Tracy recently walked into my office with a sadly typical story. After accruing some personal debt, the young lady realized that she was not in a position to make the minimum payments. Looking for help, she approached a debt counsellor, who in turn offered to deal with her creditors for a monthly fee. For the next 8 months she very happily paid the fee, and whenever a creditor called her she referred them to the debt counsellor acting on her behalf. You could only imagine her horror, when she woke up one morning to a legal summons from one of her creditors. As it turned out, the counsellor had accepted the monthly fee without even once attempting to negotiate with her creditors. In fact her creditors informed her later that the counsellor had been avoiding their calls altogether. When she attempted to contact the counsellor, he in turn avoided her calls as well. Not only was she left in a worse financial state, she was forced into legal proceedings.
The Financial Consumer Agency of Canada (the”FCAC”) has released an article entitled “DEBT REDUCTION COMPANIES: BEWARE OF ‘TOO GOOD TO BE TRUE’ OFFERS” warning the public against some practices within the field of debt reduction. Through this article the FCAC informs the consumer of red flags to watch for when engaging with a debt reduction company, as well as strategies to protect themselves. After reading the article, I thought it important to expand on the topic; specifically on how it relates to the field of insolvency, since the two areas are tied together.
Beware of Claims from Debt Reduction Companies
Debt reduction companies lure consumers into a free consultation through lavish claims such as 75% debt forgiveness. For many consumers who are dealing with overbearing debt, such extravagant claims are hard to resist. (This is a smoke and mirrors sales pitch as these companies do not have the ability to magically erase debt.) After the consultation, the debt reduction company will claim to negotiate a debt reduction settlement with all the creditors on behalf of the consumer for a fee. The consumer is left with the reasonable impression that the fee is deserved since the consumer may save more through the debt reduction. What the consumer does not know is that the debt reduction company is not the one actually doing the negotiation. In most circumstances they are merely acting as the middle man, and charging a fee for simply referring them to a Trustee in Bankruptcy who is licensed by the federal government to handle a Consumer Proposal.
The Process of Negotiating Debt Forgiveness
Let me go into some detail on the process of negotiating debt forgiveness; which is formally known as a Consumer Proposal. A consumer proposal is part of the Bankruptcy and Insolvency Act, and is therefore a piece of legislation. The proposal involves the consumer putting forth a payment plan to his creditors; most of the time this includes a significant reduction in debt. The creditors may accept this proposal and debt may be forgiven. On the other hand the creditors may decide to reject the proposal forcing the consumer into bankruptcy. The important thing to note in regards to the consumer proposal is that the process must be undertaken by a Licensed Trustee in Bankruptcy. Since the debt consultant is not a Licensed Trustee, they must themselves refer the file to a Trustee in Bankruptcy.
Preventing Excess Fees
Many consumers do not realize that they could have approached a Trustee themselves and avoided paying the debt reduction company’s fee to begin with. The consumer is paying a middle man’s fee for a service that could have been accessed directly.
In a lot of cases, the consumer (who is already in debt) will likely end up paying the useless “middle man” fee as they find it intimidating to talk to a Trustee in Bankruptcy, finding it as a formal admission of failure. Others feel that talking to a Trustee is the first step towards bankruptcy and trustees can not offer other solutions for coping with debt. This could not be further from the truth. A Trustee is governed by a strict set of rules and regulations provided under the Federal legislation, providing the consumer with an assurance of objectivity. A Trustee will provide the consumer with multiple options, including debt forgiveness through a consumer proposal. Only after all other options are exhausted would a trustee, in conjunction with the consumer, consider bankruptcy as an option.
On her part, Tracy had no choice but to declare bankruptcy. Had she come to see me prior to dealing with the debt counsellor she may have been able to avoid bankruptcy.
Now why would anyone pay this extra fee if it can be avoided? If you're facing financial hardship, contact me directly for a free confidential consultation request and evaluate what your debt solutions are.
Tracy is a pseudonym used to protect the identify of the individual in this situation.