I’ve seen a lot on the news lately about debt settlement programs and companies that are out there offering services to help people settle debts for less than what they owe. Doug Hoyes of Hoyes Michalos & Associates even got involved yesterday on the airways with an interview by CHCH about debt relief options for Canadians.
Companies advertise on the TV and radio claiming they can cut you debt by 70%… I’m sure you’ve probably heard the same ones. The only legislation in Canada that has been introduced by the government to allow people to do this is through a Consumer Proposal. Now, just because a Consumer Proposal is the only program that is legislated on by the government, does not mean other programs are not legal, after all anyone can make an offer to anyone…
So who are these companies, are they government programs and can they help you?
Canadians are in debt. Hence that’s why a lot of companies have appeared recently claiming they can help. They want to profit on the increasing debt loads Canadian’s are carrying by charging fees in exchange for the promise of help.
To be clear, I have no problem with anyone out there that’s:
- A) Genuinely trying to help someone get out of debt
- B) Giving honest advice
- C) Helps someone explore all their options
- D) Does not mis-lead someone into false promises/hope
I also have no problem with doing your research (in fact I encourage it). Look around, ask friends, family for opinions, explore different websites, speak to more than one person.
If you’ve been turned down for help by the banks and need help with debts, there’s 3 main type of company in Canada that can help you:
- A “For Profit” credit counselling company / debt settlement company (they offer debt settlement / negotiation)
- A “Non For Profit” credit counselling company (they offer debt management plans)
- A trustee / administrator of consumer proposals (they administer consumer proposals and bankruptcies)
The chart below compares the differences between the three services offered. The footnotes below the chart provide further commentary.
Hopefully the chart above outlines the main comparisons between each option. Some notes are provided for each heading:
General
Because a consumer proposal is federal law, when you file the creditors have stop activities to collect the debt. The protection happens immediately on the day you file. Any legal action and wage garnishments have to stop the day you file too.
With both credit counselling and consumer proposal, you’ll meet with a qualified and licenced professional who’ll explain your options in person to you so you can make an informed choice.
Some (not all) debt settlement companies don’t have offices in Ontario you can meet them at. Some are just call centers based out of the U.S. or elsewhere. Any Canadian address they have is usually just a mailing address where they have mail forwarded to. This could be important or not depending on whether you’d prefer to actually meet the person you’re about to trust with your money.
In both credit counselling and a consumer proposal, the creditors are contacted immediately and asked if they’re willing to accept the proposal / plan and most importantly, this is normally done BEFORE you make any payments.
In debt settlements, the concept is that you’ll be asked to save up money in your bank account and then three years later when you have some savings you’ll then be told to call the creditors yourself and what kind of offer to make them. In the mean time, you’ll be told to ignore the phone calls…. hmmm ignore the phone for 3 years??? (So you have to save the money yourself and do the work yourself).
One other slight difference is that in debt settlement programs and credit counselling each creditor can choose to partake in the program or not whereas in a consumer proposal the creditors get to vote on the proposal and if the majority accept the proposal any dissenting creditors have to accept the proposal if they’re outvoted. This ensures that you won’t be left with any creditors still collecting from you.
Debts
Most unsecured debts get included in all three programs. The only type of debt that can’t be included in any program is debts such as support, fines, restitution, debts from fraud, and student loans if it’s less than 7 years since you left school.
Most credit cards, credit lines, loans, overdrafts, pay day loans can be negotiated on.
The difference between our three examples is that with a debt settlement program you’re still legally responsible to pay your debts whilst at the same time you attempt to save up your money to make a settlement offer 2 or 3 years later whereas in credit counselling and a consumer proposal, your creditors are contacted immediately.
I doubt very much a creditor is just going to sit back and wait 3 years for you to save up money. Furthermore, most people we meet with that are struggling to pay debts, tell us that unfortunately they’re not in much of a position to start saving money. If they could, they would.
The most important aspect of this is that because the debt settlement company is telling you to save money for 3 years and ignore the phone, nothing is happening with the creditor… Therefore the creditor is free to continue to take whatever steps necessary to attempt to recover the debt from you, including taking legal action. It’s true that some creditors use the threat of legal action as a scare tactic (rather than actually taking action), however you have to decide if you think it’s worth the risk.
Assets
All three programs allow you to keep control of your assets, however if some creditors don’t agree to the credit counselling plan or don’t want to wait for you to save up money to make a settlement offer, they could attempt to attack your assets by putting a lien against your home or seizing the funds in your bank accounts, for example as a way of recovering the debt from you. In a consumer proposal, as mentioned before all collection activity by creditors has to stop all the way from start to finish – including attacking assets.
Taxes
Of the three options, only a consumer proposal will help you if you have tax debts. CRA won’t negotiate debt settlements with credit counsellors or debt settlement companies.
Payments
Most credit counselling plans and consumer proposals set up fixed affordable payments that you make each month throughout the repayment period. In debt settlement plans, the debt settlement company will usually have you make up front payments or larger payments in the first few months.
This is done to guarantee they at least receive their fees first (oh, and don’t forget, you have to do the hard work by saving your money, ignoring the phone calls, and then attempting to call the creditor yourself to make the settlement offer after making them wait 3 years…. )
As mentioned earlier, in a Consumer Proposal you typically don’t make your first months payment until a month after the creditors have been contacted by the Consumer Proposal administrator. Usually it takes 2 to 3 weeks for most creditors to respond to being asked to accept or decline a consumer proposal with a 45 day maximum limit to respond.
Credit
All three impact your credit to a fairly equal level. A consumer proposal stays on your credit report at an R7 rating for 3 years after you’ve completed your proposal. Credit counselling at an R7 for 2 years after you’ve completed your payments. With debt settlements, it works like this…. If you’re currently up to date with payments, you’re rated R1. So when you start the debt settlement program you may have to stop paying your creditors for typically 3 years in order to be able to save up for your settlement offer that you’ll make 3 years from now, each month you don’t pay your debt you go down one R level. So R1 becomes R2, becomes R3 and so on.
When the debt goes to collections (because you’re not paying it) it will go to an R9. Anything going to R9 will stay there for 6 years from the date it’s finally settled. So if it takes you 3 years to make your settlement, it will be an R9 for 9 years altogether. To put this in perspective, a bankruptcy is an R9 for 6 years after the bankruptcy is finished. So most debt settlements stay on your credit longer than a bankruptcy would!
The reason why you hear most people say 7 years for a bankruptcy as a minimum time for a first time bankruptcy is 9 months, so 9 months + 6 years is pretty much 7 years.
So choose wisely… everyone you hear on the tv and radio is claiming they can help you. But do your research and make sure you understand how the program works and where your money will be going. Call 310PLAN or email me today if you have questions or would like to set up a free, no obligation consultation to chat about your situation.