September 5, 2017

Debt consulting proposal loans purportedly confer an “advantage” to the borrower but do they? Are such loans in some way fraudulent or are they just questionably ethical?

The “advantage loan” scheme involves trustees who work with particular debt consultants.  It doesn’t matter who see the client first, the trustee or the debt consultant.  Either way here is how it works:

The debtor is sized up for a proposal – typically based on a formula of offering the creditors an amount equal to 25% of the face value of the unsecured (proposal) debt.  To help explain the scheme, let’s assume the debtor owes $80,000, in all likelihood most of the debts are institutional credit card debts.  Minimum monthly payments on that level of debt would be somewhere around $2,000 and the balances would not be going anywhere.

The trustee (sometimes in collusion with the debt counsellor) pre-determines that the debtor could qualify for a loan with repayment terms of around $650 per month.  The loan is negotiated and pre-approved by a company that the debt consultant works with – possibly a related company.  

However, in spite of having determined that the debtor can afford to $650 a month, the trustee instead offers the creditors a proposal at $20,000 over a five year term.  The monthly payments under the proposal would be about $335.  Knowing that the debtor can afford to pay more it appears that the trustee is at the very least using extremely poor ethical judgement.  Trustees are required to remain “neutral” in all of their dealings and in this case there is evidence of an element of partisanship.

In any event, following creditor approval of the terms of the proposal the debt consultant’s company finalizes the pre-approved “advantage” loan.  One “advantage” that is being sold by the debt consultant is that the loan payments will be reported to the credit bureau improving credit scores and that the proposal will come off the credit report in three years instead of eight.


Now, our hapless debtor will be paying back a $20,000 loan, plus multifarious fees to the debt consultant including a finder’s fee and administrative fees.  The terms will extend over sixty months at 29.9% interest.  The total payable under the loan will be about $45,000 and while making payments the debtor will not qualify for any other credit because s/he now owes too much money that remains unpaid following a proposal filing.  Had s/he stuck with the original proposal and made payments of $650 instead of the $350 s/he could have easily doubled up the payments and been debt free in a mere 30 months.

Who got the “advantage” form this scheme?  The trustee certainly did – he didn’t have to wait five years for the proposal to get paid out to collect all of his fees.  The debt consultant also scored with a whole bunch of fees including the initial consultation fees and loan referral fees (commissions) before during and after the proposal.  The poor old debtor though is right back where s/he was before s/he met the debt consultant.

If you meet a debt consultant who is trying to sell you a bag of goods or push you to “one particular” trustee or as they call us “officer of the court” – don’t walk out of their office, run!