Furthermore, any person employed by a debt settlement firm, for-profit credit counselling agency or a collection agency, having direct dealings with debtors must be registered as a “collector” under the Collection and Debt Settlement Services Act.

  2. Must maintain a bondDebt settlement service providers must maintain a bond approved by the Registrar.  The purpose of the bond is to protect the debt settlement service  provider’s clients in the event trust monies are mishandled or misappropriated.
  3. Must operate from a permanent place of businessThe draft regulation provides that a debt settlement service provider must operate from a permanent place of business in Ontario—that is not a dwelling—which is open during normal business hours.
  4. Must maintain a trust accountUnder the draft regulation a debt settlement provider shall maintain a trust account at an approved financial institution located in Ontario.  This trust account must be designated as a “Collection Agencies Act Trust Account”.  Any trust funds a debt settlement services provider receives on behalf of a client must be deposited into this trust account.
  5. Restrictions regarding a debt settlement firm’s representations and advertising claimsThe draft regulation circulated by the Ontario Ministry of Consumer Services contain a number of restrictions relating to representations and advertising claims that a debt settlement firm is entitled to make.  The following representations are prohibited:
    • The firm’s services are provided on a non-profit or charitable basis where they are not
    • Claims that the firm’s debt settlement services are approved of, or are part of, a program run by any government
    • Any references to the firm’s registration under the Act other than the debt settlement firm’s registration number

    Any claims that misrepresent or exaggerate the services of a debt settlement provider or the benefits of a debt settlement agreement are prohibited.  This includes claims that becoming a client will prevent legal action against a debtor or garnishment of a debtor’s wages.

    Furthermore, a debt settlement service provider is prohibited from making any claims that are not based on typical results, in circumstances where the typical results are determined by a debt settlement service provider’s average results during a six to twelve month period in the prior calendar year.

  6. Restrictions with respect to websites operated by debt settlement service providersUnder the draft regulation where a debt settlement service provider has a website any place on the website requesting a debtor’s personal information must clearly display the following information:
    • Name of debt settlement service provider
    • Principal business address in Ontario
    • Telephone number, fax number, and e-mail address
    • Registration number under the Act
  7. Mandatory content requirement for all debt settlement contracts
    The draft regulation contemplates there being two different types of contracts for debt settlement services. One category are those where the debt settlement service provider attempts to negotiate a one-time payment for less than the full balance owing. The other category is where the debt settlement service provider is attempting to negotiate a repayment schedule involving multiple payments—typically fixed monthly payments over a significant period of time.

    The draft regulation circulated by the Ontario Ministry of Consumer Services requires that certain information must be included in all debt settlement service agreements including the following:

    • The debtor’s name, address, and telephone number
    • The debt settlement service provider’s name, principal business address in Ontario, telephone number, fax number, e-mail address, website address and registration number under the Act
    • The names of any persons providing debt settlement services to the debtor under the debt settlement services agreement and their registration numbers
    • The names of any persons involved in negotiating or concluding the agreement with the debtor
    • The date on which the agreement was entered into
    • The proposed termination date of the agreement
    • An itemized list of all services that will be provided under the agreement
    • The details of all the debts to which the agreement applies
    • The total amount owed by the debtor to all creditors under the agreement
    • Any restrictions, limitations and conditions under the agreement
    • A statement that a debtor is entitled to receive a written status report with respect to the agreement within 15 days after requesting it
    • The date and signature of the debtor, the debt settlement service provider and the individual representing the debt settlement service provider at the time the agreement was signed
    • The agreement shall disclose whether or not the debt settlement service provider receives any funding from any creditor of a debt to which the debt settlement services agreement applies
  8. Eighteen-month maximum length of debt settlement agreementsThe draft regulation restricts the length of debt settlement agreements.  As a general rule, debt settlement agreements terminate 18 months from the date the agreement was entered into, except where:
    • The agreement provides for termination on an earlier date
    • Where a debtor makes payments to the debt settlement firm then the agreement terminates 18 months from the date of the last payment
    • Where a debt included in a debt settlement agreement is settled then the agreement terminates 18 months after the date of such settlement
  9. Mandatory content for agreements seeking one-time paymentsWhere the debt settlement services agreement is for the purpose of negotiating a one-time payment for less than one hundred percent of the full balance owing the agreement must include the following information:
    • The first page of the agreement shall be the document titled “Settling Debt” available on a Government of Ontario website
    • A statement that the debt settlement services agreement is for the purpose of negotiating one-time payments for less than the full balance owing
    • A statement that the maximum payment or security for payment for the debt settlement service provider is ten percent of the amount of each debt
    • A statement that for each debt included in the agreement the date on which an offer to settle will be made and the amount of the one-time payment that will be offered

    Big DebtThe first page of the agreement, a document titled “Settling Debt” contains information warning consumers of some of the disadvantages of attempting to settle debts by making a one-time payment.  It also advises the consumer that he can, for whatever reason, terminate an agreement within 10 days of receipt of a signed copy of his debt settlement agreement.  A consumer who wishes to enter into a debt settlement services agreement must date and sign this document.

  10. Mandatory content for agreements seeking multiple paymentsWhere the debt settlement service agreement is for the purpose of resolving one or more outstanding debts by means of making a series of payments then the debt settlement service agreement must contain the following information:
    • The first page of the agreement shall be the document titled “Repaying Debt and Credit Counselling” available on a Government of Ontario website
    • A statement that the debt settlement services agreement is for the purpose of resolving one or more outstanding debts by way of making a series of payments
    • A statement that the maximum payment or security for payment that the debt settlement service provider may require is equal to fifteen percent of every payment made by the debtor to the creditor with respect to a debt to which this agreement applies
    • The agreement will include a proposed schedule of repayment for each debt

    The first page of the agreement, a document titled “Repaying Debt and Credit Counselling” contains information warning consumers of some of the disadvantages of resolving debts by making a series of payments.  It also advises the consumer that he can, for whatever reason, terminate the agreement within 10 days of receipt of a signed copy of his debt settlement agreement.  A consumer who wants to enter into a debt settlement agreement must date and sign this document.

  11. Imposes duties to provide certain services on behalf of its clientsThe draft regulation circulated by the Ontario Ministry of Consumer Services imposes a number of obligations on debt settlement service providers that could be described as duties owed to clients.  To learn more about the duties of debt settlement service providers owed to clients click here.
  12. Restrictions regarding fees charged by debt settlement services providersThe draft regulation with respect to debt settlement service providers restricts the fees that debt settlement service providers can charge.  These fees can be summarized in the following chart:

    Maximum fees charged by debt settlement service providers

    One-time payment
    “debt settlement services”
    Series of payments
    “for profit credit counselling services”
    A debtor cannot be required to pay more than 10 percent of the amount of each debt in feesA debtor cannot be required to pay more than 15 percent of every payment made by debtor to a creditor in fees
    Reimbursement for NSF fees for debtor’s dishonoured chequesReimbursement for NSF fees for debtor’s dishonoured cheques
    Plus an additional $50.00 fee for each debt included in the credit counselling agreement
  13. Restrictions when a debt settlement firm is entitled to charge fees or require security for payment of feesThe draft regulation also restricts when a debt settlement service provider is entitled to charge fees to a client.  As a general rule, a debt settlement service provider is not entitled to (1) accept payment of fees from a client, or (2) require any security for payment of fees from a client until the following three conditions have been met:
    • The debtor has entered into an agreement with the creditor regarding the amount to be paid to settle the debt
    • The debtor has made at least one payment under the settlement agreement with his creditor
    • The debt settlement service provider has written evidence of such payment by the debtor to his creditor

    Where a debt settlement service provider is attempting to negotiate a settlement based upon multiple payments to a creditor then the debt settlement provider is also entitled to charge a client $50.00 for each such debt.  There are no restrictions as to when these fees can be charged.

    Furthermore, in the event that any debt settlement service provider incurs an NSF charge because of a dishonoured cheque provided by the debtor then the debt settlement service provider is entitled to reimbursement for the actual out-of-pocket expense associated with the NSF charge.

  14. Onerous record keeping requirementsThe draft regulation circulated by the Ontario Ministry of Consumer Services imposes onerous record keeping obligations on debt settlement service providers.  The following records must be maintained by a debt settlement service provider:
    • Copy of the debt settlement services agreement
    • Any receipts issued and disbursements made by the debt settlement service provider on behalf of the client
    • Copies of all correspondence relating to debt settlement services provided by the debt settlement service provider including e-mails, regular mail, as well as faxes to or from the client, any guarantor, the debtor’s representative or the client’s creditors
    • Records with respect to negotiation of debt repayments
    • Any other records created or used while dealing with the client, client’s representative or client’s creditors
    • Copies of all published advertisements and the records required to support any claims or statements made in the advertisements

    Under the draft regulation any records that must be maintained by a debt settlement service provider must be maintained for six years.  Furthermore, the Registrar—the person responsible for administering the Collection and Debt Settlement Services Act—can require a debt settlement service provider to provide records upon request.


Prohibited practices for debt settlement service providers

The Ontario Ministry of Consumer Services’ draft regulation with respect to debt settlement firms prohibits a significant number of practices.  These prohibited practices can be summarized under the following six headings:

  1. Entering into a debt settlement agreement with a consumer where it is not appropriate to do soA debt settlement firm is not permitted to enter into a debt settlement agreement with a consumer in circumstances where:
    • The consumer is not in a position to protect his interests due to disability, illiteracy or lack of capacity to understand the debt settlement agreement
    • It is apparent that the debtor’s creditors will not negotiate a settlement of the debtor’s debts
  2. Failure to provide certain informationIn certain circumstances a debt settlement provider is not permitted to withhold certain information from a debt settlement client:
    • Failure to provide a client with information as to how to contact debt settlement provider during business hours
    • Failure to inform a client of a creditor’s refusal to accept a settlement offer within 15 days of the refusal
    • Failure to respond to debtor’s communications within a reasonable time
    • Failure to provide a client with a written report on the performance of the debt settlement agreement within 15 days after receiving request

    Furthermore, a debt settlement firm is prohibited from failing to advise a client’s creditors that the debt settlement firm is authorized to negotiate settlements on a client’s behalf within 15 days of becoming authorized to do so.

  3. Making misrepresentationsIt is a prohibited practice for a debt settlement firm to make certain false or misleading representations:
    • Misrepresent  to a client the time it would take to achieve promised results
    • Give any person false or misleading information
  4. Prohibited financial transactionsA debt settlement provider is prohibited from offering or paying any compensation in exchange for a debtor entering into a debt settlement agreement.  Furthermore, a debt settlement firm is not permitted to receive any compensation related to the extension of credit to a client.
  5. Privacy-related prohibitionsA debt settlement firm is not permitted to communicate any information about a client’s debts to any person except the debtor, a guarantor of the debt, the debtor’s representative or the creditor’s, without the client’s written permission.
    Furthermore, a debt settlement firm is not permitted to obtain a debtor’s contact information from a third party unless the third party named the debt settlement provider and the debtor explicitly consented to the contact information being shared.
  6. Miscellaneous prohibitionsThe draft regulation for debt settlement service providers contains a number of miscellaneous prohibitions:
    • Restricting the client from having access to his credit or making representations suggesting the client is restricted to such access
    • Restricting the client from communicating with his creditors
    • Providing debt settlement services under a name other than the one the debt settlement service provider is licensed to operate
    • Entering into more than one debt settlement services agreement with a debtor
Mark Silverthorn
Mark is a former collection lawyer, collection industry insider and author.

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