I am about to climb back on my soapbox.
This spring I talked about why everyone seems to be advertising consumer proposals. Some of these companies are very subtle in their approach. They may not mention the word consumer proposal but instead will talk about a Canada government debt relief program. Don't be fooled by this. The only debt relief program administered by the federal government is a consumer proposal.
To help clarify matters, today I am going to compare consumer proposals to some of the other services that are available and more importantly, being advertised to sound like consumer proposals. It is getting tricky out there with everyone promising to reduce your debt or your payments or both. The truth is, only a consumer proposal administered by a licensed insolvency trustee can deliver on these promises.
Let’s start by considering debt settlement companies. As recently as this past July, the Government of Ontario enacted new legislation to regulate - and presumably, greatly reduce - debt settlement activity in the province.
What is a debt settlement?
A debt settlement is an arrangement to repay your existing debt under new terms. The most common examples are to settle with your creditors for significantly less than you owe. The problem with these firms in the past was they charged all of their “professional fees” up-front, before they actually made any arrangements with your creditors. In almost every case, the creditors initiated collection and legal action before the debt settlement company even contacted them. Once legal action was started a settlement was no longer possible. Any fees you paid were simply lost.
The new debt settlement laws prohibit this practice. Instead, debt settlement companies get paid once the debt is settled and not before. Interestingly, almost all of them stopped operating as soon as the new laws were announced…
In their place, the debt settlement companies are changing into debt consulting or debt coaching firms. Now, instead of claiming to arrange a settlement, the companies charge you a fee to develop a plan to reduce your debts. The plan is called a consumer proposal which may only be administered by a licensed trustee.
The debt consultants charge you a fee and then refer you to a trustee to implement the plan. This is particularly unnerving because it's free to speak to a trustee in the first place.
What is a debt management plan?
Another solution that is being sold to the public is called a debt management plan, also known as credit counselling. In Canada there is a network of not-for-profit entities that offer these services. Many are small, local charities; a couple are massive national machines disguised as charities. Regardless, a debt management program is designed to reduce or eliminate any new interest charges on your debt. You still repay the debt in full, but without any new interest so that your payments are often lower and go directly to reducing the debt.
Unfortunately, in most cases, a person would be better off filing a consumer proposal than a debt management plan. This is true for a number of reasons:
- The impact on your credit report is the same for a debt management plan and a consumer proposal
- A debt management plan usually has no interest charges going forward – a consumer proposal never does.
- In a consumer proposal you repay a portion of what you owe – in a debt management plan you repay the entire debt. The most common amount repaid in a consumer proposal is about 1/3 of your debt, but it varies depending on your circumstances. 1/3 is certainly less than 100%.
It is easy to see why a consumer proposal is a better solution than a debt management plan. In response to this, the massive national credit counselling agencies I referred to earlier, simply refer many of the people that contact them directly to a licensed trustee to file a consumer proposal (but not before taking a fee).
If anyone is offering to reduce your debt or your payments or both, ask them how they intend to do so. Specifically, ask them if they are going to recommend that you file a consumer proposal and if they are, ask if they are a licensed trustee or an employee of a licensed trustee’s firm. If they are not, ask them why you should pay their fee when the trustee is the person you need to speak to and the trustee will see you for free. It should make for a short meeting.
At the end of the day, you have to do what makes the most sense to you. I encourage everyone to investigate every option before they make a decision about how best to deal with their debt. My only real caution is not to agree to pay any fees for “middle men” – make sure the people that you are speaking to can actually solve your problems, not simply refer you elsewhere for a price.