September 5, 2017

That comment of course is all a matter of perspective, but, apparently, our regulator isn’t too keen on the modus operandi of some consultants either.

Here’s how it may play out:

You are debt and afraid of meeting with a “Bankruptcy Trustee”, after all, who in their right mind wants to go bankrupt?  But then you heard that someone is offering access to “new government debt relief programmes” – so you figure it’s worth checking out.

Your first meeting with the debt consultant is exploratory and there is no charge.  The consultant explains that they can help you put together an alternative payment arrangement that might save you up to 80% of the total amount of your unsecured debts.  That sounds enticing, but of course there will be fees for service.

The debt consultant will usually want a “professional fee” of between $1,000 to as high as $6,200 for their services.  You might reason that if they are saving you a whack of money on your debts it’s worth scraping that together.  They provide you with a portfolio containing advertisements and testimonials along with some official looking contracts.  You even agree that you will not talk to your creditors any longer and the debt consultant will be your official representative.  Wow!  You can already feel the relief.

For the sake of our example let’s assume that you owed $80,000 on a variety of credit cards and lines of credit.  The debt consultant has recommended that you pay only $20,000 towards your debts through a modified payment plan that will allow you up to 60 months (5 years) to repay at $335 per month with no additional interest.  Given that you have been struggling to make payments of about $2,000 per month, sometimes taking money from one form of credit to pay another, you can already feel the relief.

The debt consultant advised you that you must meet with an “officer of the court” who will approve your offering to your creditors.  You will also need two counselling sessions and you are not allowed to miss any payments.  It all sounds good – so you take the initial fees out of an RSP and pay the debt consultant.  They arrange the meeting with the “officer of the court” – a Licensed Insolvency Trustee (formerly a Bankruptcy Trustee) with who they work.  The trustee told you that you had an early payout option written into the proposal that allowed you to discount the remainder amount payable to 80% of the outstanding balance.  You sign the papers as directed by the debt consultant answering a few questions from the Trustee and leave understanding that everyone is on your team.

That is when things may start to change.  The debt consultant had pre-approved you for private financing, perhaps, from a related company.  After your consumer proposal is approved by the creditors (45 days later) the debt consultant suggests a great way for you to finish your proposal early and start to rebuild your credit.  All you need to do is to take out a “proposal loan”, use the funds to pay out the discounted balance on the proposal and the lender will report you to the credit bureau as a I-1 thereby improving your credit score.

Now of course your payments will change as there will be interest but your credit will be improved and very soon you will be in good standing again.  Remember that a consumer proposal remains on your credit report for a period of three (3) years after it is paid out – so the sooner you pay it out the sooner you can clean up your credit report.

Being eager to get this thing behind you, you might agree to the scheme and sign the credit application.   Remember, you were pre-approved for the loan at the time of signing up the consumer proposal.  From the loan proceeds you will be obligated to pay $1,000 for a referral fee plus a $1,000 fixed administrative fee and interest calculated at 29.9%.  You take the payments over a period of up to 72 months at about $525 per month.  You are paying a little more, but on the upside, you will “have your credit back”.

There is of course a downside to all schemes, in the illustrated scenario you will have paid $38,470 including interest and the two proposal payments as well as the “professional fees”.  You will also be in debt and will have the value of that loan counted against your debt service ratio when you apply for further credit.  Because the proposal will still show on your credit bureau report for three years after completion – even though you did pay it out earlier.