If you have too much debt, there are five options for eliminating debt. Here’s my short video explaining your debt management options:
I explain these five debt busting options in the video:
Personal budgeting: Make a budget, and pay off your debts on your own. (I’m not a big fan of budgeting, since it’s hard, so you can read my post on why budgeting is a bad idea, and what you can do to manage your money without budgeting).
Debt Consolidation Loan: A debt consolidation loan is a loan used to pay off multiple smaller debts. It allows you to combine multiple payments into one smaller monthly payment, generally at a lower interest rate and spread over a longer period of time. Of course debt consolidation doesn’t reduce your debt, unless you can pay more towards the principal each month.
Credit Counselling: A credit counsellor can negotiate repayment plan where you pay your debts in full, but at a reduced interest rate. This is called a “Debt Management Plan” and works well if you can repay your debts in full.
Debt Settlement: A debt settlement is an arrangement negotiated with a creditor where you pay a portion of the amount owing. If you owe $20,000, you could offer to pay $8,000 as a lump sum to settle the debt, or you could offer to make payments over time. If the debt is old, and if you have a lump sum of money, this may be a viable solution. However, if you have many debts, you must reach an agreement with each creditor, which may not be possible.
Consumer Proposal: A consumer proposal is a legally binding settlement between a debtor and a creditor. It typical involves the debtor making one monthly payment, on an agreed upon settlement amount, over a period of no more then 5 years. At the end of the proposal period the debtor is then released of any remaining balances, which may be left from their original amount of debt.
Bankruptcy: In an Ontario bankruptcy an individual surrenders certain assets to a trustee, in order to be absolved of their debts. They are then legally declared bankrupt and required to adhere to the duties of a bankrupt, in order to obtain an absolute discharge, at the end of their bankruptcy term.
Which option is right for you? Try our debt options calculator, or contact us for a no charge initial consultation to review your options.
A married couple was in to see us this week. They have about $45,000 in debt, and they had spoken to a debt settlement firm who had advised them that they would attempt to settle their debts for payments of $850 per month for 36 months, or just over $30,000. They wanted a second opinion, so they brought in their contract with the debt settlement firm. I reviewed the contract, and found many interesting clauses. But before I review the contract, let me tell you the end of the story: they will be filing a consumer proposal, where they will pay $375 per month for 60 months, or $22,500.
Here are the clauses in the contract I found interesting:
First, the debt settlement company “does not make regularly scheduled payments on the Client’s behalf to creditors.” Why not? Because in a typical debt settlement plan you are required to accumulate a lump sum of money, which is then used for the settlement. In this case it’s expected that it will take 36 months, or three years, for the client to accumulate enough money that the creditors are likely to accept the settlement.
This is in direct contrast to a consumer proposal, where we get the creditors written agreement at the start of the process, and then we make regularly scheduled distributions to the creditors.
You may be thinking to yourself, “wait a minute; if in a debt settlement it might be three years before the creditors see any money, isn’t it possible that they will sue me?” Good question. In fact, the contract addresses that as well. Here’s a quote:
“Entering into a debt settlement program does not guarantee that you will not receive collection calls, letter, lawsuits or garnishments.”
Again, that is in direct contrast to a consumer proposal. Upon the filing of a consumer proposal there is an automatic “stay of proceedings”, which means that lawsuits and garnishments from credit card companies and banks are required to stop while they consider the proposal.
Finally, here’s another clause from the debt settlement company contract:
“We determine your eligibility for a debt settlement program, but we do NOT evaluate your unique credit and debt situation to determine the best debt relief option for you. It is your responsibility and choice to evaluate and determine which option is best for you. It is important to be aware of other debt relief options which may include credit counselling, a consumer proposal, bankruptcy or working directly with your creditors.”
Wow. At least they admit that they are not giving you any advice, and they won’t tell you about your other options.
And that’s true. They didn’t tell this couple that instead of paying over $30,000 for a debt settlement plan that would not protect them from lawsuits or garnishments, and might not even work, they could instead file a consumer proposal for just over $20,000 and receive full legal protection.
So what’s the moral of the story? Know your options. Investigate all of your options, and decide which option is best for you. To find out more, watch this video where I explain your five basic debt management options:
November 14 to 18 is Credit Education Week in Canada, and I must admit I have mixed feelings. I strongly agree that Canadians need more education about credit, and debt, so anything we can do to help educate Canadians is good. However, I also wonder who should educate Canadians about credit.
Credit Education Week, according to their website, is sponsored by many financial institutions, including Capital One (the Platinum Sponsor), and three of the big banks (RBC, TD, and BMO). Other sponsors include OLG (who operates our lotteries and casinos; I’m not sure what they have to do with credit), a large payday loan company, Credit Canada, and three bankruptcy firms.
There are what appear to be many good conferences to be held during the week. According to their schedule, there will be a Money Management and Budgeting Workshop Monday to Thursday at the Family Counselling and Support Services for Guelph offices. We have referred hundreds of people over the years to Family Counselling in Guelph for credit counselling. They are a great organization, and I’m glad they are involved.
I must admit, however, that I do get a bit of queasy feeling when I see big banks and credit card companies sponsoring Credit Education Week. Don’t banks and credit card companies want us to borrow? Yes, of course they do, that’s how they make their money, but I guess they would tell us that they want us to borrow responsibly, and that’s why they sponsor Credit Education Week.
I think my queasiness is really caused by the use of the word “Credit”. I don’t like that word. Credit is a positive word, like “giving someone credit for a job well done.”
I prefer the word “debt”, because that’s really what we are talking about. I think we should call it what it is: “Debt Education Week”, but I assume the banks would not want to sponsor something that negative.
I also worry that the advice might be somewhat one-sided. If you call us here at Hoyes Michalos and ask us to explain your options, we will explain all of your debt management options. We’ll talk to you about budgeting to cut your expenses to pay off your debt on your own. We’ll talk about debt consolidation loans, credit counselling, debt settlement, consumer proposals and bankruptcy. Do the banks that sponsor Credit Education Week want you to know about consumer proposals and bankruptcy? I doubt it. They would be much happier if you paid in full, or if you did a debt management plan.
Of course we only make money from you if you file a consumer proposal or bankruptcy, so why do we explain all of your options? Two reasons:
First, we want you to find the right solution, even if we don’t make any money from it. We’ve been in business since 1999, and a big portion of our work comes from satisfied people we have helped, so we know that by explaining all options we will continue to grow.
Second, it’s the law. We are licensed by the federal government, and Directive No. 6R3 requires us to “discuss the options available to debtor for resolving financial difficulties”, including “non-legislative debt settlement arrangements” which includes debt consolidation, credit counselling, debt settlements, and budgeting.
So, when you meet with us, we tell you everything, as I explained on the radio a few weeks ago:
So what’s my point? Am I against Credit Education Week?
No, I support Credit Education Week. But to answer the question “who should educate Canadians about debt?” the answer is NOT the banks, or bankruptcy trustees, or credit counsellors, because we all have our own biases. Credit counsellors make their money from debt management plans. Bankruptcy trustees make their money from consumer proposals and bankruptcies, so those are the options we will emphasize.
The answer, I believe, is that the best person to educate you, is you.
Do your own research. Go to some of the Credit Education Week sessions, but also do your own research. Read many points of view.
In an interview on CBC she tells the story of a young man, earning $21,000 per year, who got $15,000 in credit from a big bank. You can watch the interview on CBC. The only solution for this person was to, you guessed it, file a consumer proposal.
You won’t see Gail Vaz-Oxlade speaking at Credit Education Week, delivering her message of personal responsibility, and looking out for yourself.
Too bad, because looking out for ourselves is the best answer.
So here’s my challenge to you: assume this week is Debt Education Week, and make it your personal goal to learn as much as you can about the ways to deal with debt. Learn how banks make money, and research the role played by credit card companies, debt consultants, credit counsellors, and bankruptcy trustees. Review your debt options, and then decide what option is best for you.
Before we start telling stories, what exactly is a debt consultant? As Joel Sandwith explains it, a debt consultant is often someone who is suggesting a solution that is “too good to be true.” In Rebecca Martyn‘s experience as a trustee, a debt consultant is often simply someone who charges a large up front fee, and then refers you to a trustee. Danielle Ratford has even less respect for them: she calls debt consultants a wolf in sheep’s clothing.
Sadly, Joel, Rebecca and Danielle’s opinions are based in real life stories.
Ian Martin tells the story of Carl (not his real name), who talked on the phone for a while with a debt consultant, only to discover he was talking to someone in California! Ian’s advice: “when it comes to debt consultants, know who you are getting into bed with.”
Susan Jung tells the story of “Tasha”, who met an apparently very kind and caring debt consultant, who promised to deal with her debts. Unfortunately the plan was that Tasha would pay him $1,200, and then he would set up a meeting for her with the “Court Officer”. I don’t want to steal Sue’s story, but here’s a hint: whenever anyone tries to impress you with a term like “Court Officer”, be suspicious. If you file a consumer proposal or bankruptcy with Hoyes Michalos we are appointed by the Court to administer your file. If a debt consultant tells you they are arranging a meeting with a “Court Officer”, they are really telling you that they are referring you to a trustee. That’s fine, but don’t pay $1,200, or more, just to get referred to a trustee.
If you want to meet a trustee, contact Hoyes Michalos, and we’ll meet with you to discuss your options for free.
Benny Mendlowitz met with a woman in his Scarborough office who met a debt consultant who’s office is on the same floor as Benny’s office. She said to the debt consultant “why would I pay you $500 to hook me up with a trustee when I can do that myself?” At that point, she got up and left, found Benny, and Benny filed her consumer proposal (and he didn’t charge her any up front fees).
So why do people go to debt consultants? Because they advertise a lot, particularly in the Toronto area. Julie Wildman in our Toronto office tells the story of the debt consultant ads “snaring” an unsuspecting couple who paid the debt consultant $1,000, and never heard from them again. That’s sad, and that’s why I’m writing this article as a warning to others. Ross Stevenson in Vaughan tells a similar story, and he advises that the truth about debt consultants is simple: they can’t offer legal protection from your creditors! Adam Rauf in Brampton is more aggressive, calling debt consultants a scam!
I won’t go so far as to say every debt consultant is a scam artist, but I will say this: if your wages are being garnisheed, there are only three ways to stop it:
get the creditor to stop the garnishment, which they will generally only do if you pay it off in full, plus interest and legal costs;
A debt consultant may be able to make a deal to stop a garnishment. If they can, and it doesn’t cost you too much, great. But a debt consultant is not licensed to file a proposal or a bankruptcy, so they can’t offer that form of legal protection.
All they can do is charge you a large up front fee, and then refer you to a licensed trustee.
So, for legal protection, bypass the middle man, and don’t pay an up front fee. Contact us, and arrange for your no charge initial consultation where we will explain all of your options.
Douglas Hoyes, Consumer Proposal Administrator, Bankruptcy Trustee
We’ve all heard the ads: “Government program will reduce your debts! Call now! Operators are standing by!”
Most of us have also received phone calls from telemarketers (they always call when you are eating dinner) promising to settle your debts if you “Act Now!”
Who are these debt consultants, and why can they afford to advertise heavily, and hire telemarketers?
The answer is that many of these debt consultants aren’t anybody at all. They don’t have any professional qualifications, and in many cases they don’t even have offices in Canada. They work out of call centers in the U.S., and they take your money and often don’t do anything at all. (It’s easy to have lots of money to spend on advertising if you never incur any costs to actually provide a service).
Believe it or not, many of them are nothing more than a referral service for bankruptcy trustees! They charge you a huge fee, and then refer you to a trustee!
Two weeks ago I reported on the results of my investigation into Cambridge Life Solutions, one of the big advertisers on radio. (When you read the article you will see that this is a classic example of a company from the U.S. making phone calls from their U.S. call center to unsuspecting Canadians).
So why do these debt consultants exist? They exist because most people with debt problems have never had debt problems before, so they don’t know who to turn to for help. You don’t want to talk to a bankruptcy trustee, because you’ve heard that bankruptcy trustees in Canada work for the creditors, right? (It’s not true, but that’s what debt consultants want you to believe). So, when you have a problem, you call the company that advertises the most.
Debt consultants do not require a government license, or any formal training, so anyone can call themselves a “debt consultant”. (You can read the Doug Hoyes biography for details on my professional qualifications and experience). That makes it easy for anyone to set up shop and start taking your money.
Debt consultants often charge huge up front fees. It’s not unusual to pay hundreds, even thousands of dollars to them before they even pick up the phone to contact your creditors to see if a deal is possible. (At Hoyes Michalos you don’t start paying until your consumer proposal is filed with the government, and a legal “stay of proceedings” is in place, preventing your unsecured creditors from taking you to court and garnisheeing your wages).
Finally, as noted above, a licensed bankruptcy trustee and consumer proposal administrator like the professionals at Hoyes Michalos provide legal protection from your creditors.
Debt consultants don’t.
I have no objection to companies helping people deal with their debts. I do object to unregulated companies with no professional qualifications using telemarketers to entice unsuspecting people into parting with thousands of dollars for nothing.
My advice? Do your research.
Before you hire anyone to help you solve your debt problems check them out on line, then arrange a personal, in person meeting. At Hoyes Michalos we are happy to talk to you over the phone to answer your questions, or give you some ideas with our free, on-line evaluation, but all the technology in the world is no substitute for a personal meeting, so before you sign any paperwork with us, and before you pay us any money, we will meet with you in person to review your options and help you make a plan that’s right for you.
Have you ever heard those commercials where the “debt consultant” promises to “reduce your debt by 80%!” Sounds too good to be true, doesn’t it?
Have you actually called one of those debt consultants, and had them say to you “you need to hire us, and pay us a lot of money, because we only work for you; a bankruptcy trustee works for your creditors! They don’t care about you!”
Is that true?
You have debts, and you want to solve your debts without filing bankruptcy, but you’ve heard that a consumer proposal is just as bad as bankruptcy?
Is that true?
There are a lot of debt myths out there, and whenever I meet with anyone who has questions about these myths, I take the time to explain what’s true, and what isn’t.
Doug Hoyes in the 570 News studios
Unfortunately I can only meet with one person at a time, so it’s hard to dispel all of these myths.
I need a wider audience, and this Saturday I’ll have one.
I’m pleased to announce something new: for the first time ever, we’ll be doing a one hour live radio show that will be broadcast on the radio, and on the internet on video!
That’s right, you can “see us on the radio”.
On Saturday September 24 from 1:05 pm to 2:00 pm Ted Michalos and Doug Hoyes will be appearing live on 570 News, and we’re going to spend the entire hour talking about Debt Myths.
You can participate in many ways. You can:
Listen on the radio to 570 News;
Listen on the internet, at 570News.com (just click the Listen Live button);
During the show you can e-mail us a question, and my office will relay it to the studio; or
Send me a Tweet on Twitter @doughoyes and I’ll try to respond on air, time permitting.
If you want to learn more about how to deal with debt (or if you’re just curious to see what it looks like to “watch” a radio show), please join us this Saturday after the 1:00 pm news on 570 News for our inside look at Debts Myths.
The Office of the Superintendent of Bankruptcy released statistics for the number of insolvency filings in Ontario, and all of Canada in for the period ending June 30, 2011. At Hoyes Michalos we take great pride in being on the cutting edge of information about consumer proposals and bankruptcy, and our large team spent the day analyzing the numbers. Here’s what we found:
First, the good news. The total number of insolvency filings are down.
In the first six months of 2010 in Ontario there were 28,944 personal bankruptcies and consumer proposals filed. In the first six months of 2011 that number dropped to 26,473, a drop of 9%.
In all of Canada the overall decrease was 8%, so Ontario is representative of the national average. However, here’s where it gets interesting:
In Ontario personal bankruptcies in the first six months of this year decreased by 23% (from 17,314 to 13,406). That sounds like great news for the economy, but that was counter balanced by the increase in the number of consumer proposals filed, from 11,630 last year to 13,067 this year, and increase of 12%.
In the first six months of 2010, 60% of filings were bankruptcies, and 40% were proposals. In the first six months of this year it was much closer to a 50/50 split. What’s going on here?
Since Ted Michalos and I founded Hoyes Michalos back in 1999 we have always encouraged consumer proposals as an alternative to bankruptcy; the rest of Canada is starting to catch up, and is start to realize that in many cases a consumer proposal is a better alternative. Here’s why:
If you file bankruptcy, you are required to provide copies of your paystubs each month, and if you have surplus income as defined by the government, you pay more, and your bankruptcy lasts longer. That’s not a problem in a consumer proposal; once we negotiate a deal with your creditors, that’s it. No wonder people like consumer proposals.
Second, as the economy improves and incomes increase, consumer proposals (for the reasons noted above) become better alternatives to deal with your debts. If the economy continues to improve, it’s likely that the percentage of consumer proposals filed will continue to increase.
However, a word of caution: the percentage of consumer proposals filed has dropped as the year has progressed. In the first three months of this year there were actually more consumer proposals filed in Ontario than bankruptcies (6,586 to 6,567). In the second quarter bankruptcies were higher (6,839 to 6,481). Does that mean the economy is fading?
Perhaps, but we will have to wait a few more months to know for sure. In a bankruptcy you lose your tax refund, so if you are expecting a tax refund you may choose to wait until you get it for last year before filing (so you only lose one year and not two). That tends to cause an increase in bankruptcy filings in April, May and June.
How many proposals and bankruptcies were filed in your city? I’ve compiled a list of all of each commentary from all Hoyes Michalos team members, so click on your city to find out more:
And finally, for more on consumer proposals, this consumer proposals site is a feed of articles from around the web. We will continue to monitor events, and post new updates as further information becomes available.
So, you go to your barber and start talking to him about your debts – you’ve got lines of credit, credit cards, income taxes – you name it, you owe it. You talk some more and your barber says, you should file a consumer proposal. Go and see this guy. Great, your problem is solved. Then the barber says, “that will be $15 for the haircut and $750 for the financial advice…”
Would anyone out there pay him?
Of course not, but those same people will answer an ad for a “debt consultant”, meet with them a couple of times and then hand over hundreds, perhaps thousands of dollars to be told the same thing – you need to file a consumer proposal. Go and see this guy…”
“This guy” is a licensed trustee in bankruptcy. Here’s the foolish part – you can easily find a trustee on the internet or even in the phone book, you don’t need to speak to a debt consultant first, you certainly don’t need to pay a debt consultant a ridiculous fee. In fact, we have a list of all of our licensed Ontario bankruptcy trustees right here on our web site.
If you want proof – go and speak to the debt consultant, but before you pay them any fees or sign any agreements, call a trustee yourself. I’m willing to bet donuts to dollars that the trustee will give you similar, if not the same advice, and they won’t charge you a fee to speak to them.
If that sounds like too much work then simply ask the debt consultant if the procedure they are recommending for you is called a consumer proposal. If it is, ask them if they are a licensed trustee and can therefore provide this service. When they tell you that they are not, ask them what their fee is for?
It’s your choice and it’s your money, but it seems to me rather foolish to pay your barber hundreds, perhaps thousands of dollars to be told to go and see someone else…
The bankruptcy rate in Ontario dropped by 29% in 2010. Does that mean that the recession is over, and everything is fine? Not quite.
Douglas Hoyes, CA, Bankruptcy Trustee
It’s true that the number of personal bankruptcy filings in Ontario dropped from 66,935 in 2009 to 56,619 in 2010. That’s over 10,000 fewer bankruptcies, so yes, that’s definitely good news. However, before we start rejoicing at how great everything is, let’s consider three facts:
First, the level of debt we carry continues to increase. As I reported earlier this month, credit cards continue to create a financial abyss for “Joe Debtor”, the average person who files bankruptcy. As long as our debt levels remain at record levels, it’s inevitable that the number of bankruptcies will increase. They may drop for a year or two, but long term they can only increase.
Second, one of the reasons bankruptcies decreased was because the federal government changed the bankruptcy rules in September 2009 to make it more expensive to file bankruptcy if you have surplus income. The new rules also extended the length of bankruptcy, meaning you could now be bankrupt longer. As a result there was a surge in bankruptcies in the month leading up to the new rules, and then a corresponding drop off in the months after. If you compare 2010 to the record year of 2009, it’s not surprising that the numbers in 2010 dropped. However, the number of bankruptcies filed in 2010 is still higher than 2008′s numbers, so the trend remains up.
Third, while bankruptcies fell, the number of consumer proposals filed in 2010 increased substantially. In 2009 20,414 consumer proposals were filed in Ontario; that number increased by almost 16% to 23,619 in 2010.
Again, that’s not surprising. If bankruptcy is now more expensive and lasts longer, it’s natural for more people to file consumer proposals as a way to avoid bankruptcy.
Here’s my take on these results:
I’m pleased that the economy showed a slight improvement in 2010, and I’m pleased that the unemployment rate in Ontario remains lower than it is in the United States, and I’m glad our interest rates remain low. However, we can’t rely on low interest rates forever.
Our world is in turmoil, with protests against government happening in Africa and the Middle East, nuclear power problems in Japan, and of course a federal election in Canada in May. With this uncertainty we don’t know what tomorrow will bring. If this volatility causes upward pressure on interest rates, our debt service costs go up, and the economy slows down, and that’s not good for the average person.
That being said, I am pleased that consumer proposal filings are increasing. I meet with and talk to dozens of people each week, and almost every one of them is happy to avoid bankruptcy if possible, while still dealing with their debts. That’s a positive trend for the future.
Credit counselling, also called a debt management plan, may be a solution if you do not owe a lot of money to your creditors. It may also be a solution if you have fallen behind on your payments, or were unable to pay your creditors for awhile but feel you are able pay them in full now.
Janette Martin, North York Office Client Service Specialist
Here’s how it works: A credit counsellor will contact your creditors and help arrange a debt management plan that allows you to repay your debts in full over a period of time. This arrangement is voluntary and is not legally binding on you or your creditors. A credit counsellor is not able to settle your debts for less than the full amount owing, but is often able to negotiate a lower interest rate during your repayment period. A debt management plan will not work if you have a tax debt with Revenue Canada. A debt management plan will be reported to the credit bureau and will reflect negatively on your credit record.
If you feel that you have the ability to repay your debts in full but need help dealing with your creditors then your next step should be to contact a credit counsellor. Finding a reputable credit counsellor is not always easy. If you do an internet search for credit counselors in your area, you will likely get hundreds of hits. Word of mouth or a referral is a good way to find someone. We have a list of credit counsellors that we have dealt with personally, and we believe they are highly reputable.
When looking for a credit counselor, there are a few things to keep in mind. First of all, how much will you pay in fees? Is there an up front consultation fee? Annual or monthly “membership” fee? Monthly service fee? When you call to make your first appointment be sure to ask if there is a consultation fee.
Also, it is not a good idea to start making debt management payments until your credit counsellor has confirmation from each of your creditors that they are willing to participate in the program and exactly how much they agree to accept each month. I often meet with people that have entered into a debt management plan and after making several monthly payments, their credit counsellor contacts them to tell them that their monthly payment will need to be increased. This happens because one or more of your creditors did not accept the amount that the counsellor offered them initially and will only agree to your debt management plan if you increase your monthly payment. Beware of debt management scams where the debt consultant takes your money, but doesn’t actually do anything.
Is credit counselling a solution? Say you owe $15,000 to your creditors. If you decided to pay down this debt on your own over three years, you could expect payments of approximately $680 a month. If a credit counsellor could get all of your creditors to agree to stop interest and allow you to repay this debt over three years, you could expect to pay approximately $420 a month. Seems like a good solution. You know you can make payments of $420 a month because you are paying more than that each month to your creditors now. Unfortunately lot of people I meet with are unable to maintain their debt management payments because they underestimated the amount of money they have available after paying all of their living expenses.
A debt management plan is a good solution if you can afford to pay all of your debts in full, but just need a break on the interest. If you can’t repay the debt in full, a better solution may be a consumer proposal. A consumer proposal is a settlement of your debts and is legally binding on all your creditors, including Revenue Canada. A consumer proposal ensures that all of your creditors are treated fairly; one creditor does not have the ability to demand a higher payment than your other creditors. A consumer proposal can only be filed by a licensed Trustee; a credit counsellor cannot file it for you. The payments in a proposal on that same $15,000 of debt would be significantly less than a debt management plan, possibly as low as $200 a month for 36 months.
Understanding your options will help you pick the solution that works best for you. Since everybody’s situation is different and there are many factors to consider when deciding your best route, it is best to seek advice from a professional.
To find out if a debt management plan or a consumer proposal is right for you, please use our free, 10 second, on-line debt options calculator to review your options. Then call us at 310-PLAN (that’s 310-7526, no area code required, and that number works for all of our Ontario offices), or e-mail us today to arrange for a free initial consultation.
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