September 5, 2017

“Wag the Dog”. Debt consultants could not exist without the support of trustees.

The fact is that debt consultants can do little or nothing to help debtors find relief except to refer them to a trustee in bankruptcy for help.

Only licensed collection agencies, trustees in bankruptcy and lawyers can provide debt settlement services.  Generally speaking debt settlements are fraught with challenges and do not represent a very viable stand-alone business model.  This is because the people seeking to settle their debts often cannot afford to pay professional fees and frequently have insufficient resources to make a viable settlement offer anyway.

If they are not providing debt settlement services, what exactly do debt consultants do, or can they do and how do debt consultants get paid?

The big thing is that debt consultants have a huge leg up on bankruptcy trustees for advertising.  It really is that simple!  Just the word “bankruptcy” sends shivers down many people’s spines the social stigma, although undeserved, is very real.

Nonetheless, no one ever planned to go bankrupt, at least no one we have ever met.  Most people “planning a bankruptcy” are doing so at the eleventh hour and struggling to preserve some semblance of social dignity.  Even repeat bankrupts do not set out to go bankrupt.

There are a lot of misconceptions and a great deal of confusion about bankruptcy and bankruptcy trustees.  Urban myths abound regarding the actions taken by trustees and the consequences of insolvency filings striking up images of people being tossed out of their homes and forced to sell all their worldly possessions.

Ironically trustees, trustee firms, and their various licensing and sanctioning bodies have done a pretty poor job of promoting the profession.  As a result many people are afraid to even make the first call to a trustee’s office.

Part of that problem could relate to regulatory restrictions on advertising.  Trustees must advertise that they are “bankruptcy trustees” in all of their advertising.  But without providing supporting information regarding the profession, the stigma of “bankruptcy” puts most people off of seeking advice or assistance.

Enter the “debt consultant” they are unlicensed, largely untrained and unregulated.  However, they are able to make all sorts of solicitations short of putting themselves out to be trustees in bankruptcy or able to provide debt settlement services (in Ontario).

There is nothing new about debt consultants they have been around for years effectively doing nothing more than working as agents for certain bankruptcy trustees.  In the past they were more likely to be one off types, individuals who had relationships with trustees and who would charge a fee for the referral.  Two such local debt consultants were paralegals who would charge several hundred dollars to essentially assist with the completion of an application form, the compilation of required information and the introduction to the bankruptcy trustee.

The Office of the Superintendent of Bankruptcy (“OSB”) is the regulatory oversight body for all bankruptcy trustees.  Although the OSB has been aware of these behaviours which may conflict with the trustees’ code of ethics regulating and controlling such actions has been extremely challenging.  Part of the problem is that debt consultants are private companies over which the OSB has no jurisdiction.

The OSB does regulate trustees but proving wrongdoing on the part of the trustee in the trustee/debt consultant relationship is problematic.  Essentially since trustees are not allowed to pay for referrals the most obvious contravention of the code of ethics is a finding that the trustee either directly or indirectly made payment to the debt consultant in consideration of a referral or referrals.  If such a finding were to be made the trustee could be sanctioned in some manner.

With burgeoning numbers of people filing for bankruptcy it has been very hard for the OSB to monitor the source of each client file much less determine if or not any kind of monetary transaction has occurred between the trustee and the debt consultant.  Sharing office space has become commonplace not just between trustees and debt consultants but between other professional services firms as well.

If the trustee were paying the rent or advertising for the debt consultant there would be a pretty clear conflict of interest.  However, most debt consultants charge the debtor directly for their (referral) service and do not charge the trustee.  We have heard of such fees ranging from a few hundred to several thousand dollars.  In some cases the debt consultant actually gets paid more money than the trustee for nothing more than making a referral.

Some debt consultants try to hold onto the debtor even after the completion of their bankruptcy or proposal by selling additional services or financial products such as insurances, mortgages and even facilitating credit card applications on a fee for service basis.  All of which may be referred to preferred service providers who may pay kickbacks.

At bottom the profession itself must take some responsibility for the existence of debt consultants.  If trustees would build their businesses based on the integrity of their own advertising and ignore debt consultants all together they would eliminate such practices.  However, the trustees who use such services may be unable to successfully promote themselves without such tactics.

We knew of one particular trustee who obtained about one third of all their business from one debt consulting company – when they ceased to be compliant with the debt consultant’s demands (essentially to look the other way on regulations) the debt consultant referred their files elsewhere resulting in a significant loss of business.

Our office obtains referrals from a variety of professional service providers but we have not and will not participate in supporting debt consultant services.