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When should we be concerned about the relationship between debt consultants and bankruptcy trustees?
Posted on September 13, 2015 by Mark Silverthorn I can empathize with a bankruptcy trustee who not only has to compete for revenues with other trustees but also credit counselling agencies and debt settlement firms.
I do not envy bankruptcy trustees. Firstly, they have to spend a significant amount of money to run a financially viable business. While they receive compensation for facilitating Canadians making a consumer proposal or filing for personal bankruptcy many trustees feel that it is necessary to spend substantial sums on advertising. A trustee is competing for revenues with not only other trustees but also credit counselling agencies-most of whom benefit from favourable tax status-and debt settlement firms.
Secondly, a trustee is at a competitive disadvantage in terms of the number of people who might pay for their services. A consumer wishing to enter into credit counselling or hire a debt settlement firm is not legally required to meet with them in person. In contrast, bankruptcy trustees must meet in person with a person considering making a consumer proposal or filing for personal bankruptcy. Therefore, a credit counselling firm or a debt settlement firm could operate across Canada from a single office. Because a bankruptcy trustee can only make a consumer proposal or file a bankruptcy on behalf of someone they have met in person then a trustee’s revenue base faces major geographic limitations.
Finally, no one wants to speak to a trustee. The last person a person struggling with debt wants to speak with is a bankruptcy trustee. Canadians would rather speak to anyone-and I literally mean anyone-advertising “Avoid Bankruptcy”. A consumer with financial problems is more likely to contact a debt consultant, a credit counselling agency, or a debt settlement firm before they contact a bankruptcy trustee.
Some debt consultants act as significant funnels of referrals to bankruptcy trustees
Bankruptcy trustees across the country employ a number of different strategies for inviting consumers to contact their office and learn more about the benefits of making a consumer proposal or filing for personal bankruptcy. It is common for many trustees to spend a substantial amount of money on traditional advertising. Many trustees spend a significant amount of money on their website and internet advertising. Finally, some, but not all, trustees may generate a sizeable number of files from referrals from debt consultants.
Diverse group of debt consultants operating in Canada
Debt consultants come in all shapes and sizes. They provide advice or services to consumers struggling with debt. Some consultants have one or more licenses. Other debt consultants are not licensed. I am a debt consultant. I provide advice for a fee to consumers who are struggling with unsecured consumer debt. The largest debt consulting firm in Canada is Four Pillars which has approximately 50 offices across Canada.
There is nothing inherently inappropriate with a bankruptcy trustee having a relationship with a debt consultant that results in generating files for a bankruptcy trustee. In certain circumstances, however, a trustee’s relationship with a debt consultant can violate the Office of the Superintendent of Bankruptcy Canada’s Code of Ethics for Trustees in Bankruptcy. It is not fair that bankruptcy trustees who scrupulously comply with the Code of Ethics as it relates to debt consultants should be at competitive disadvantage vis-à-vis a trustee who has an improper relationship with a debt consultant.
Improper for trustees to provide compensation or benefits for referrals
It is a contravention of the Code of Ethics of Bankruptcy Trustees for a trustee to pay, directly or indirectly, a fee, compensation or a benefit in return for a referral.
Trustees shall not encourage anyone to engage in any conduct which is illegal or dishonest with respect to the bankruptcy and insolvency process
It is a contravention of the Code of Ethics of Bankruptcy Trustees for a trustee to “assist, advise or encourage” any person to engage in conduct which is illegal or dishonest in connection to the bankruptcy and insolvency process.
It would be fair to say that the majority of trustees in Canada do not engage in conduct which would come close to violating the Code of Ethics of Bankruptcy Trustees. Unfortunately, there are some bankruptcy firms whose conduct as it relates to debt consultants might constitute a violation of the Code of Ethics or warrant an investigation by the Office of the Superintendent of Bankruptcy.
Link to Code of Ethics of Bankruptcy Trustees
Here is a link to the website where you can read the Code of Ethics of Bankruptcy Trustees.