Caution When Dealing With Canadian Credit Counsellors
CAUTION! Some credit counsellors exist only to refer you to a trustee. You should never have to pay to be referred to a trustee.
If your objective is to get out of debt as soon as possible, at the lowest cost, and to rebuild your credit in the quickest way possible then the worst thing you can do is use credit counsellors.
Francine Kopun, Business reporter, In an article in the Toronto Star has this to say about one of the largest credit counsellor firms in Ontario:
One of Canada’s most recognizable not-for-profit credit counselling agencies does not employ any certified credit counsellors and industry sources claim counsellors are instructed to engage in practices that take advantage of clients mired in debt
The Public Interest Advocacy Centre, in a 2007 report says:
PIAC considers it of deep concern that none of the provincial legislation currently in place addresses the relationship between non-profit CCCAs and major creditors. Credit counsellors that operate as “non-profit” are funded by various credit grantors – such as banks, credit card companies and department stores; who also control their Boards of Directors. This relationship represents a clear conflict of interest. The creditor’s effective decision-making control over nonprofit CCCAs (who rely on them for funding), makes it unclear as to who’s interest the credit counsellor is truly representing. Consumers need to approach these non-profit CCCAs with a healthy dose of skepticism and an eye to ]ensuring that they are getting the best advice for their particular financial circumstances.
The Osgoode Hall Law School, in a 2011 research paper had this to say:
In return for their work, the Credit Counselling Agencies (CCA) are paid by both the creditors and the debtors. From the creditors, they receive a percentage of whatever the debtors’ pay to the creditors, generally on the order of 20%. From the debtors, they ask for about 10% of the monthly payment made to the creditors.
We identify four ways in which some CCA might be violating those rules:
misrepresenting what they do, not complying with their fiduciary duties, not complying with the rules surrounding not-for-profit status, and acting as collection agencies without being Licensed to do so.
More and more credit counselling firms have opened up for business in Canada in the last ten years, fueled by the debtors’ desires to do almost anything to avoid bankruptcy.
Credit counsellors have you make regular payments under a debt repayment plan, to them and they in turn make payments to your creditors. Credit counsellors get paid by holding back a certain percent of your payments for their fees.
There are two types of credit counsellor; independent credit counsellors and ones who advertise as “non-profit”. The two types of credit counsellors have similar services. The main difference is that the “non-profit” Credit Counselling firms get funding from various credit grantors such as banks, credit card companies, and department stores.
Credit counsellors can assist you in acquiring the discipline you need to get control of your debt.
Be careful! Many people do not fully understand all the ramifications involved such as:
• Effect on your credit rating.
The credit bureau will record that a debt repayment plan is in place. Three years after the debt repayment plan is satisfied the record will be removed from the credit bureau.
• Are your payments too high?
Your payments should be high enough to significantly reduce your debt but not so high that you have “no life”. If you do not have money left over at the end of the month to pay for the small pleasures in life you may find that you end up defaulting on your payments to the credit counsellor.
• What should your monthly payments be?
We find that Industry Canada Standards on required payments in a bankruptcy are quite accurate in establishing the maximum payments that should be made in a monthly payment schedule set up by a credit counsellor. The standards for 2012 are:
• For how long should you pay?
Most trustees in bankruptcy feel that the term should be a maximum of three to four years. It is a stipulation in the Bankruptcy and Insolvency Act that the term for a “Consumer Proposal” be no more than five years. Terms longer than this have a very high failure rate, because people cannot see a “light at the end of the tunnel”.
Credit counsellors versus Licensed Insolvency Trustees
Are there advantages for a person using the services of a credit counsellor rather than a trustee in bankruptcy?
Let’s consider the facts and then you decide.
Keep in mind that Licensed Insolvency Trustees are Licensed by the Federal Government and subject to stringent codes of ethics. Also be aware that a bankruptcy trustee is the only debt professional who can provide a full range of financial solutions.
• Some credit counsellors are ethical but It’s an unregulated industry that has some unethical companies that only want your money.
• If you have some concerns about the advice your credit counsellor has given, you have the option of getting a second opinion:
• Trustees will give you a free consultation and there’s no obligation to use their services.
• Insolvency lawyers will charge you for 1 – 1 ½ hours of their time but it will be money well spent for your peace of mind and potential savings of thousand of dollars.
Here are some things to be aware of when dealing with credit counsellors:
- Credit counsellors that advertise as “non-profit” are funded by banks, credit card companies and other credit grantors and therefore have a conflict of interest. Be careful! Their mandate is to steer people away from going bankrupt or filing a proposal. Be sceptical and you decide if they are giving the best advice for you and your family or the best advice for their sponsors the banks, credit card companies and other credit grantors.
- Setting your monthly payments too high is common. We find that the Industry Canada Standards on required payments in a bankruptcy or a proposal are very accurate in establishing the maximum payments that should be made. You can calculate your maximum monthly payments by filling in this Bankruptcy Calculator.
- Setting a payment plan for an extended period of time such as five or more years is common. This is almost always a very bad idea for you. Most trustees in bankruptcy feel that the term should be a maximum of three to four years. It is a stipulation in the Bankruptcy and Insolvency Act that the term for a “Consumer Proposal” be no more than five years. Terms longer than this have a very high failure rate, because people cannot see a “light at the end of the tunnel”.
- Some credit counsellors just want to charge you for filling out bankruptcy forms and referring you to a “very good” bankruptcy trustee. Don’t pay anyone for doing this! All bankruptcy trustees have the same code of ethics and the same costs and will all give you the same service.
- Some counsellors may try to mislead you by saying that their services will give you a better credit rating than a bankruptcy and that a bankruptcy or a proposal will ruin your credit rating. Don’t be fooled! Any kind of a payment plan or bankruptcy or a proposal will be flagged by the credit bureau and will be a negative on your credit bureau report.
- Some credit counsellors may try to frighten people into using their services by saying how terrible bankruptcy is. Don’t be misled by these bankruptcy myths.