You hear the debt consultant ads on the radio or television, and they sound great. “Reduce your debts by 70%” they say, and you don’t have to file bankruptcy in Canada! But is it really possible to reduce your debts by 70% without bankruptcy?
Yes, it is. There are two obvious ways to settle your debts for less than the full amount you owe.
First, you could file a consumer proposal. A consumer proposal administrator, licensed by the government of Canada, can work with you to propose a legally binding settlement. If your creditors agree, it’s a done deal. And yes, in my career I have filed thousands of consumer proposals, and the average settlement amount is between 25% to 50% of the amount owed.
The second obvious ways to settle your debts is to stop paying them, wait about 18 months, and then call up your creditors and say “hey, I owed you $10,000 a year and a half ago and I haven’t paid you anything, would you take $2,000 cash today?” In some cases they will, because if 18 months have gone by, they’ve probably decided to write off the debt.
Or maybe not: it’s quite possible that at some point they take you to court, sue you, and garnishee your wages, so “doing nothing” is only a good strategy if you are unemployed and have no wages to garnishee, no bank accounts to freeze, and no assets to seize.
Unfortunately, these “debt consultants” you hear on the radio and TV are pretending they are offering the first option (a consumer proposal), but they are actually offering the second option (hide and hope).
Here’s how it works: they put you on a “payment plan” where you pay them $500, or $750 or whatever each month. The first few months go to their fee. The rest of the money (less more fees) goes into a “settlement” account. After about three years there will be enough money in the settlement account to propose a settlement with your creditors, which they may or may not accept. Of course by now you have already guessed the problem: it’s unlikely that your creditors will wait for three years and not try to garnishee your wages. You just got scammed.
So how can you tell if you are getting scammed by a debt consultant?
1 The most obvious scam is huge up front fees. When you file a consumer proposal or a bankruptcy, you don’t make any payments until your proposal or bankruptcy is filed with the government. When you meet with a not for profit credit counselor to do a debt management plan, you start paying once the creditors are notified. There are no up front fees. Debt consultants will typically charge you $1,500 or more before they do anything!
2 The next most obvious scam is that the debt consultant doesn’t actually contact your creditors! That’s right, they take money from you, but do nothing. If you file a consumer proposal or bankruptcy, by law your trustee is required to notify all known creditors within 5 days of your filing. A debt consultant waits until you have saved the full settlement amount, which could be three years from now, and then they contact the creditors. Of course it’s unlikely you will want to put up with getting sued for three years, so in most cases you stop paying before the debt consultant even makes a phone call!
3 Here’s another scam: no real people! If you go to a reputable credit counselor or bankruptcy trustee’s website, they will list their staff. On my firm’s website we have pictures and biographies of all of our client service team members, so you can see our faces before we meet with you. A disreputable debt consultant either doesn’t have a website, or it will not have any real people’s names on it.
4 Of course if they have no real people, that means they don’t meet with you in person. They do everything over the phone. That’s scary. How can you trust someone that you can’t even meet with? Many of these debt consultants operate from call centers in California or Florida, so they aren’t even in Canada! Do you really want to trust your financial survival to someone three thousand kilometers away? Or would you prefer to meet with someone in your town, who truly understands your situation? Under no circumstances should you ever agree to pay money for financial services to someone you can’t meet with in person.
5 The final scam: a reputable financial advisor will tell you all of your options. Someone “selling” a “hide and hope debt settlement” will not explain that you have other options (like budgeting, debt consolidation, credit counseling, consumer proposals and bankruptcy). If the debt consultant doesn’t explain all of your options, they are not advising you, they are just selling to you.
You are an important person. Don’t trust your financial future to a company with no people willing to tell you their real names, or meet with you in person, who want to charge you large up front fees but they won’t contact your creditors, and they won’t explain all of your options.
Do your research, and make your decision based on all of the facts, not just based on a fancy television advertisement.