Credit Counselling

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May 26, 2022

Back in 1995 I tenuously started my insolvency career at Credit Counselling London.  Credit Counselling London was a non-profit group and a member of the Ontario Association of Credit Counselling Services.  At that time, I knew precious little about credit, since I have always been debt averse, but I had a fairly new university degree, in psychology.  Although I was initially hired temporarily to cover a maternity leave, the position became full time until funding was reduced some three years later.

I was trained by the Executive Director (“ED”) who had me sit in on a few sessions he conducted, then I was cut loose to counsel clients on my own, with the ED’s words of wisdom, “there you go, it’s not rocket science” ringing in my ears.  At that time, Credit Counsellors were restricted to how many clients they were able to see each day, regardless of demand, and demand was high.  Back then, there were only about 900 Licensed Insolvency Trustees (“LITs”) in Canada – today there are about 3,200.

Credit Counselling Agencies have been helping people solve debt problems since the early 1960s.  Credit Counselling does not operate within the legal framework of the Bankruptcy & Insolvency Act, and they are not regulated by the Office of the Superintendent of Bankruptcy (“OSB”).  Credit Counselling provides a liaison with institutional and mainstream Creditors and helps Debtors to manage their debt problems with repayment terms that are based on two pivotal factors 1. Full repayment of the debt and 2. Being able to afford the monthly payments.

A Counsellor will sit with a prospective Debtor and review their monthly income and expenses to see if there is sufficient funds to make a repayment programme, called a “DMP” (an acronym for Debt Management Programme) work.  The Debtor is allowed up to 60 months to make payments into the programme, the payments are calculated as the total principal amount of the debt divided by sixty months.  A debt of $20,000 divided by sixty works out to be $333 per month – plus there is a mark up for administrative expenses, let’s say $50 per month.  A Debtor owing $20,000 to participating Creditors would pay the agency $383 per month and would still have to pay non-participating Creditors their regular payment each month.

If the Counsellor (after working through a month’s worth of income and expenses) finds the Debtor cannot afford the DMP they will suggest eliminating monthly expenses from the budget so that, on paper at least, things will work out.  The expenses that are eliminated first are deemed to be “non-essential” line items such as alcohol, eating out, gifts, and children’s allowances.  Other line items may be adjusted based on assumptions of lifestyle changes – things like cellular services, TV subscriptions, gym memberships, and even projected grocery savings.  Once on the DMP, monthly payments must be made on time each month or the DMP falls into default.  Once in default the participating Creditors may resume collection activities unless, or until, the DMP is reactivated by the Debtor meeting with the Credit Counsellor and creating a plan to get caught up.

When a Debtor cannot manage the payments, the Counsellor may refer them to a LIT, usually one that benefits the agency with financial contributions.  There are many stories involving Trustees paying fees to Credit Counsellors for referrals – in spite of the OSB frowning on the practice and doing what it can to curtail the behaviour.  Another arrangement was to refer the mandatory two credit counselling sessions to the Credit Counsellor – the two sessions pay $85 each.  Again, the OSB implemented policies to prevent or slow the practice of effectively paying for files. 

Credit Counselling has (metaphorically) lived through many changes since their inception.  In the early days, agencies were all volunteer based and thrived on donations from a variety of sources.  Later they received funding from the Ministry of Community and Social Services (“MCSS”).  In the 1990s the NDP government of Bob Rae withheld funding after amendments to the BIA paved the way for a more affordable solution under Federal legislation.  Credit Counselling agencies in Ontario, at the time, had thousands of open and active DMPs, in order to be able to manage trust funds the agencies are all registered Collection Agencies.  The OACCS and other affiliates arranged with the Canadian Bankers Association to collect a commission on collections – originally. they would receive 25% of funds being disbursed to participating Lenders, that was later reduced to 22.5%

The unfortunate reality being, without adequate third party funding, Credit Counselling was forced to focus on revenue generation and competing with LITs for clients.  Credit Counselling, with its non-profit agencies, has always had the advantage of the appearance of neutrality.  As noted above in the second paragraph, there are now nearly triple the number of LITs that were around when I first went to work for Coopers & Lybrand in 1998.  LITs have the advantage that programmes offered have legal standing and they are licensed and regulated by the Federal government. 

The Credit Counselling model is still slowly changing, now there is a focus in decentralization with an emphasis on remote services using telephones, MS Teams and Zoom to meet with Debtors and set up DMPs.  In “the olden days” the best feature of Credit Counselling was its colloquial and neighbourly nature, clients could drop in and chat with their Counsellor or one of the administrative staff.  Even LITs have shifted to remote service offerings which depersonalizes the whole experience of seeking help.

It is always hard to foretell change but there have been many changes in the insolvency business at all levels.  Having said that, on average about one tenth of one percent (0.001) of Canadian consumers will likely be filing an insolvency proceeding with a LIT in the coming year.  The zeitgeist leans firmly in favour of Consumer Proposals over Bankruptcies with an average of around 80% of all insolvency filings being proposals.  In 2011 some 50,460 people, in Ontario, filed insolvency proceedings (about 50/50 proposal vs bankruptcy).  Since 2011 there are more than double the number of LITs to service those clients, who are the same clients Credit Counselling is trying to recruit.  In 2021 a total of 30,327 Ontarians filed an insolvency proceeding, that is a total ten-year decrease of 40%.  Looked at another way (given the doubling of competition in the marketplace) that represents an actual decrease of 80% in available business.

Perhaps the best fit for Credit Counselling is not competing with LITs for insolvent clients but rather in education Debtors with strategies to avoid becoming overwhelmed with debt in the first place.  It would seem to behoove bankers to pay money to educate their clients to avoid default rather than pay commissions for delinquent collections.  While Canadian consumers are the most indebted people in the world there are few to no strategies in play to prevent them getting further into debt.  In recent years the housing boom has created the opportunity to pile on debt using mortgage financing, but with rising interest rates lenders are being more cautious and we should see a return to slightly higher insolvency filing levels.   Removing the competitive element would help maintain the integrity of the system and create a community of resources that are not only helping people get out of debt but providing them with meaningful ways to manage money more successfully.  If you or someone you know needs help with debt problems call us at 519-646-2222