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Who can help:

July 15, 2020

When you have debt problems who can help?  Consumers are inundated with misinformation through social media platforms, newspapers, radio and other forms of advertising.  The purpose of this blog is to demystify who are the players are and what they can do for you when you are having debt challenges.

Licensed Insolvency Trustees (LITs) are the only people you can really trust to help you negotiate debt challenges.  LITs are licensed and closely regulated by the Office of the Superintendent of Bankruptcy under the auspices of the Industry Canada.  You can take no such, or similar, assurance from any of the other players in the field.

In Ontario, as a result of scam services, regulations were passed to regulate, and to some extend curtail, the activities of unscrupulous Debt Consultants.  Under the Collection and Debt Settlement Services Act the only people able to help with debt settlements are Licensed Collection Agencies, Lawyers and of course LITs.

How they can help:

Lawyers:

Your lawyer can negotiate settlements of debts on your behalf, typically this type of work is too costly for the consumer and of little interest to otherwise busy law practices.  We most often see settlements being made as funds are being disbursed from the sale or refinancing of real property

A few law firms did make a foray into the world of debt settlement mostly negotiating for reductions on statute barred debts.  They would obtain a retainer from their clients, who would then typically continue to make monthly payments to the law firm – ostensibly to build up a pool of funds that would be used to make settlement based on a reduction of the face value of the debt.  The lawyers’ fees would include a commission based on a percentage of the amount of reduction.  Over time we have seen most law firms drop this line of business.

Debt Consultants:

Debt consultants are almost completely unregulated they may not make debt settlements unless they are a Licensed Collection Agency.  Their typical modus operandi is to take as much money up front as they can, under the guise of helping the consumer to negotiate the sharks in the water, including LITs who the debt consultants suggest “work for your creditors”.  The fact is that LITs are regulated by the law, rules and regulations under the Bankruptcy & Insolvency Act.  Rule 39 of the Act requires that:

Trustee’s shall be honest and impartial and shall provide to interested parties full and accurate information as required by the Act with respect to the professional engagements of the trustee.

Debt Consultants usually work in collusion with one or two LITs to whom they refer their clients for help by filing a consumer proposal.  I formerly worked for a firm that used debt consultants as a major referral source at one of their offices.  Standing in for the trustee who was on vacation, I learned that a debt consultant had charged a client $6,200 in fees.  The fees were withdrawn from an exempt RRSP (in other words if the client had met the trustee first – they would have kept their RRSP through their bankruptcy).  The client then had to pay the trustee $1,800 over a term of nine months to administer the bankruptcy.

The same debt consulting firm would arrange for “proposal financing” for its clients – the scheme would work something like this:  Debtor approaches debt consultant and discusses reducing their debts to 25 cents on the dollar.  The debt consultant contacts their related finance company to seek approval for a loan for the 75% reduced value.  The debt consultant gets finders fees for procuring the loan, which are added into the loan amount, and interest, because the client is “high risk” is very high 29.9%.  The trustee then takes on the file and negotiates the proposal settlement.  Initially the proposal is calculated with 60 monthly payments, but once agreed upon by the creditors and deemed approved by the court the debt consultant pays out the 25% settlement value and the client is on the hook for a new debt, the finance company loan. 

The loan is sold on the notion that the old debt is cleaned up and the new debt will report favourably to the credit bureau “improving the client’s credit score”.  But now, instead of paying back 25% of the original debt the client is paying back 75% with accrued interest and ancillary fees.  Also, although their credit score may improve, access to credit is still impeded by the fact they filed a consumer proposal and their debt service ratio is too high to allow them to take on more debt.

Non-Profit Credit Counselling:

Non-profit credit counselling agencies do have their own, private, regulators and conduct peer reviews of their practices.  They are funded mostly by large institutional creditors (Banks and Credit Unions) in order to operate in the province of Ontario these organizations must be licensed as Collection Agencies.  The commissions they receive, by agreement with the Canadian Bankers Association, stands at about 22% of the monies they collect.  Because the agencies are registered as “charitable” organizations they issue the banks charitable donation receipts from the commissions.

As a result of a lack of autonomy the agencies are not able to compromise (reduce) the face value of the debt.  They may set you up on a debt management programme that enables you, by agreement with most of your creditors, to pay the face value of the debt over a term of not more than 5 years with interest being waved pending completion.  You will also have to pay monthly administrative fees.  Once the terms of repayment are completed your credit report will be treated exactly the same as if you had done a consumer proposal with a LIT – except you will have paid the debt in full without reduction.  

Online Consultants:

There has been a recent proliferation of online debt consultants.  Most either make promises they cannot keep and scam you out of money for services they cannot perform or the simply refer you on to a LIT firm that pays for the referrals as an advertising expense.

LITs:

LITs are specifically trained to understand insolvency and property laws.  LITs are the only professionals that can administer bankruptcies and proposals.  LITs have been able to significantly reduce the face value of debts through the filing of proposals.  LITs can negotiate debt settlements with individual creditors (for a fee).  LITs can use form or informal proceedings to help you find relief from actions by your creditors.  LITs have the advantage of having the law on their side and after you have signed up for either a bankruptcy or a proposal the Act provides a stay of proceedings, meaning you are legally protected from any legal actions against you by any of your creditors. 

If you need help resolving your debt problems, call us first 519-646-2222