Debt Consultants: Why You Should Avoid the Extra Cost

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Posted in Debt Help
Posted by J. Douglas Hoyes, CA, CPA, LIT, CIRP, CBV

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For the first time ever, the federal government has issued a scathing report, saying that it appears that debt consulting firms are taking advantage of vulnerable consumers.  They charge large up front fees, but in many cases they don’t actually provide a service; they simply refer customers to a Licensed Insolvency Trustee.

Debt consultants charge consumers a fee for their advice. It sounds reasonable as many professions do that, except for the fact that they aren’t experts in the field of insolvency. Only a Licensed Insolvency Trustee can file a bankruptcy or consumer proposal on behalf of consumers in Canada. This means that only Licensed Insolvency Trustees have the thorough knowledge of the process and have a proven track record of helping people through an insolvency.

Debt Consultants: Upfront and Impersonal

Many people seeking advice from debt consultants have been hit with a pretty hefty price tag. If they found the information helpful, then it was worth it. But it’s also worth knowing that many debt consultants charge you for information you can get for free from a Licensed Insolvency Trustee.

In addition to charging upfront fees that are then pocketed by the debt consultant, they also push a one size fits all solution. Instead of impartially weighing your options, debt consultants will push you to the track that they profit off of. For the most part, that’s when they refer you for a consumer proposal. They’ve got a guy for that – in fact, they have 50.

For approximately 50 LITs within these 13 firms, more than 40 % of their Division II filings [consumer proposals] were sourced from these debt consultants.

The OSB is initiating a series of amendments over the next year that will address the risks and issues associated with debt consultants involvement in the insolvency process. Hoyes, Michalos & Associates does not generate business using leads from debt consultants. We also have personalized solutions for each client as each person’s financial situation is different. In many cases, people who come to speak with our team (for free), don’t end up filing a consumer proposal or bankruptcy.

How Can You Protect Yourself?

Our recommendations are simple. Know who you’re dealing with, and make sure to ask the right questions.

  • Do not pay any upfront fees
  • Do not sign a contract to pay anything until you have met with a Licensed Insolvency Trustee
  • Only deal with the Licensed Insolvency Trustee
  • Ask what fees you are being charged, and what you are paying for with those fees
  • When in doubt, seek a second opinion from another Licensed Insolvency Trustee

Always ask whether or not the person you’re dealing with is a Licensed Insolvency Trustee. If you’re uncomfortable being so direct, the OSB has a LIT registry that lists off all LITs in Canada.

Resources mentioned in today’s show:

FULL TRANSCRIPT show #143 with Ted Michalos

debt-consultants-why-you-should-avoid-the-extra-cost-transcriptDoug Hoyes: For the first time ever, the federal government just issued a bombshell report saying that it appears that two very large debt consulting firms in Canada are taking advantage of vulnerable consumers. Let me repeat the three most important parts of what I just said, debt consultants taking advantage of vulnerable consumers.

Civil servants don’t like to point fingers. So for the government to actually put this in writing makes this easily the most amazing report ever issued by the OSB.

Today, I’m joined by my Hoyes Michalos co-founder and business partner, Ted Michalos. So, Ted, you ready to say something that you’re going to regret later today?

Ted Michalos: Thanks. Unlike the civil servants, we’re quite happy to point fingers.

Doug Hoyes: [laughs] So, well, let’s get to it then.

Ted Michalos: Let’s see how it goes.

Doug Hoyes: So here’s the background. The Office of the Superintendent of Bankruptcy, the OSB, which is a division of the federal government is responsible for regulating all Licensed Insolvency Trustees in Canada. That’s Ted, and me and all of our Hoyes Michalos trustees. They enforce the rules and if we don’t comply, we could lose our licence and be out of business. So it’s serious business but it’s pretty rare that the OSB actually takes away someone’s licence. It happens maybe once or twice a year, so it’s rare.

Usually, if a Licensed Insolvency Trustee makes a mistake the OSB works with them to correct the issue. We deal with the OSB all the time and, for the most part, they’re quite reasonable, wouldn’t you say, Ted?

Ted Michalos: That’s a safe comment.

Doug Hoyes: So what has these reasonable government employees so riled up? Well, on April 28th, 2017 the Office of the Superintendent of Bankruptcy issued a report saying that some Licensed Insolvency Trustees have questionable relationships with debt consultants and that it’s costing consumers thousands of dollars.

Now, this doesn’t come as a surprise to Ted and I. We’ve been talking about this for years.

Ted Michalos: [laughs]

Doug Hoyes: In fact, I’ll put a link in the show notes to a YouTube video we filmed of a radio interview we did back in 2011, so that’s six years ago, where we talked about this exact issue.

So, Ted, before we review the OSB’s report let’s start with the definition, what is a debt consultant?

Ted Michalos: All right. So there’s no hard and fast definition for this. We all use it in different ways. I think what the government is saying is debt consultants are unlicensed professionals that are charging people fees to get the same sort of information or advice that they could get from a Licensed Insolvency Trustee for free. So they’re people that are specializing in accessing people’s fears. You don’t want to call a Licensed Insolvency Trustee because it’s scary but you will call somebody who says, “I can help you avoid bankruptcy and get rid of your debts.”

Doug Hoyes: Yeah. And you said the key word there which is “fees”. These are people who charge fees and we’re going to throw some numbers around.

Ted Michalos: And they can be really big fees.

Doug Hoyes: Because … yeah.

Ted Michalos: If you want to get me going, we can have some fun with that.

Doug Hoyes: Oh, we’ll get you going. I’ll quote some numbers in a minute.

Ted Michalos: [laughs]

Doug Hoyes: So why does the OSB care about this then? It’s … they licence us, Licensed Insolvency Trustees, obviously they don’t licence unlicensed debt consultants. So why is this an issue for the OSB?

Ted Michalos: Well, a consumer doesn’t recognize that they’re even is a difference here. So if somebody says they’re a debt consultant, they sound they’re some sort of professional and they’re assuming that somebody is regulating them, with some kind of controls, when in fact there are none.

So Licensed Insolvency Trustees, our obligation is to present an honest and objective analysis. So when we talk to somebody we’ll show them all their options, we’ll tell them these are the things that you can do, these are the ramifications of doing them.

Well, if I was just some person being paid a fee for landing new customers I might not be as forthright or honest. In fact, I know that they’re not. So if the only way I make a fee is if I convince you to do a certain procedure, I’m going to sell you to do that certain procedure.

Doug Hoyes: Yeah, whether it’s the right thing for you to do or not.

Ted Michalos: Right.

Doug Hoyes: So how big a problem is this? How prevalent is this association between Licensed Insolvency Trustees and debt consultants? So let me quote a few sections from the report. And this, again, the government report I’m quoting, I’m not giving you my opinion, this is from the government. “In 2016, in 17 percent of all Division II filings” … that’s a fancy word for consumer proposal …

Ted Michalos: Right.

Doug Hoyes: … “the debtor reported having paid for financial advice before being directed to an LIT.”

Ted Michalos: Right. So that means they spoke to somebody else first and they actually paid a fee for it.

Doug Hoyes: “Fifty-seven percent of 2016 consumer proposal filings” … and, again, I’m quoting from the government report here … “for which prior financial advice was reported were received from LITs who had relationships with two large-volume debt consultants.” So this is not some little, tiny conspiracy here where one guy, you know, meets a couple of people.

Ted Michalos: No.

Doug Hoyes: This is a very coordinated, very large, in essence, attack on the insolvency system.

Ted Michalos: Well, and let’s not hide stuff in all the percentages. So 17 percent of people paid a fee, more than half of those people paid it to two specific companies. So you’re talking about five or six thousand people paid one of these two companies an awful lot of money for advice actually that you can obtain for free.

Doug Hoyes: Well, let me quote one more time from the report.

Ted Michalos: Yeah.

Doug Hoyes: “Thirteen LIT firms,” that’s trustee firms, “including one national-level firm were found to have one or more LITs operating in a frequent and sustained relationship with the two large-volume firms.”

Ted Michalos: Yeah.

Doug Hoyes: And, now, the report does not name names, so I do not know for a fact which large national-level firm they’re talking about.

Ted Michalos: Do you think they use initials in their name?

Doug Hoyes: Well, it could be.

Ted Michalos: [laughs]

Doug Hoyes: And, I mean, because frankly there are all only one, or two or three large national level firms, so it wouldn’t be … isn’t too hard to figure out who it is.

Ted Michalos: Right.

Doug Hoyes: But, again, this … it brings the whole system into disrepute when the two big guys are in effect colluding to, you know, not provide great advice for vulnerable consumers.

Ted Michalos: Yeah.

Doug Hoyes: So, again, the takeaways from these findings, only 17 percent of proposals are affected by this. Well, I don’t know, is that a low number or a high number.

Ted Michalos: Yeah, I think … well, that’s … that report being affected by it.

Doug Hoyes: Right, that report being affected by it. Sixty-four percent of those files involved just two large debt consulting agencies, 13 LIT firms. And these are cases where the debtor unnecessarily paid for consumer proposal advice before talking to a trustee.

So let’s bring this home then. Why should someone … why would someone … let’s start with that. I think you, kind of, already addressed this. Why would someone contact a debt consultant before contacting an LIT?

Ted Michalos: Let me give you a story, somebody that came in to see me last week.

Doug Hoyes: Client stories, here we go.

Ted Michalos: So it’s a married couple, they were in their … if I had to guess, they were in their fifties. They went to see … they answered one of those ads that said you can avoid bankruptcy, we can help you deal with your debts, we can reduce them up to twenty percent. Sounded great, they went in and they sat down with a person.

And the approach was very friendly, right? It was … there wasn’t pressure involved, what it was “We can help you deal with your debts. Yeah, we can do all of that stuff. Here’s the first step, you know, give me $500.00 today. I want you to start out with some paperwork and we’re going to set you up a meeting next week with somebody else.”

All right. They went to the second meeting and it was, “All right, we think you need to do this and, in fact, we need another $500.00 payment and then we’ll get you started by referring you to the third guy.” The third guy was going to be a Licensed Insolvency Trustee but they didn’t know that at the time.

So they had two meetings, were supposed to pay a thousand dollars to meet with some guy to solve their debts. The reason they contacted them in the first place was … wasn’t … there wasn’t the intimating I’m meeting with a Licensed Insolvency Trustee, we used to be called bankruptcy trustees which was probably worse. But it was I’m just meeting with a guy who’s a debt consultant, I specialize in helping people solve their problems, as straight forward as that.

When they got in there they realized that, wait a minute, something about this doesn’t quite sound right, “Five hundred bucks and I can do away with my debts?” They owed $50,000.00, by the way. “Now we need another 500 bucks,” “Well, wait a minute, what was the first $500.00 for?” “Well, that was so we could meet with you and get you started,” “Well, what’s the second one for?” “Well, because we’ve got to get all this stuff ready and …” I mean, they just became suspicious because of the way this thing was unfolding.

And, to their credit, they did a little homework on the internet and they discovered, “Well, wait a minute, these guys aren’t Licensed Insolvency Trustees, these guys … they’re nothing, I mean, they’re not regulated by anybody, they’re asking us for a fee and now they’re sending us to this third guy.”

Doug Hoyes: Yeah, and to put it in perspective, so let’s say I’ve got a problem with my car.

Ted Michalos: Okay, you have a problem with your car.

Doug Hoyes: Thank you. So I’ve got a couple of choices, I can go to a, you know, certified class A mechanic … I think that’s what they’re called, right?

Ted Michalos: Yeah, yeah.

Doug Hoyes: And he can … he or she can take a look —

Ted Michalos: Unless they work for Canadian Tire, then they’re something else.

Doug Hoyes: Then it’s a different story. So they can take a look at my vehicle and tell me what’s wrong or I could pay an automotive consultant who isn’t a class A mechanic, who’s just some guy who could say, “Yeah, I think you need this, this and this,” I could pay them a fee and then go to the expert. Well, does that make any sense?

Ted Michalos: Right, just … well, you know, the perfect commercials are those LifeLock guys, right, “Oh, I’m not a dentist, I’m a dental monitor,” you know, you don’t want to talk about —

Doug Hoyes: I have not seen those. I have not seen those commercials.

Ted Michalos: It’s on TV. You go down, you sit down and the fellow, “Yeah, you got a really horrible cavity, I’m going to lunch now,” “Aren’t you going to fix it?” “Oh, I’m not a dentist, I just tell you that you have a cavity.”

Doug Hoyes: Yeah. And so if I’ve got a medical problem wouldn’t I just go right to the doctor, like, doesn’t that kind of make sense?

Ted Michalos: Right.

Doug Hoyes: So what you just described there then is exactly our problem with what debt consultants do, you go to someone who isn’t licensed, doesn’t have the training and the expertise, they charge you a bunch of money and all they’re actually doing is referring them to a Licensed Insolvency Trustee —

Ted Michalos: Right, correct. What they’re doing is they’re identifying that you’ve got more debt than you can deal with and they think you make enough money every month that you can afford to pay some fees to deal with those debts. So they’re not trying to determine if this is the best solution for you or even the right solution, they’re trying to determine do you fit their criteria for somebody that they can sell this product to.

Doug Hoyes: And so how does this differ from what we do?

Ted Michalos: All right. So as a Licensed Insolvency Trustee … more than half the people I speak to don’t end up having to file, so they don’t need to file a proposal to the creditors or file a bankruptcy, what they need is somebody to help them analyze where they’re at. So a Licensed Insolvency Trustee will consider your finances, so what do you own, who do you owe, how much income do you have coming in, what are you spending every month and then is there a way to solve this problem through the various tools that we have.

The first tool is can we just help you with your budget? Well, there aren’t any fees involved with this, this is helping you help yourself or should you be refinancing. In the current real estate market, it’s amazing how many people are just going out and getting second mortgages. And we can do a show on that, I’m sure.

Doug Hoyes: Oh, in fact I’m …

Ted Michalos: We probably have.

Doug Hoyes: … pretty sure last week’s show as on real estate. So the point is we’re not charging any upfront fees.

Ted Michalos: Right. And if we did we would get in trouble. I mean, that’s one of the advantages of dealing with somebody that’s regulated by the government, we’re not allowed to charge you upfront fees. If we do, we’ve got to disclose them to everybody and they come out of any eventual fees that we’re allowed to collect for the work we are licensed to do.

Doug Hoyes: Yeah. So if you were to do a proposal, and you’re going to file it next month and you gave us $500.00 today, we would have to take that $500.00 and put it towards your proposal payments.

Ted Michalos: Correct.

Doug Hoyes: It’s pretty much that simple.

Ted Michalos: And the debt consultant puts it in their pocket.

Doug Hoyes: So there’s a huge difference there. Well, we’re now hitting into the idea of the actual dollars involved. So, again, let me, you know, pull out the government’s report and read you a couple of paragraphs here, because this is kind of amazing. “Costs of insolvency for consumer debtors. Debtors” … and, again, I’m quoting from the government’s report here, these are not my words, not my opinions. “Debtors served by LITs who had ongoing relationships with debt consultants usually ended up paying thousands of dollars more for the administration of their insolvency than debtors who were not sourced through a debt consultant.”

Ted Michalos: Yeah, that makes sense, because you’re paying somebody twice.

Doug Hoyes: Like, that’s not hard to understand there, is it?

Ted Michalos: Right.

Doug Hoyes: They are paying thousands of dollars more. “Typically, debt consultants required a consumer debtor to sign a fee agreement for consulting services prior to being introduced to a selected LIT. Debtors typically understood the role of the LIT as being limited to meeting with the debtor to file the proposal developed by the debt consultant.”

Ted Michalos: Right.

Doug Hoyes: So and, again —

Ted Michalos: And that’s completely backwards the way that the system is supposed to work.

Doug Hoyes: That’s completely backwards. And so, again, we can talk about clients we’ve dealt with. And you, kind of, described it pretty well with the clients you met with recently, they go the debt consultant and the debt consultant says, you know what, the trustee is bad.

Ted Michalos: Well, the trustee doesn’t represent you.

Doug Hoyes: The trustee does not represent you, right.

Ted Michalos: The trustee’s not there to help you, the trustee’s there to make money.

Doug Hoyes: That’s right, the trustee is just there to make money. And, in fact, they’ll often say the trustee represents the creditors.

Ted Michalos: Right.

Doug Hoyes: And the reason they say that is you’re going to pay the trustee money and the trustee is going to give that money to the creditors, obviously, therefore they’re working for the creditors. Whereas me the debt consultant I only work for you, I don’t care about anything other than you, so you’re paying me as this unbiased advocate for you.

Ted Michalos: Yeah.

Doug Hoyes: What’s your response to that?

Ted Michalos: Well, the problem with that is that there’s very little advocacy going on. So the concept behind being an advocate is that you’re in somebody’s corner, you’re going to fight for them. There’s very little fight involved here. They get you to fill out some paperwork, they’ll forward that to the LIT that they have the relationship with and that’s what they’re going to do.

The LIT will tell them this is what needs to be offered for the creditors to agree. There’s no secrets here, there’s no magic, you know, you’re not dealing with a guy who knows something more than anybody else on the street.

Doug Hoyes: Well, but what about the argument that you work for the creditors?

Ted Michalos: Yeah, and we’re officers of the court, so we have a fiduciary responsibility to everyone involved, anyone who’s involved in the insolvency process, the individual that’s in trouble, the creditors that are receiving the payments from the trustee, the Office of the Superintendent and the courts. We have to maintain this middle of the road.

The analogy I always use is we’re referees. So think of us at … as a hockey game, right, we’re the guys who enforce the rules. We don’t write the laws, we tell you if you’re offside, if you’re onside. And it’s the same for either team, we don’t look at one side or the other. If we do, we’re not doing our job, you won’t have us back as a referee.

Doug Hoyes: Right. And that’s a key point. Upfront we tell you here are the rules, here are how they work, so you know what you’re getting yourself into.

Ted Michalos: Right.

Doug Hoyes: And this whole notion that we work for the creditors, well, no. Ultimately, you come to us, you select us to be your LIT and if we do a lousy job you’re going to be telling all your friends that we did a lousy job. If we treat you fairly and get the result that you want, you’re going to be telling all your friends that it worked out great. We’ve been in business since 1999 so that’s, what, eighteen, nineteen years now.

Ted Michalos: Yeah.

Doug Hoyes: And a lot of our work is referral work. People have dealt with us, they send their friends and their family members. So I can, pretty much, guarantee you the debt consultants aren’t getting a lot of referral work.

Now, let me read another paragraph, because this will blow your brains, from the … again, from the government report. “In the cases reviewed, the amount of the consulting fee portion of the agreement between the consumer debtor and the debt consultant averaged approximately $2,400 and reached as high as $4,200.” Like, what more do I need to say about that?

Ted Michalos: Right. So what you need to understand, anyway, listening to this is that what the OSB is doing here is trustees are paid a portion of what you pay to your creditors as an administrative fee. And they’re saying whatever you pay to this debt consultant before you pay any proposal payments is now an additional pure fee and they’re right.

So I’ll give you a numeric example. You’re going to pay back $20,000 on $60,000 worth of debt, about a third and that’s a pretty typical proposal.

Doug Hoyes: Typical proposal, yeah.

Ted Michalos: The fees on that $20,000 are going to run about 4,500 bucks, somewhere in that … does that sound right, 20, 18, 36 … no, about $5,100. There aren’t any upfront fees, that’s what the trustee will get paid over the four or five years while you pay it out.

If you went to a debt consultant first, they would charge you … probably on that size of debt, $1,500, three payments of $500 each. So now instead of paying fees of $5,000 you’ve paid fees of 6,500. So have you got so much money in your pocket that you can afford to pay an extra 1,500 that you didn’t have to pay. That’s really the question.

Doug Hoyes: It’s crazy. Well and let me read you one more sentence from the government’s report, “For lower-value proposals” … so that would be a, you know, proposal where maybe the total payments are 10,000, 15,000 something like that …

Ted Michalos: Right, right.

Doug Hoyes: … “the consulting fee commonly ranged from 20 to nearly 40 percent of the value of the proposal.”

Ted Michalos: Sure, because if you were paying back $10,000 … so let’s say you owed about 30 … the fees for that would be somewhere in the neighbourhood of $3,200. If you paid $1,500 in consulting fees up front, now you’re paying $4,700.

Doug Hoyes: But and to pay 40% more for something and get zero extra value is crazy.

Ted Michalos: Right.

Doug Hoyes: It’s like, well, you can go to this place and get your oil changed for a hundred bucks or you can go over there and pay a hundred and forty. Okay, if it’s the same thing, I think I’ll take the hundred, thank you very much.

Ted Michalos: Yeah. Well, and people have to understand that … this may come across as sour grapes because we have a bias, because we’re the Licensed Insolvency Trustees and we don’t deal with these guys. But the reason we don’t deal with these guys is because, frankly, I think they’re crooks. I mean, if you can get advice … competent advice for free or go to a not-for-profit and maybe they charge you 10 bucks … well, talk about that some more … what’s the point in paying somebody $1,500? Like, I just don’t get it.

Doug Hoyes: Yeah, their argument is we are looking out for you. And so you go to the trustee and the trustee is going to say, “Well, you need to file a proposal where you pay $300 a month for five years. Do you know what, you really only need to pay $150 a month.” The trustee is charging you more money because they make more money.

Ted Michalos: Right.

Doug Hoyes: But, guess what, it’s the creditors who vote on the proposal. So if we recommend that you file a proposal and pay 300 bucks a month, we can offer a proposal of $150 but the creditors are going to say, no, we want more money, we do a couple of hundred of these every month.

Ted Michalos: Right, yeah.

Doug Hoyes: And we’ve been doing them for years and years and years.

Ted Michalos: Right. So we keep track of what creditors vote which ways and what their minimum expectations are.

Doug Hoyes: Yeah. We’ve got a very detailed internal system … and you can’t see it because this is a radio show … but on the other side of these walls here we’ve got a group of six people who do nothing but proposals and they keep track of every single one we do. So if someone comes in to see me and they say, okay, I owe money to the Royal Bank, or to Canadian Tire or CIBC or whatever we can go … look in our system and see all the previous votes that company has done.

Ted Michalos: Right.

Doug Hoyes: And we know that, you know what, they’re going to look for this particular term, they want thirty cents on the dollar, they want fifteen cents on the dollar, whatever. So a debt consultant doesn’t have access to that kind of information.

Ted Michalos: Well, they never actually interrelate with the creditors.

Doug Hoyes: They never talk to them, no.

Ted Michalos: I mean, that’s the other part of this thing that really drives me crazy is they’ll tell you when you come see them, stop making your payments, stop answering the phones, oh, don’t worry about those collection letters. The reason they’re doing that is once you stop dealing with any of these … your debts in the normal course of business you’re pushing yourself down a road.

And so you’ve talked to the debt consultant, they’ve told you to do all these things but you haven’t made your decision yet how you want to solve the problem. Well, they’re forcing you into a decision. Once you stop making those payments it’s not like you can catch them up again.

So now you’re two months down the road you haven’t made a decision and somebody’s threatening you with a lawsuit. Well, it’s too late to just try and negotiate, or budget or do something else, you need a real solution and they’ve got you. They’ve got a hook in you now, they’re going to say, “Well, look, we’ll get you in to see our guy really quickly. You got to pay us that fee and get it done.”

Doug Hoyes: Well, it’s kind of like going to a real estate agent and saying, “I want to buy a house,” and they say, “No problem, we can get you a better deal on a house.” So I’ve got two different real estate agents who I’m thinking of hiring and one of them says, “We can get you that house for $300,000,” and the other one says, “No, that house is worth $450,000” okay, I guess I’ll go with the $300,000 one.

Ted Michalos: Right.

Doug Hoyes: I put in my bid at 300,000, well, guess what, it gets rejected. The buyer has no obligation to take something that’s well below market value.

Ted Michalos: Right.

Doug Hoyes: I mean, again, let me read from the government’s report. “The OSB took a look at proposals and the OSB’s comparison of the data identified a consistent difference in the frequency of files with very low proposed values,” that’s just what I just talked about, underbidding on a proposal.

Ted Michalos: Right.

Doug Hoyes: “LITs working with debt consultants filed five-year consumer proposals with payments under $100 per month about 14 to 19 percent of the time, this compares with only 4% of such proposals filed by the control group of LIT.”

So in your experience, Ted, I mean, okay, would you say that, yeah, it’s probably less than 4% where we’re doing a proposal, that’s four hundred … or a $100 a month or less?

Ted Michalos: Right. Yeah, I mean, the reason that somebody does a proposal that size is that, well, they’ve been … they’re afraid of the whole idea of a bankruptcy. And I don’t want to turn this into a bankruptcy versus proposal thing. But if you are on social assistance or a fixed income, limited means and somebody convinces you to pay $75 a month for five years when you could pay probably less than $100 a month for nine months who are they helping. I mean, they’re putting money in their pocket because they put you into a proposal, they got to charge you a fee. Probably the right answer for that person was a bankruptcy but that’s not what this show is about.

Doug Hoyes: Yeah, a bankruptcy or doing nothing. And, as I said earlier in the show, these debt consultants, overwhelmingly, are recommending consumer proposals.

Ted Michalos: They are because, in most cases, they don’t … they can’t charge any sort of a fee or … yeah, a consulting fee if you’re going to do a bankruptcy. So if the correct answer is that you need to file bankruptcy it’s hard to justify paying them $1,500 when the bankruptcy itself probably only costs $1,800.

Doug Hoyes: Yeah, the typical bankruptcy would do, if you have no surplus income, no assets, you’re probably paying a couple hundred bucks a month for nine months.

Ted Michalos: Right.

Doug Hoyes: The average fee that a debt consultant charges is $2,400, the OSB said that.

Ted Michalos: Yeah.

Doug Hoyes: So why would you pay $2,400 to a debt consultant who is doing nothing and then actually only pay the trustee $1,800, it makes no sense.

Ted Michalos: Right.

Doug Hoyes: They have to justify their fees and the way they do that is by putting you into a proposal, making a low-ball offer. And then of course what happens, the creditors come back and say, “Well, we’re not accepting four cents on the dollar, that’s crazy,” and then who gets blamed for it, oh, it’s the LIT, the debt consultant says, “Oh, sorry, I’m out of the picture now.”

Ted Michalos: Yeah. Well, and a worse example … so let’s say the creditors do agree to it, you get three years into paying $75 a month and you stop paying because it’s … you … it just wasn’t sustainable. Well, your bankruptcy would have been over a year and a half ago, you would have had all that money in your pocket and now you’ve got to file bankruptcy anyway because the proposal … you weren’t able to complete it. I mean, the debt consultant really doesn’t care because they got their fee upfront, they got their first transaction in. Once you’re … once they’re through with you it’s … I mean, they’re on to the next guy.

Doug Hoyes: Yeah. And the way we get paid … and, again, our fees are licensed by the federal government, regulated, every LIT gets the same percentage of the pot in a proposal, we get paid as we send money to the creditors.

Ted Michalos: Right.

Doug Hoyes: So the creditors accept the proposal and then every few months we’re sending them what’s called a dividend, a payment towards the debt, we get our fee at that point. So if the creditors vote no on the proposal we’re not getting paid, if we make the proposal too onerous that you can’t afford it and it fails we’re not getting any further payments after that point.

Ted Michalos: And, of course, the debt consultant was paid in full before they referred you to actually file the proposal.

Doug Hoyes: Yeah. So whether it works or not —

Ted Michalos: So their money has come and gone.

Doug Hoyes: Yeah, they don’t care whether it works or not. So okay. Before we get to the practical advice section of the podcast, I want to discuss what the OSB is actually going to do about this and what you think they should do.

So I’ll tell you what they say they’re going to do. They’ve issued this as a … kind of, a moral suasion, let’s throw it out there. From the OSB’s report they say that, quote, “Over the next year the OSB will initiate a series of amendments to OSB directives, BIA forms and compliance programs to address the risks and issues identifies … identified in this report. Areas of focus will include fulfillment of the LIT’s responsibilities and all aspects of the insolvency process,” et cetera, et cetera. So they’re saying that “we’re going to make some tweaks”.

Ted Michalos: Right.

Doug Hoyes: Okay. I guess making some tweaks is better than doing nothing. I mean, if there’s some murderer running around I don’t know if tweaks is the answer but —

Ted Michalos: But one of the challenges they have is the largest firm in the country is guilty of this, so …

Doug Hoyes: Yeah. As they said, that’s in their report that it’s a large and a —

Ted Michalos: So it would be interesting to see how they tweak the largest firm in the country.

Doug Hoyes: Yeah. It’s kind of like a banking regulator, knowing that the biggest bank in Canada is doing bad stuff, well, what are you going to do, shut down the biggest bank in Canada, that’s kind of hard.

Ted Michalos: Yeah. And that was just an example, we don’t know if the biggest bank in Canada is doing bad stuff. [laughs]

Doug Hoyes: No, no, I’m sure they’re perfectly reasonable people and doing everything fantastically but …

Ted Michalos: [laughs] Certainly.

Doug Hoyes: Okay. So what the OSB is saying is “we’re going to make some minor tweaks”.

Ted Michalos: Right.

Doug Hoyes: What do you think they should do? This is a very serious problem, they’ve identified the fact that consumers on average are paying $2,400 to these debt consultants who do nothing.

Ted Michalos: Well, it’s better than that. They can tell from filing patterns which trustees or which Licensed Insolvency Trustees are doing this. So, for example, if a trustee doesn’t have an office in St. Catharines and they’re doing 25 new files a month in St. Catharines, probably they’re getting work referred to them from somewhere, right?

Doug Hoyes: How is that possible, yeah.

Ted Michalos: They haven’t got an office but they’re doing all that work. So they easily know who it is that’s guilty of this. If a trustee does 95% of their files are consumer proposals and very few bankruptcies, well, probably they’re not seeing the public themselves, they’re getting their work referred to them.

Doug Hoyes: Because, on average, most trustees it’s a relatively even split between proposals and bankruptcy.

Ted Michalos: Yeah, pretty even split. And, intuitively, that’s what it should be. So, if you’re giving people the right advice, either you can help them without filing anything, or half the time they’ll file a proposal to repay part of the debt or half the time, you know what, file the bankruptcy, get on with your life more quickly.

If a debt consultant is not getting the fee for bankruptcies or telling them they don’t need any help, well, you know what they’re going to sell them. What should you do, the biggest single thing, don’t pay any fees up front.

Doug Hoyes: Well, but I’m asking —

Ted Michalos: If anybody … well …

Doug Hoyes: And we’ll get into that.

Ted Michalos: What can the OSB do.

Doug Hoyes: What should the OSB do?

Ted Michalos: Oh, that’s right, yeah.

Doug Hoyes: What should the OSB do. So I’m appointing you the superintendent of bankruptcy now.

Ted Michalos: Well, that’s great. Woohoo.

Doug Hoyes: That’s great, you’re the new guy.

Ted Michalos: Oh, and I want my eight weeks vacation. That’s a different conversation.

Doug Hoyes: Yeah. So what —

Ted Michalos: Do I get a pension?

Doug Hoyes: Yes, you get a pension. So what should they be doing?

Ted Michalos: All right. Well, again, so they can identify easily who they think are the … I’m going to call them the guilty LITs, the people that are acting in a way that’s not —

Doug Hoyes: The guilty parties. Okay, so they’ve got this list, they know who’s doing it.

Ted Michalos: — correct. Yeah, right. So the first thing they should do is moral suasion, okay, we know who you are, we’ve identified you, fly right.

Doug Hoyes: And that’s exactly what this report is.

Ted Michalos: Right, so that’s the first step.

Doug Hoyes: I mean, this is the first shot, the shot across the bow.

Ted Michalos: Yeah. So the second step is, if somebody’s not smart enough to pay attention to that, well … they call it a Chinese customs inspection. So the example is you send a load of produce into China and they’re not going to ban its arrival but it will sit on the docks until it’s rotten and then they’ll release it.

So the trustee, they just … all of our trustees fees have to be approved by the Office of the Superintendent before we can actually complete a file. So they could just slow down the paperwork and … it doesn’t have to be anything … what’s the word I’m looking for …

Doug Hoyes: Yeah, gum up the works is what you’re talking about.

Ted Michalos: Yeah, right.

Doug Hoyes: So what you’re talking about in a bankruptcy there’s a letter of comment that’s issued at the end of the file and that’s when we can draw our final fees. Well, right now for us that happens pretty much automatically, we push a few buttons on the computer, a few minutes later —

Ted Michalos: Comes right back.

Doug Hoyes: — comes right back.

Ted Michalos: Yeah.

Doug Hoyes: But, yes, they could do a manual review and it could take weeks, weeks or months.

Ted Michalos: And with a proposal they could … just they could simply start reviewing proposals.

Doug Hoyes: Well, they could request creditor’s meetings.

Ted Michalos: Yeah.

Doug Hoyes: And, in fact, they have been doing that in … we … you know, the discount clauses issue, which we’re not going to get into because we don’t have the time for that and it’s already been solved. But that’s exactly what they were doing. They identified an anomaly.

Ted Michalos: Right.

Doug Hoyes: And so they said whenever they see that anomaly we’re going to request a creditor’s meeting. And in most cases, in most consumer proposals we do there is no creditors meeting or, if one is required, it’s just a paper thing, you know, here, sign a piece of paper.

Ted Michalos: Right, it’s done by fax and email.

Doug Hoyes: Done by fax, nobody actually shows up. But the OSB could say “we are going to chair all those creditors meetings”.

Ted Michalos: Yeah.

Doug Hoyes: So for that big trustee firm that’s doing this and for those LITs that we know are getting most of their work from these guys, let’s have creditors meetings for every single one of your files.

Ted Michalos: And that dramatically increases the cost of the LIT doing the work, because we don’t get paid by the amount of time we put into a file. We get paid a percentage of the money that’s flowing through. So if suddenly have to do an extra five or six hours worth of work the file isn’t profitable anymore.

Doug Hoyes: Especially on … and it’s a real hassle for the debtor because now you got to take a day off work, you got to show up at this meeting, you got to answer questions —

Ted Michalos: Yeah. And there’s anxiety, why am I having a meeting, my friend did one of these with Hoyes Michalos down the road and there was no meeting.

Doug Hoyes: Hoyes Michalos. Everything was fine. They could also do examinations of the debtor.

Ted Michalos: Yeah, to find out how much did you pay and was it properly disclosed. But here’s the … I mean, if they really want to do something about this, if they find out that a fee was paid to a debt consultant they have the right to have it deducted from the trustee’s fees in the file. And so, suddenly, it’s not the consumer paying the fees up front, it’s the LIT paying the fees. And I think that would dramatically change things too. Because if you … if I was going to get paid $4,000 worth of fees on a proposal and I had to pay $2,400 … or had $2,400 deducted because I paid a consultant first, I don’t know that I would do the file.

Doug Hoyes: It gets to the … well, and if it was a $2,400 fee and the $2,400 deduction, you’re working for free.

Ted Michalos: Well … right.

Doug Hoyes: So at some point it doesn’t make any sense. Well, and I guess the other thing they could do is actually print a list of the offending parties.

Ted Michalos: Sure. I mean, if they published a list saying these are the guys that are performing this practice, without saying good or bad, just saying these are the people that are using debt consultants —

Doug Hoyes: These are the facts.

Ted Michalos: — you can decide for yourself if it’s worth the money.

Doug Hoyes: And you think word would get around pretty quickly, consumers would go, okay, and …

Ted Michalos: Yeah. We’ve been harping on this thing now for over a decade and they’re still in business. In fact, they’re probably busier than they’ve ever been, so …

Doug Hoyes: Right, and so that’s why we’re doing this podcast today in the hopes that we can actually get the word out that this is a serious issue … and, again, this is not just our opinion, the government has finally after … I mean, again, we’ve been on this case for five, six, seven years. They’ve finally done some research and issued a report that says, “We’re going to think about it, we might do something.” So hopefully it’s progress.

Ted Michalos: Yeah, yeah.

Doug Hoyes: Okay. So we’ve given the OSB advice, we know you’re watching, so hopefully you’ve taken these things into account.

Ted Michalos: [laughs] Listening, it’s radio.

Doug Hoyes: Absolutely. Well, this is going to be on YouTube as well if the video recording works, so …

Ted Michalos: So I should look up every once in a while.

Doug Hoyes: Exactly. So and … you know, for the OSB I’m … you know, Ted and I are more than happy to fly to Ottawa, and chat with you in person and give you our thoughts. But what about the person who is listening to us now, the actual individual who’s got some debt issues and they’re trying to figure out, okay, who can I trust, should I go to a debt consultant, what about you guys, how do I know if I’m being treated fairly, what practical advice can you give me?

Ted Michalos: Right. So this is where I was going before. So we jumped the gun a little bit. So let’s start this by saying that, at the end of the day, it’s your decision. If you decide that there’s value in paying these guys a fee before you actually talk to a Licensed Insolvency Trustee, we’re not going to stop you. I mean, it’s … you’re an adult, you got to decide what’s right for you.

But some warning signs for you. You shouldn’t ever have to pay an upfront fee. So if somebody meets with you for free and at the end of the meeting they say, “Well, okay, but now to go any further you got to give me 500 bucks,” wait a minute, trustee is not going to ask you for $500.00. That’s probably money that’s going to a debt consultant.

Doug Hoyes: And that’s real simple advice to understand.

Ted Michalos: Yeah.

Doug Hoyes: We do not charge upfront fees, number one, because we think it’s unethical but, number two, we’re not allowed to, the rules say we can’t do it.

Ted Michalos: Right.

Doug Hoyes: So you do not pay us anything until the paperwork has been filed with the government.

Ted Michalos: So there’s a test for you, right? So you met with somebody because they’ve done that first meeting for free, at the end of the meeting they ask for money, all right. So at this point you shouldn’t be signing anything. Don’t make any sort of commitments, you want to think about this some more.

The follow-up question as soon as somebody asks you for money should be, “Are you a Licensed Insolvency Trustee?” and if that doesn’t make you comfortable, “Are you actually going to do the work for me?” Because if they’re a debt consultant, they can’t. If the guy comes back and says, “Well, I’m going to refer you to my guy down the street. He’s going to actually do the filing,” okay, so why am I paying you money then.

Doug Hoyes: Yeah, when I go in for my surgery consult I would like to talk to the surgeon, not someone who knows the guy who knows the guy who knows the surgeon.

Ted Michalos: Right.

Doug Hoyes: I mean, I want to know who I’m dealing with. So don’t pay upfront fees, don’t sign a contract to pay anything until you’ve met with an LIT. Only deal with an LIT. And I guess, even more basic than that, ask “what fees am I being charged?”.

Ted Michalos: Right, what’s the upfront cost … what are you asking me to pay and why.

Doug Hoyes: And we’re happy for you to ask us that question too because, again, our fees are set by the government, we’re … it’s right in the proposal what we’re getting paid.

Ted Michalos: Right. And, again, if the guy says it’s 1,500 bucks and you think that’s $1,500 well spent, then I respect your decision to do that.

Doug Hoyes: Yeah, I mean, there are lots of people who will go talk to their accountant or their lawyer first and pay their accountant or lawyer money, okay, that’s fine, I’ve got no problem that, particularly if you’re in a business situation maybe it makes a lot of sense because there may be tax implications and whatnot.

Ted Michalos: Right.

Doug Hoyes: But in that case you know what you’re getting, they charge you by the hour, you’ve been dealing with them in the past and they have no incentive to refer you to one person or another.

Ted Michalos: Right.

Doug Hoyes: They’re probably giving you independent advice. But when you’re dealing with a debt consultant … and I guess the other question you could ask them … so, “Okay. You’re going to be referring me to someone. Do you only refer to one different party?”

Ted Michalos: Yeah, “Can I get a list? Who should I be taking to?”

Doug Hoyes: Right. I mean, with the not-for-profit credit counsellors that we deal with in most of the cities we’re in they have a list of three or four different LITs that they’ve met with, preapproved, they know they’re legit. So they don’t send everybody to the same person in most cases, they spread them around.

Ted Michalos: Right.

Doug Hoyes: So … okay, so I think that’s really good advice. What are your final comments then on anything to do with debt consultants, the OSB or people who are listening who may have issues with any of this?

Ted Michalos: Well, so I get the attraction, the debt consultant is allowed to, basically, play on your fears, not only of the debts that you have but of having to talk to a Licensed Insolvency Trustee. It was better for them when we were called bankruptcy trustees, because that’s an even scarier name. So they are playing on your anxiety and your fear, because you don’t want to do that. You want to do something better.

So any time a deal sounds too good to be true, it probably isn’t true. They’re going to meet with you for free up front, because the first time they meet with you it will be, “Yes, come on in for a free consultation.” And more and more these are being done over the internet or by phone now. But the conversation always end with, “Okay, I think we can help you. I need that 500 bucks.” And so they’ll immediately ask you for money and that’s your warning sign, wait a minute, you haven’t done anything yet, why do I need to give you money.

Doug Hoyes: Yeah, it’s pretty much as simple as that, don’t be signing anything, don’t be paying any money before something is filed, deal with a Licensed Insolvency Trustee. Simple as that.

Ted Michalos: Yeah. And you … and, yeah, you can use the second opinion thing on trustees. So you go to see a Licensed Insolvency Trustee and call another one, go see another one. I mean, we call that opinion shopping but, quite frankly, it’s your life, you got the right to look around and make sure you’re comfortable with the people you’re dealing with and you’re getting advice that you can live with.

Doug Hoyes: Well, and I think I met with two people in the last week who had been to see another LIT and they just weren’t comfortable, they didn’t understand the explanations they were getting, well, great, go see someone else then, we get a lot of work from that too, so …

Ted Michalos: Right.

Doug Hoyes: Excellent. Well, I think that’s an excellent way to end it, that’s our show for today, full show notes, including links to the bombshell government report.

Doug Hoyes: And all of the previous videos and articles we’ve written on this topic can be found at hoyes.com, that’s h-o-y-e-s-dot-com.

If you want to have your say, there’s a link on the OSB webpage so that you can send a message directly to the government explaining that you don’t think vulnerable consumers should be scammed by debt consultants who only want to take their money. So feel free to take advantage of that.

Thanks for listening. Until next week, I’m Doug Hoyes. That was Debt Free in 30.