How The Government Regulates Debt Settlement: A Comprehensive Guide
Government Protections in the Debt Settlement Industry
There’s no denying that the troubling reality of consumer debt has surged to significant heights in recent years, with many citizens falling into a financial abyss. In Canada, for instance, data from Statistics Canada showed that in 2019, Canadian families dedicated nearly 15% of their net earnings to manage consumer debt, with over 7% directed towards interest costs. This alarming trend raises concerns about the potential fallout following unforeseen incidents like health issues or job loss, leading to a possible default on debts.
Fortunately, government regulations are in place to protect consumers from unscrupulous debt collection and debt settlement practices. However, laws and regulations can vary depending on geographical locations. In this article, we will delve into the intricacies of How The Government Regulates Debt Settlement and highlight the risks of engaging with debt settlement firms or credit counsellors.
Understanding Debt Settlement
Debt settlement represents an informal accord struck between you and your creditors, facilitated by a debt settlement company or credit counselling agency. These entities aim to aid you in repaying your debts, but the agreement carries its own set of risks that cannot be overlooked.
Debt settlement is often compared to other debt repayment alternatives like consumer proposals and bankruptcy, but each bears its distinct differences.
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Risks Associated with Debt Settlement
According to the Credit Counselling Society, the success rate of debt settlement agreements is less than 10%. This statistic implies that a significant portion of those who pay fees to for-profit debt settlement companies, approximately 65%, fail to reach a settlement. Here are some reasons why:
Non-Participation of All Creditors
Unlike legally binding agreements such as consumer proposals or bankruptcy, debt settlement is informal. This informality means that some creditors may not agree to a repayment arrangement.
Adverse Impact on Credit Rating
With debt settlement, the debt repayment company usually advises you to cease payments to your creditors, and instead divert those funds into a separate bank account. Such a setup could negatively impact your credit rating in the long run, especially if the process takes up to three years.
Creditors May Opt for Legal Action
Delayed payments could prompt creditors to pursue legal action, especially if they grow weary of not receiving payments over a long period.
For-Profit vs. Non-Profit Credit Counsellors
Just like there are regular, for-profit debt settlement companies and credit counsellors, non-profit agencies also exist that can help you arrange a debt repayment plan. Both types provide similar services, but it’s crucial to understand the differences and the additional risks that come with for-profit entities.
Conflict of Interest
Non-profit credit counselling agencies adhere to a code of ethics, which includes rules around what they can charge and prevents conflicts of interest. Conversely, for-profit debt settlement companies often represent both you and your creditors, leading to a clear conflict of interest due to dual compensation.
Debt Repayment
Non-profit credit counsellors, bound by a code of ethics, contact all your creditors, making payments to each of your bills to maintain good standing. On the other hand, debt settlement companies often deal with only one creditor at a time, potentially agitating your other creditors.
Financial Counselling
A for-profit company’s primary aim is to profit from arranging debt repayment plans. As a result, they often overlook or downplay financial counselling, an essential component of debt settlement.
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Regulations for Debt Settlement Companies
To protect consumers from becoming victims of debt settlement companies, it’s crucial to understand the regulatory boundaries within which they must operate. Here, we’ll use Canada’s most populated province as an example, remembering that each region will have its own set of laws.
The Collection and Debt Settlement Services Act lays down the following rules for debt settlement and credit counselling companies in Ontario:
- No upfront fees for repayment plans, except for a one-time, $50 setup fee;
- A maximum charge of 15% of any payments made into a debt settlement plan;
- No collection of fees before reaching an agreement with creditors and making payments to them;
- A mandatory cooling-off period of 10 days during which the client can cancel the contract for any reason.
Filing a Complaint Against Debt Settlement Companies
If a debt settlement company violates any of the above rules, or if you feel they’ve engaged in improper business practices, you can file a complaint with the Ministry of Government and Consumer Services in Ontario. Each province will have its own regulatory body for such complaints.
Debt Settlement Policies Across Provinces
In recent years, several provinces have updated their debt repayment laws to crack down on predatory practices by debt settlement companies.
For instance, in 2016, British Columbia implemented restrictions on the number of fees debt repayment companies could charge and mandated increased transparency through the use of mandatory disclosures surrounding the risks of debt settlement.
In Alberta, the Consumer Protection Act states that no debt repayment company “can make any arrangement with a debtor to accept a sum of money that is less than the amount of the balance due and owing to a creditor as final settlement without the prior express consent of the creditor”.
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Federal Laws Around Debt Collection
In addition to the rules governing debt settlement in Canada, it’s also essential to understand the laws around debt collection, as the practices are closely linked. The rules that creditors and collection agencies must follow when attempting to recover monies owed to them include:
- Not contacting debtors on provincial holidays;
- Not using threatening, intimidating or abusive language;
- Not pursuing legal action without first informing the debtor;
- Not applying excessive pressure on a debtor to repay a debt;
- Not disclosing a debtor’s personal or financial information to friends or relatives of the debtor.
Debt collectors in each province must also adhere to a statute of limitations which varies from 2 years in Ontario to 6 in 8 other provinces and territories.
Before You Opt For Debt Settlement
While a debt settlement arrangement may work well for some, it’s advisable to explore all other options first. Consider reducing your monthly expenses or increasing your income. Perhaps a debt consolidation loan can be arranged through your primary financial institution. These steps can help you manage your debt load while maintaining your credit in good standing.
If you do decide to meet with a debt settlement company or credit counselling agency, ensure that you understand your rights beforehand and research the laws applicable in your province.
The government has a significant role in regulating debt settlement. It’s essential to be aware of How The Government Regulates Debt Settlement and protect yourself from potential pitfalls. Remember, knowledge is power, especially when it comes to managing your financial health.
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