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Who can help you get out of debt?

Region: Ontario Answer Number: 0276

When you are in a situation of financial difficulty, there are many options to consider. It is also important to decide if you need professional help and if so, what types of services are available.

1.  Credit Counselling Agencies

What are they?

Most credit counselling agencies offer free educational materials and workshops, and many are registered as not-for-profit entities. Although their counselling services are usually free, they do get paid from both debtors and creditors once payments are made by debtors under debt repayment plans.

How do they help?

Many credit counselling agencies provide debtors with credit counselling services and debt management plans.

Credit counselling services include discussions with the debtor about matters such as:

  • their income,
  • expenses,
  • spending habits,
  • budgeting,
  • the use of credit, and
  • financial planning for the future.

Debt management plans

Debt management plans (DMPs) are proposals made to creditors. It is important to understand that credit counselling agencies do not negotiate with creditors to reduce the amount owed. Rather, they consolidate all of the debts into one larger debt, similar to a debt consolidation loan. In order for the debtor to be able to afford to pay the full amount they owe, the debt management plans call for a longer repayment period with smaller monthly payments. In a DMP you make regular payments to your credit counselling agency (not a financial institution) which then makes payments to your creditors every month until your debts are completely paid.

A DMP will cover unsecured debts including lines of credit, unsecured loans and credit cards. However, there are many debts that cannot be paid through a DMP, such as:

  • money owed to CRA,
  • student loans,
  • car loans,
  • mortgages, and
  • court ordered judgments

Results of debt management plans

  • debt is not reduced
  • the debtor pays set-up fees for the DMP
  • the debtor pays the full amount owed plus 10% – 15% to the credit counselling agency
  • debt payments are reduced and spread out over a longer time-period
  • the debtor’s credit rating is still negatively affected – reports as an R7 for the length of time it takes to complete the program plus an additional 3 years
  • as long as payments are being made it is very difficult (if not impossible) for debtor to get more credit (such as for a mortgage, or car loan etc.)
  • after debt is fully paid, it still takes time for debtor to improve their credit rating

How do credit counselling agencies get paid?

Most credit counselling agencies charge both the debtor and the creditor for preparing and administering a debt management plan.

Debtor pays:

  • initial set-up fee (about $50-$100)
  • monthly maintenance fee (about 10% of the total paid to creditors)
  • application fee
  • membership fee

Creditor pays:

  • upfront fee or fee for each creditor
  • fair share donation, ranging from 0% to 20% of the amount paid by the debtor

For example:

The initial consultation may be free for the debtor. Then there may be a one-time fee of $50 charged to the debtor when they start a DMP. Thereafter, every month the credit counselling agency will charge the debtor about 10% in addition to what the debtor is paying to the creditors. So, if the debtor is paying $300 per month to pay off the debt, the debtor would be charged $330 – $345 per month in total. The $30 – $45 extra would go to the credit counselling agency.

In addition, the credit counselling agency usually also charges the creditors another 10% – 20% of the funds received by the creditor. So, with a $300 monthly payment, the credit counselling agency would receive an additional $30 – $45 from the creditors.

In total, therefore, the credit counselling agency makes between 20% – 30% of the amount of the debt for collecting and re-distributing the payments.

2. Licensed Insolvency Trustee (LIT)

Who are they?

Licensed Insolvency Trustee (LIT) is a professional licensed and regulated by the Office of the Superintendent of Bankruptcy Canada (OSB).

How do they help?

LITs provide services such as debt solutions as prescribed under the Bankruptcy and Insolvency Act (BIA). Because LIT’s owe a duty to both creditors and the administration of the consumer proposal process, they cannot act as advocates for debtors when making consumer proposals.

Unlike other professionals, an LIT is an Officer of the Court, and as such, is the only debt relief professional in Canada legally allowed to administer insolvency procedures regulated under the BIA. Specifically, LITs are licensed to file, manage and supervise consumer proposals and bankruptcies. When filing a proposal or bankruptcy, LITs will guide the debtor through the entire process and will prepare and file the necessary paperwork, as well as deal directly with the creditors.

Results of consumer proposals

  • total debt amount is usually reduced
  • the debtor fees pay for filing fees set out in the BIA
  • debt payments are reduced and spread out over a longer time-period
  • the debtor’s credit rating is still negatively affected – reports as an R7 for the length of time it takes to complete the program plus an additional 3 years
  • as long as payments are being made it is very difficult (if not impossible) for debtor to get more credit (such as for a mortgage, or car loan etc.)
  • after debt is fully paid, it still takes time for debtor to improve their credit rating

Results of bankruptcy

  • entire debt is cleared (except for certain payments, such as child support)
  • debtor’s assets (if any, and with certain provincial exceptions) are sold to pay the debt
  • the debtor’s credit rating is negatively affected – reports as an R9 for the period of the bankruptcy plus an additional 6 years for a first time bankrupt, 14 years for a second time bankrupt
  • after the debtor is discharged from bankruptcy (usually 9 months) they can start to rebuild their credit rating
  • the bankruptcy stays on the debtor’s credit report for 6-7 years

How do LITs get paid?

Pursuant to the BIAconsumer proposal fees are as follows:

  • $750 payable on filing a copy of the consumer proposal
  • $750 payable on the approval of the consumer proposal by the Court
  • 20% of the moneys distributed to creditors under the consumer proposal
  • the fee for filing a consumer proposal ($100)
  • the costs of counselling at a rate of $85 per session if counselling is provided on an individual basis and $25 per person per session if counselling is provided on a group basis

For example, if the debtor owed $30,000, the consumer proposal might ask the creditors to lower the amount outstanding to $20,000. If accepted, the LIT would keep $4,000 as payment. In other words, the LIT’s 20% fee comes out of the payment to creditors and is not separately charged to the debtor.

Pursuant to the BIAbankruptcy fees include:

  • about $1,800 paid by the debtor,
  • 35% on the portion of the receipts (money received from the sale of the debtor’s assets) more than $975 but less than $2,000, and
  • 50% on the portion of the receipts (money received from the sale of the debtor’s assets) more than $2,000.

In other words, the LIT’s 35% and 50% fee portion comes out of the payment to creditors.

3. Debt Settlement companies

What are they?

Debt Settlement companies are also referred to as, debt reduction, or debt relief companies. Primarily, debt settlement companies negotiate with creditors to substantially reduce the amount of the debt in exchange for one lump-sum payment. If your creditors agree to the offer, you must provide the lump-sum payment to your debt settlement company, who will then pay your creditors.

How do they help?

With debt settlement, you may be able to actually reduce the amount of money that is owed, and prevent bankruptcy. Unlike credit counselling agencies and LITs who owe a duty to both debtors and creditors, debt settlement companies work for the debtor.

Some debt settlement companies also provide credit counselling services and money management advice, and may refer to an LIT should you decide that a formal consumer proposal or bankruptcy is required. They are usually for-profit businesses that make money from fees that they charge their clients. Debt settlement companies generally handle both individuals and families who are in a position for debt settlement, such as those who:

  • cannot meet their monthly minimum service payments of $10,000 or more of unsecured debt
  • prefer to avoid bankruptcy
  • have access to a lump sum payment to offer the creditors to settle the debt at a reduced amount
  • would like to relieve stress, reduce debt and take control of their finances

How do debt settlement companies get paid?

Debt settlement companies usually charge a flat fee, or a percentage of savings for the services they provide. Fees can vary depending on the complexity of the situation.

4. Debt Consultants or Intermediaries

The Debt Consultant acts as an advocate for the debtor, to find the most effective debt solution based on their long term financial goals, and, when required support them through their insolvency and throughout their financial rehabilitation. No one is legally prescribed to represent the debtor under bankruptcy legislation and with only two options, consumer proposals and bankruptcy, Licensed Insolvency Trustees (LIT’s) are limited in the advice and services they can provide to debtors during their initial discovery into the debt help available.

Debt consultants can provide independentunbiased information to debtors which include information on the consumer proposal and bankruptcy process, along with a review of other potential solutions including:

  • consolidation loans,
  • re-financing,
  • support from family and friends,
  • sale of assets and improved budgeting, and
  • debt repayment strategies.

This gives the debtor much needed information, the opportunity to make a fully informed decision, and the ability to confidently  commit to their chosen solution.

Services provided by Debt Consultants:

  • Full review of all options available to manage debt.
  • Financial assessment to determine if client can avoid insolvency.
  • Advocate for a consumer to help obtain the best possible outcome of chosen debt solution.
  • Work with the consumer to implement chosen debt solution.
  • Access to a network of LIT’s with varying interpretations of the BIA.
  • Provide comprehensive financial rehabilitation programs.
  • Educate and improve the financial literacy of their client.
  • Provide credit rebuilding and credit education programs to reduce the impact on the clients credit rating and help keep them out of debt and to avoid future financial failure.
  • Help to remove conflicts the LIT faces in performing their duties and responsibilities to the creditors in administrating a consumer proposal or bankruptcy.

Two important things to understand:

  1. A debt consultant cannot file a consumer proposal or bankruptcy and requires an LIT to do so if this is the solution their client chooses.
  2. A debt consultant is paid directly by the debtor and fees are separate to that of the LIT.

How is a Debt Consultant paid?

Fees are paid directly by the debtor as the Debt Consultant works for the debtor. They will usually charge a flat fee for the service they provide.

Before you move ahead with a Debt Consultant

Working with a debt consultant is by no means a requirement and for consumers that have a strong understanding of all options available when dealing with debt, doing it alone is certainly an option. A debtor will need a solid knowledge of the BIA and the confidence to interview LITs, non-profit credit counsellors, and look at re-financing options available so they can compare each plan presented.

For those intimidated by navigating this process alone, working with a debt consultant can be an excellent option. The debt consultant will be their own independent advocate and will provide support, compassion and extended financial education and rehabilitation services.

Before you move ahead, ensure that you have read and understood the contract, including the services you are receiving, the services a debt consultant is unable to offer, and that all fees are fully disclosed.

It is also recommended that you:

  • do your due diligence on the company before signing the contract,
  • check previous customer reviews, and
  • check the Better Business Bureau (BBB) rating and any consumer complaints.

 

 

There are many options to consider when you are in a situation of financial difficulty. For easy-to-understand debt solutions on your terms, contact our preferred experts 4Pillars and rebuild your financial future. With 60 locations across Canada, they will help you design a debt repayment plan and guide you with compassionate advice. No judgment. For help, visit 4Pillars or call toll-free 1-866-690-3328 .

 



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