Debt Settlement Canada – The Good and Bad
The debt settlement industry in Ontario and Canada is complicated. There are many players and several programs that can help you settle your debts. Some are safe, some work – others don’t.
There are three common types of debt settlement services in Canada:
- Debts can be settled legally through a consumer proposal filed with a Licensed Insolvency Trustee.
- Credit counsellors can offer a debt management program which does not settle your debts but does provide opportunity for interest relief and a repayment plan.
- Debt settlement companies and debt consultants may offer to negotiate an informal debt settlement agreement with individual creditors or they may just refer you to a Licensed Insolvency Trustee in exchange for a substantial fee.
Settle Your Debts Safely with a Consumer Proposal
A consumer proposal is the only legal, safe option to settle your debts for less than you owe because a settlement through a licensed insolvency trustee:
- Provides an immediate stay of proceedings stopping creditor actions like collection calls, court actions and garnishments while you negotiate your debt settlement.
- Covers all of your unsecured creditors. No creditor can opt-out of the debt settlement program (and the only process to eliminate CRA debt as well).
- No payments or fees are required until your settlement proposal is filed with the government and you receive full creditor protection.
- Has a high success rate – at Hoyes Michalos 99% of settlements negotiated with creditors are successfully approved by those creditors.
The Dangers of For-Profit Debt Settlement Companies
Debt consultants and for-profit debt settlement companies have taken advantage of so many consumers across Canada that many provinces, including Ontario, have enacted legislation regulating how they operate. In Ontario for example, debt settlement agencies are now required to register under the Collection and Debt Settlement Services Act.
This has not, however, completely eliminated the dangers of dealing with an unlicensed debt consultant or for-profit debt settlement company. Many debt settlement companies are now operating under the ‘umbrella’ of a law office. These are the same agencies as before; they are just working around the new laws since lawyers are excluded from the debt settlement Act. Other settlement or debt consulting agencies are charging large referral fees to unsuspecting consumers to refer them to a licensed insolvency trustee to file a consumer proposal.
Beware agencies that:
- Offer to settle your debts informally. According to the Canadian Bankers Association less than 10% of informal debt settlement programs work.
- Offer to help you settle your debts through a ‘government program’ or refer you to the ‘officer of the court’. These are misleading terms that really mean a consumer proposal. You do not need to pay to see a licensed insolvency trustee – ever.
- Offer to negotiate a better settlement deal with your creditors than the trustee because they ‘work for you’. Our experience is that the creditors more often than not reject low-ball proposals. In addition, the savings are never as large as the fees you pay the debt consultant up front.
But What About Not-for-Profit Credit Counselling Agencies?
Legitimate credit counselling agencies can help you negotiate a repayment plan of 100% of your outstanding debts through something called a debt management plan. They cannot offer a debt settlement because they do not settle your debts for less than you owe. If you only have a few debts, a debt management program is a good option. If you have debts over $10,000 and are insolvent, settling debts through a formal debt settlement program like a consumer proposal is almost always a cheaper and better alternative.
Another misconception about credit counselling is that it is better for your credit report. This is not true:
- A debt management plan will appear on your credit report as a settlement program and will remain for 2 to 3 years after your final payment (depending on the credit bureau). A consumer proposal also remains on your credit report for 3 years after your final payment. In the end both programs remain on your credit report for the same length of time.
- A DMP costs more because you have to pay off all of your outstanding balances. A consumer proposal settles your debts, often for 35 cents on the dollar or less. That means you can begin saving more money, much sooner, in a consumer proposal than you can through a debt management program allowing you to improve your finances much faster.
Most Debtors Prefer Settling Debts Through A Consumer Proposal
Debt settlement through a consumer proposal has becoming increasingly popular as a way to avoid bankruptcy. Today almost half of all insolvencies in Canada are consumer proposals. A settlement agreement via a consumer proposal, filed through a licensed trustee, provides the creditor protection you need while you work out a plan with your consumer proposal administrator to not only combine all of your debts into one, affordable payment, but fully settle those debts for less than you owe. You also keep any assets you own. This makes a debt settlement through a consumer proposal a highly attractive debt relief option for debtors dealing with debt problems.