Roughly half of Canadians have a hard time trusting professional companies to help them out of debt.
That’s one of the findings of a recent poll conducted by Ipsos for MNP Ltd., one of the largest insolvency firms in the country. Although the survey didn’t ask consumers where the cause of the distrust lies, experts have a few guesses.
“Many people — particularly young people — don’t know that there is a regulated system in place to help severely indebted individuals,” Grant Bazian, president of MNP Ltd said in a statement.
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Licensed insolvency trustees (LITs) are the only ones authorized to offer debt relief options such as consumer proposals and bankruptcies. Proposals discharge part of a borrower’s debt, while bankruptcies erase all debts with a few exceptions such as some student loans and spousal and child support. Both are legal processes.
Beyond LITs, though, is a universe of debt-help companies and organizations that knows little government regulation.
Some offer low-cost, quality counselling as well as less drastic debt solutions that can help borrowers repay what they owe in a more sustainable way. Others charge steep fees and make false promises, or act as pricey intermediaries between borrowers and LITs or other credit counsellors.
It’s a maze many debtors have a hard time navigating.
“There’s a lot of quick-fix type of ads: ‘you have problems? We’ll fix it in 30 days’,” Bazian told Global News. “Nothing’s that easy.”
Even the non-profit label isn’t necessarily a guarantee of quality or high ethical standards, according to Saul Schwartz, a professor at Carleton University’s School of Public Policy and Administration.
“Some of them are good and actually do provide some credit counseling. Some of them are not so good — and there’s really no way for the poor debtors to figure out which one is which,” said Schwartz, who has written extensively about personal insolvency in Canada.
As for for-profit companies, some will encourage a high-interest loan that’s meant to tide you over while they negotiate with your creditors, according to the Financial Consumer Agency of Canada (FCAC), a federal consumer watchdog.
“Be aware that some companies make money from fees, set-up costs and interest. You may still be carrying debt after the process is over,” the FCAC warns.
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Debt relief options
Consumer proposal. It’s a legal process that sees an LIT negotiate a binding debt repayment plan with your creditors. Usually, you pay back a reduced amount based on what you can afford given your income, assets and some expenses. Your credit score will suffer for three years after you complete the proposal. Filing a proposal generally costs around $1,500, according to the Credit Counselling Society (CCS). However, the fees are carved out of your debt repayments. You’ll never pay more than what you originally owed. Also, the fees are federally regulated, meaning every LIT in the country will charge you the same amount.
Bankruptcy. This is the nuclear option for when you can’t afford to repay even part of your debt. Like a proposal, it’s a binding legal process: your creditors can’t change their minds, and the collection agencies must stop calling you. You don’t get to keep your assets in a bankruptcy proceeding, but there are some important exceptions. For example, depending on what province you live in, you may be able to keep a car, the savings in your Registered Retirement Savings Plan or work-related tools. Your credit score will be affected for six or seven years after a first bankruptcy and even longer if it’s not your first time. The cost of a bankruptcy is around $1,800, according to the CCS.
EDITOR’S NOTE: The paragraph below has been amended to reflect how credit counselling agencies receive payment
Debt management plan. It’s an informal process in which a credit counselling agency tries to get your creditors to voluntarily agree to consolidate your debts into one more affordable payment. Usually credit counsellors managed to reduce or eliminate the interest on your debt, but you’ll still have to repay 100 per cent of the principal. Tax liabilities are excluded and you may not be able to include loans backed by a property like your house or your car. Collection agencies can continue to call you, although normally they won’t, according to the FCAC. On the flip side, a debt management plan only stays on your credit scores for two years. Non-profit credit counselling agencies generally receive a donation from creditors equal to 20% of the debt repayments, according to Schwartz. In addition, there may be monthly administrative fees you’ll have to pay out of pocket, although non-profits have self-imposed price caps and will charge you based on your ability to pay, according to the FCAC.
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Accreditation and qualifications
If you’re hoping to file a consumer proposal or bankruptcy, it’s relatively easy: go straight to someone who calls themselves a LIT. If you’re looking for a good credit counselling agency, you may have to do considerably more legwork.
The FCAC lists many associations that require their members to adhere to set standards:
- Credit Counselling Canada
- Canadian Association of Credit Counselling Services
- Canadian Association of Independent Credit Counselling Agencies
- Ontario Association of Credit Counselling Services
Check to see whether the agency you’re looking at is a member of any of the above.
In Quebec, credit counselling services are usually provided by Associations coopératives d’économie familiale (ACEFs).
Another resource is the Canada Revenue Agency’s online list of registered charities, where you can verify an organization’s current status.
You can also check whether counsellors working at the agency have qualifications like the Accredited Financial Counsellor Canada designation, offered by the Ontario Association of Credit Counselling Services, or have taken the Insolvency Counsellor’s Qualification Course, offered by the Canadian Association of Insolvency and Restructuring Professionals.
Beware of pressure to sign up for a debt management plan — it may be a sign the agency is more interested in getting its cut of your debt repayments than actually helping you regain a handle on your financial situation.
If you just want some advice
While LITs must provide two counselling sessions to anyone filing for a consumer proposal or a bankruptcy, the format is set by law and “pretty regimented,” according to Bazian.
“Credit counselors and other budgeting organizations — for profit or not-for-profit — might have more of a robust counseling session,” Bazian said.
MNP routinely refers clients to credit counsellors when they “more robust financial counselling” that LITs cannot provide, Bazian said.
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The problem with bankruptcy
Not everyone who’s struggling with debt needs to turn to bankruptcy. But some of those who do may not get to, according to Schwartz.
Debtors who have no or very little income and almost no assets aren’t able to cover the cost of the proceeding. And while some LITs will work with them for a lower fee, “it can’t be guaranteed.”
Research by Schwartz and Stephanie Ben-Ishai, of York University’s Osgoode Hall Law School, estimates there are between 11,000 and 15,000 Canadians who may find themselves in such a predicament every year.