Debt Settlement

“Debt settlement services in Canada can be very confusing and very risky.  Choose a safe alternative.”

There has been a tremendous growth in the number of Canadian debt settlement companies in recent years. You’ve heard the radio and TV ads and seen the websites. These companies offer to settle your debt for less than you owe and make the process sound pretty simple and easy. Unfortunately it’s a little more complicated than that.

What exactly is Debt Settlement?

Debt settlement, also known as debt negotiation or credit settlement, is when your creditor agrees to accept a reduced payment as full settlement for your debts. It is possible to negotiate a repayment plan with your creditors. But there is a safe way and a not so safe way.

Debt Settlement Companies

Debt settlement companies usually start by asking you to stop paying your creditors and instead set those payments aside (usually with the debt settlement company) so that, over time, you will have a lump sum of money to settle your debts with your creditors. Here’s why this approach seldom works:

  • While you are not making your payments, collection agencies start calling and your credit rating deteriorates.
  • The debt settlement company usually charges a large up-front fee, in the form of your first few months’ payments. These fees are often charged before they have contacted your creditors. If your settlement plan doesn’t work you are now out quite a bit of money and your debts are even higher.
  • Many banks, also aware of these scams, refuse to deal with these agencies.

The debt settlement industry has becoming so confusing that the Ontario government will be introducing regulations around the debt settlement industry.  The new regulations, matching similar legislation in Alberta, Manitoba and Nova Scotia will focus on:

  • banning up-front fees;
  • limiting the total amount of fees that can be charged;
  • requiring clearly worded contracts so you know exactly what service you are paying for;
  • allowing for a 10 day cooling off period to allow you to rethink your decision if you were feeling pressured to sign.

Better Debt Settlement Options

All of this does not mean that it is not possible to reduce your debts.  There are safer alternatives:

Debt Management Plan:  If you are solvent, meaning you can afford to pay back your debts but need both time and perhaps some relief from interest costs, a better option would be a Debt Management Plan. These are administered through not-for-profit credit counselling agencies. When choosing a credit counsellor, make sure they are accredited with a reputable credit counselling organization. For example, in Ontario they should be a member of the Ontario Association of Credit Counsellors.  Accredited with the Better Business Bureau or some on-line safety program is good, but not enough.

Consumer Proposal:  If you cannot repay all of your debts, the best alternative is a consumer proposal. A consumer proposal is the ONLY debt settlement program that can be called a government program. This is because it is administered through the Bankruptcy and Insolvency Act by Trustees, also called Consumer Proposal Administrators.  You should talk directly with a trustee in bankruptcy if you are thinking you need some form of debt settlement program. They can explain all of your options. Fees in a consumer proposal are paid out of the payments you negotiate with your creditors and you are not charged any fees until you file a proposal with your creditors.  In other trustees do not charge up-front fees.