111 Waterloo Street, Suite 310
London, ON N6B 2M4

Debt Settlement

Mediated Arrangements

We can act as the go-between to help you come up with workable solutions and follow through to make sure that each side has done its part. In this case we might act a mediator (go-between) to help you and your creditor(s) find an alternative agreement.

What is a debt settlement?

A debt settlement is an arrangement between you and one or more of your creditors that will allow for a final payment to be made to settle the debt.  Although results vary a great deal we may be able to negotiate an arrangement in which you only pay pennies on the dollar of the debts you owe.  Most of the time a settlement involves making a single lump sum payment of money, although a settlement could involve a series of payments.  As part of the agreement, after receiving the payment(s), the creditor(s) will stop further collection activity and report the debt to the credit bureau(s) as having been settled or paid in full.

Who can make a debt settlement?

Other than the person who owes the debt the only people who can legally help you make debt settlements in Ontario are collection agents, lawyers of Licensed Insolvency Trustee’s.  Other people or companies can only discuss the option with you and refer you to someone who can help you.  You must be very careful not to pay any fees to anyone except a lawyer or Licensed Insolvency Trustee.

Why would creditors accept a debt settlement?

Creditors must be motivated to accept a reduced amount of money in settlement for a debt.  If they think they can still collect the full amount of the debt they will probably try to do so.  For a debt settlement to be accepted reliable information needs to be sent to each creditor to convince them that the offer is reasonable and probably the best deal they are going to get under the circumstances. Creditors are more likely to trust a lawyer or Licensed Insolvency Trustee than they would trust you.

Debts that are statute barred (or too old for the creditor to be able to take you to court) may be settled more easily than other debts because creditors have few or no options to collect the amounts owed without coming to some sort of arrangement.  The Limitations Act sets out the time frame for legal actions to be commenced, if they are not started within that time frame they cannot be heard in court.

Although a creditor may be barred from using the courts to collect the debt the debt is still owed and collection activity can continue in the form of calls and notices.  Even though some debts are statute barred, creditors may have other options for collecting unpaid debts like the right of setoff or offset. Banks can use this remedy, basically if you deposit money with them and owe them money from an old debt they can just take the deposit and put it towards the amount(s) owed.

Are there other reasons that creditors would accept a settlement?

Other reasons that creditors would contemplate a settlement arrangement might include compassionate grounds, although it may be true that there is not generally a whole lot of compassion in the collections industry.  A compassionate scenario might be one in which the debtor has suffered a misfortune making them unable to pay the debt according to the original terms.  Perhaps they became ill, injured or lost their income without hope of financial recovery.

It is important to recognize that a compelling case must be made to the creditor to motivate them to accept a reduced amount of money in settlement for the debt.  After all, if it were easy everyone would be doing it all the time. Licensed Insolvency Trustees can help you make that case.

What are the challenges in obtaining a settlement agreement?

The first challenge is finding someone you can trust to provide help at a reasonable cost.  Collection agencies acting on behalf of a creditor will sometimes negotiate settlements, without third party intervention, when they understand that the person they are collecting from has some money and is motivated to make payment(s) but cannot afford to pay the full value of the debt.  Not many licensed collection agencies will put themselves out as providing consumer debt settlement services to debtors because of a conflict of interest.

Non-profit credit counselling agencies are licensed as collection agencies so they can arrange debt repayment plans.  Unfortunately, few of them provide debt settlement services since they are funded by the Canadian Bankers Association and other major creditors and are paid on a fee for service collection basis.

Alternatively, you may find a lawyer or licensed insolvency trustee who will provide such a service for you.  Licensed insolvency trustees usually refer to debt settlements as “informal proposals”.  Our office has occasionally helped consumers with informal proposals but we do find that they work best when there are fewer creditors and when the debtor has a lump sum payment to offer.

Making a compelling case to the creditor

Creditors prefer to work with Licensed Insolvency Trustees because they bring a level of integrity to the table.  This is not meant to suggest that other professionals do not act with integrity, but the point is that trustees are highly regulated and monitored by the Office of the Superintendent of Bankruptcy and required by statute (the Bankruptcy & Insolvency Act) “to be honest and impartial and shall provide to interested parties full and accurate information as required by the Act with respect to the professional engagements of the trustees”.  It is also implicit that if a debtor is already in contact with a trustee, should the attempt to settle fail a formal bankruptcy or proposal proceeding may very well be hot on its heels.

Caution

Do not engage the services of any debt settlement company through the internet, no matter how promising they sound, they typically charge exorbitant fees for nothing more than a referral to a licensed insolvency trustee.

Tom’s Top Tips

do not over-mortgage your house – the amount borrowed should be the amount mortgaged.