The truth is the right debt relief solution always depends on your circumstances. In this guide, I’ll provide a comprehensive comparison of debt consolidation vs debt settlement to help you determine which option is best for you.

What are the differences between debt consolidation vs. debt settlement?

Debt consolidation is a process of transferring existing debts into one larger loan or repayment plan. There are several ways you can do this. You can get a personal loan through your bank, credit union or other financial institution. You can use a balance transfer credit card to move balances from your current credit cards to a new card with a lower interest rate.  You can consolidate credit card debt and other bills into a second mortgage or home equity line of credit.  You can also enroll in a debt consolidation program with a credit counselling agency, although a debt management plan is more of a repayment program than a consolidation loan.

As you can see, each of these options means moving debts around. No matter which approach you use, debt consolidation does not reduce your overall debt load. You still must pay back everything you owe.

In the case of debt settlement in Canada, a Licensed Insolvency Trustee works with you to present a proposal to your creditors to accept a lower payment and settle your account. This is a method typically used by Canadians who find themselves unable to make payments on their outstanding debt. The amount you pay back is reduced, with your settlement amount usually paid out monthly over up to five years.

Pros and cons of debt consolidation

Debt consolidation is appealing because it simplifies money management and can save you money.

Some key benefits of debt consolidation include:

• You simplify the way you pay your bills. You make a single payment to just one lender with one deadline every month instead of juggling multiple due dates to multiple creditors.
• You get a lower interest rate. Most consumer debts are the result of credit card bills with high interest rates. When looking for a debt consolidation loan, look for one with a lower interest rate. This way, you can get out of debt sooner because you are paying more towards principal with each payment and less in interest.
• Your monthly payment will be lower. In addition to a lower interest rate, you can choose to lengthen the term of the loan, which gives you more time to repay your debt and lowers your monthly payment. A lower payment can help you balance your budget so you can keep up with all your bill payments.
• It can increase your credit score. Even though debt consolidation solutions may hurt your credit score in the beginning, making timely payments will help you increase the score gradually. If you keep the old credit cards that you paid off through consolidation, your score will recover even quicker because this reduces your debt utilization ratio. Just remember to use the credit cards sparingly, so you don’t go back to square one.

Debt consolidation doesn’t come with advantages only, though. There are risks with a debt consolidation loan. By consolidating your existing debt, you are simply transferring all the debts you have into a new account that has an extended-term to pay it all off. This means that you can get in trouble if you miss making payments or continue to spend on your credit cards and rack up more debt.

Some disadvantages of debt consolidation include:

• The debt remains the same. Your total debt is not reduced or forgiven, so you’ll owe the same amount of money. The only difference is that you’ll only have one creditor. If you consolidate your debts but don’t decrease your spending, your financial situation will continue to deteriorate.
• You can’t consolidate effectively with a poor credit score. To qualify for a consolidation loan at a low interest rate, you will need to have a good credit score. If your credit is poor, your interest rate might be the same or higher, which gets you nowhere.
• If you don’t keep up with payments, creditors can sue to collect. If you default on your consolidation loan or balance transfer card, your creditors can take legal action against you, which may result in your wages being garnished and, if you have a secured loan you could lose your home or have your car repossessed.

Pros and cons of debt settlement

When you settle your debts, your creditors agree to accept less than you owe and forgive the remainder of your debts.

If you have decided that settling your debts is the right option for you, make sure you do it right. There are two ways to negotiate a debt settlement in Canada. One of them is via private debt settlement companies that offer debt settlement programs, and the other is by working with a Licensed Insolvency Trustee to file a consumer proposal.

Unlicensed debt settlement companies usually don’t work well, mostly because many creditors won’t negotiate with them. They often advise that you stop making payments towards your debts in the hope that you’ll eventually reach an agreement with your creditors. The danger of working with a for-profit debt settlement company is that your creditors won’t wait and will pursue you legally to collect. They can garnish your wages or freeze your bank account without the formal, legally binding creditor protection that a consumer proposal or bankruptcy can provide.

In Canada, the most common way to consolidate debts is through a consumer proposal filed with a Licensed Insolvency Trustee.

The main benefits of settling your debts with a consumer proposal include the following:

• You avoid bankruptcy
• You get protection against creditor actions
• Your monthly payment is much lower
• Payments are fixed, unlike in the case of bankruptcy
• You get to keep all your assets

The main disadvantage of any debt settlement program is that it does have a negative impact on your credit score.  You will find it difficult to access credit for a while, although some people are able to get a new credit card within a year of filing.

Consumer proposals don’t affect any of your secured debt, such as your mortgage or car lease, which means that you’ll still need to make payments regularly to keep those assets.

To file for a consumer proposal, you need to make an appointment with a Licensed Insolvency Trustee, who will analyze your financial situation and discuss all available options with you. If you determine settling your debts through a consumer proposal is the best option for you, the trustee will help you prepare and file it for you.

Consumer proposals are legally binding debt settlement agreements. Once filed, you no longer need to deal with collection calls, and wage garnishments stop. All you unsecured creditors are bound by the same agreement, as long as the majority of your creditors agree to your terms.

Do debt consolidation loans hurt your credit score?

The answer is it depends. If you consistently make all your monthly payments on the debt consolidation loan on time, there should be no negative effects on your credit rating. Applying for a new loan may result in a short-term dip in your credit score. However, it will slowly go up again once you start making payments.

It is also possible for your credit score to improve. The reason is a debt consolidation loan can help you improve some of the factors that credit bureaus use to calculate your credit score.

A consolidation loan can help your score by:

• Improving your credit utilization as you move away from maxed-out credit cards. Of course, this is assuming you don’t drive up those balances again.
• Help you build a better payment history, especially if you previously made late or missed payments. Your old bad habits will age, have less impact on your score, and eventually fall off your report in six years.
• Improving the type of debt you have by converting revolving credit balances, like credit cards, to a term loan.

What is the effect of debt settlement on the credit score?

Debt settlement might be the best option financially if you’re struggling with debt, but your credit score will take a hit. How much of a decline depends on your situation going into the program.

If you are already behind on payments or have maxed out your credit cards, you already have a bad credit history and likely a low credit score to match. Even if your score is good, if you cannot afford to repay your debts, you risk defaulting on debts in the future. You may also not qualify for a debt consolidation loan, even with a good credit score, because you carry too much debt.  Most lenders view having a high debt-to-income ratio is as bad as having a poor credit score.

You may be wondering why debt settlement should harm your credit score when your creditors are getting some of their money back, and you’re reducing your total debt. The answer is that credit scores reward accounts that have been paid according to the original credit agreement and on time before they’re closed. In the case of a debt settlement plan, the original agreement is modified when you agree to pay back a portion of the outstanding debts. As a result, credit bureaus modify your score downward while you are in a debt settlement program. 

Having said that, creditors and the credit bureaus do look on programs like a consumer proposal better than a bankruptcy, where your debts are wiped out entirely.  That is why debts in a consumer proposal are coded as an R7, while debts in a bankruptcy are coded as an R9.

Making a deal with your creditors is about getting rid of debt you can no longer repay.

You can begin to rebuild your credit history and show a new ability to handle debt wisely once your old debt is gone.

Should you use debt consolidation or debt settlement?

It is always better to pay all your debt in full if you can. However, life events happen – a job loss, income reduction, divorce, or illness – and these often lead to more debt than you can afford to repay.  It is also true that a significant number of Canadians are living paycheque to paycheque, and just one sudden expense can mean more debt. When this is high-cost debt like a payday loan or high-interest instalment loan, this can create a cycle of debt that is hard to manage on your own.

Whether debt consolidation or debt settlement is a better solution for you depends on your finances.

Initially, you will want to see if you should get a debt consolidation loan.

To qualify for a debt consolidation loan, you must meet three basic lender requirements:

• You must have a reasonably good credit score – generally in the low- to mid-600s
• You must have sufficient income to support your loan payments
• You may need assets, such as some home equity, to provide as collateral

The higher your credit score, the lower your debt-to-income ratio and the more collateral you can provide, the lower your interest rate will be.

If you do not have any assets to get a secured consolidation loan, you can apply for an unsecured consolidation loan.  These types of loans are considered higher risk and come with very high interest rates.

If your credit score is below 600, it is unlikely that you will qualify for a debt consolidation loan at any reasonable rate.

If you do not qualify or cannot afford a debt consolidation loan, your next option will be to consider making a proposal to your creditors.

Debt settlement or a consumer proposal is an option that is best suited to individuals who:

• cannot meet their current minimum debt payments as they come due
• do not qualify for a debt consolidation loan
• cannot afford to repay their debts in full
• have a minimum unsecured debt amount of $10,000 or more
• have enough income to pay back a portion of what they owe

The goal of debt settlement is to make your life easier by getting rid of some of your debt so you can balance your budget and stop relying on debt to survive.

Debt consolidation and debt settlement advice

Debt consolidation and debt settlement are both solutions that improve your financial situation by helping you deal with overwhelming debts, but they work in different ways. In summary, debt consolidation is useful for reducing the number of creditors you owe and lowering your monthly payment, while debt settlement works for those who want to reduce the total amount of debt they owe.

If you have a lot of debt and are looking at options to help you eliminate that debt, book a free consultation with a Licensed Insolvency Trustee. Our role is to help you review all debt relief options’ pros and cons and help you gain a fresh financial start.

The post Should I Use Debt Consolidation or Debt Settlement? appeared first on Hoyes, Michalos & Associates Inc..

• You are struggling with payments on your bills and credit cards
• You are drowning in debt and facing threats of legal actions from creditors

When facing extreme financial hardship and significant debt, you need a solution that can help you get out of debt. But should you just file bankruptcy to wipe out your debts or try a debt settlement? How can a Licensed Insolvency Trustee help you make a settlement offer to your creditors?

Considering debt settlement or bankruptcy

Both bankruptcy and debt settlement are debt options for people who can’t get out of debt by budgeting, can’t get a debt consolidation loan, and don’t qualify for a debt management plan. In other words, consumers who cannot afford to repay their debts in full. In this case, you are left with two common debt relief options – declaring personal bankruptcy or debt settlement. Below I’ll help you learn about the pros and cons of each and how to know you are dealing with a trusted professional.

Bankruptcy Pros and Cons

Bankruptcy in Canada is a legal process that is governed by federal law. Bankruptcy erases debt in exchange for the surrender of certain assets and regulated bankruptcy payments.

There are several advantages to bankruptcy over other debt relief solutions.

• Bankruptcy is generally the fastest way out of debt. A first-time bankrupt with no surplus income can be discharged in 9 months.
• If you face threats of legal action from your creditors, such as a lawsuit or wage garnishment, bankruptcy provides a stay of proceedings that stops these actions.
• Since it deals with unsecured debt, bankruptcy can eliminate credit card debt, bank loans, payday loans, student loans over 7 years, and taxes owing to the Canada Revenue Agency.
• Because it is governed by the Bankruptcy & Insolvency Act, the bankruptcy process is safe and relatively predictable.

On the downside, bankruptcy can become expensive if your income exceeds the government-set surplus income threshold. The base cost to file bankruptcy in Canada is around $1,800. However, bankruptcy law says you must pay one-half of every dollar you earn above the surplus income threshold into your bankruptcy estate to benefit your creditors.

If you declare bankruptcy, you also risk losing assets like your home equity or RESP unless you can pay the trustee an equivalent cash value.

Debt Settlement Pros and Cons

Debt settlement is an arrangement to repay your creditors less than you owe. It’s a way to deal with accounts in collection and debts with high interest rates. Depending on your budget, you make a lump sum settlement or payments over a period of three to five years.

To enter a debt settlement plan, you need to find a company that will negotiate with your creditors and come up with a repayment plan. In Canada, that may mean talking with a debt consultant or Licensed Insolvency Trustee. The settlement options provided by these different debt advisors are not the same.

• A big debt settlement company provides informal debt settlement negotiation services.
• A Licensed Insolvency Trustee can settle your debts through a federally regulated program called a consumer proposal.

Let’s start with a discussion of how debt settlement works with large for-profit debt settlement companies.

Once you are enrolled in a debt settlement program, you start making monthly payments to the company you are using. The company uses this money to cover their fees for using its services as well as the cost of the settlement. Because of past abuses by debt settlement companies charging very high prices, many provinces have prohibited upfront charges and limited overall fees. In Ontario, the maximum allowable fee for debt settlement is 15% of payments.

Over the past few years, consumers have become increasingly aware of the dangers of debt settlement through a for-profit debt settlement company.

• Informal debt settlement can significantly harm your credit. Debt settlement companies frequently advise that you withhold payments while they negotiate a better deal. The problem is, creditors will report these as late payments on your credit report, lowering your credit score.
• You can end up in even more debt. Suppose your creditor refuses to settle your debt, and you stop your payments during the negotiating period? In that case, you could find yourself owing more than you started with due to interest and late payment penalties.
• Creditors can still pursue collections. Debt settlement agencies cannot offer protection from creditor actions. If you stop making your minimum payments, most creditors will take action to collect on your debt long before the agency can get in touch with your creditor. If your account is sent to collections, this is one more bad mark on your credit rating.
• The success rate is low. The participation of individual creditors is voluntary. Most larger creditors have policies against dealing with these companies.
• Not all debts can be included. Debt settlement companies cannot deal with government debts like student loans and taxes, and most payday lenders will not work with them either.

So, if settling your debts through a large company is risky, and there is no guarantee of success, is there a safer debt settlement option? Can you settle debt through a bankruptcy proceeding?

Consumer Proposal Settlement Benefits

The term debt settlement is used for two types of settlement services in Canada: entering into an informal debt settlement agreement and settling debts through a consumer proposal. Consumer proposals provide debt relief to Canadians who want to avoid bankruptcy.

If you want to use a debt settlement program sanctioned by the Canadian government, you should consider a consumer proposal.

A consumer proposal avoids many of the disadvantages and pitfalls of informal debt settlement. Specifically, a consumer proposal:

• is a legally binding debt settlement agreement you file with a Licensed Insolvency Trustee,
• provides the full creditor protection of the Bankruptcy & Insolvency Act,
• sets payment terms based on what you can afford and what the creditors expect to receive,
• deals with unsecured debt including credit cards, lines of credit, student debt and can even settle tax debt,
• allows you to keep any assets that would be forfeited in bankruptcy.

A consumer proposal is a debt relief and debt consolidation program that allows you to make one lower monthly payment and deal with all your problem debt.

The settlement you can get through a consumer proposal depends on your income, assets you own, and total debt. Proposal payments can be spread out over a maximum of five years, without interest. In many cases, this can result in savings of up to 70%.

A consumer proposal is also often cheaper than working with a for-profit debt settlement company. If your creditors are willing to accept 35 cents on the dollar, that is all you pay in a proposal. Your trustee fees are included in the settlement amount. In contrast, a debt settlement company may be able to negotiate the same 35 cent offer, but they will then add their 15% fee on top.

So why would creditors settle your debts for less than you owe? Because they know the alternative is for you to file personal bankruptcy. When working with a Licensed Insolvency Trustee, creditors know this risk is credible, which is why trustees have a better success rate than debt consultants.

While not all debt settlement companies are successful when talking with creditors, consumer proposals have a much higher success rate. At Hoyes, Michalos 99% of proposals filed are accepted by the creditors. Also, creditors have 45 days to accept your proposal, shortening the window of uncertainty. It is not uncommon to wait six months or more to finalize a deal through a debt consultant during which you are ignoring payments and watching your credit score disintegrate.

Which option is better, or worse, for your credit score?

Any form of debt restructuring program will affect your credit score.

Filing bankruptcy will cause your credit rating to fall immediately, but this is only temporary. The information about your bankruptcy will remain on your credit report for up to seven years for a first bankruptcy and 14 years for a second one. A consumer proposal remains on your credit for a maximum period of 6 years from the date it was filed.

This doesn’t mean that you can’t get any credit when you file a bankruptcy or proposal. People who take active steps to repair their credit after filing insolvency can get regular credit cards, car loans and, over time, a mortgage. Most can qualify for a mortgage two to three years after re-establishing new credit lines, depending on other qualifying criteria like your income.

A debt settlement will impact your credit for at least six years, but possibly longer. Informal debt settlement can severely harm your credit if the process does not go smoothly. While you are in the negotiating stage, your credit score will drop, especially if you stop making payments.

Suppose your debt settlement company takes six months to negotiate but cannot make an agreement (or you can afford to maintain the agreed-upon payments). In that case, you will have several new negative marks on your credit history and higher debt, making it difficult to recover.

Because there is no stay of proceedings, some creditors might continue to report accounts as making payments or in collection. Individual debts will not be removed until seven years from the date of the last activity. If that is the date of your final payment, that means debts settled through a debt settlement program can remain on your report much longer than a bankruptcy or consumer proposal.

Bankruptcy and debt settlement calculators

So how can you calculate whether bankruptcy or debt settlement is right for your situation? How do you determine if your income is too high to make bankruptcy a good idea but high enough to afford a settlement offer through a consumer proposal?

Begin with our surplus income and bankruptcy calculator. Calculate what your monthly surplus income payments might be if you were to declare bankruptcy based on your income and family size. Keep in mind: if you have assets that must be seized and sold in a bankruptcy, this will increase your bankruptcy cost as well. Always speak with a trustee for guidance on your actual costs.

If you determine you have potentially high surplus income, move on to our consumer proposal calculator.  This will provide an estimate of the minimum creditors might accept in a debt settlement compared to other debt restructuring programs like debt consolidation or credit counselling. Again, each situation is unique. If you have significant assets, like high home equity, this will increase the amount you will need to offer your creditors to get them to accept the deal. A good read is our reference article on calculating consumer proposal payments.

Making the final decision

In summary, bankruptcy erases debt in exchange for the surrender of assets and regulated payments while debt settlement is an arrangement to repay less than you owe.

If you can’t afford to pay your debt in full, consider talking to a Licensed Insolvency Trustee about your debt relief options.

A consumer proposal is filed with a Licensed Insolvency Trustee. As a federally licensed and trained debt expert, a Licensed Insolvency Trustee is a good alternative to working with a debt settlement company.

They can help you compare bankruptcy vs debt settlement vs a consumer proposal. Contact us today for a free, no-obligation consultation.

The post Bankruptcy vs Debt Settlement. Which is Better? appeared first on Hoyes, Michalos & Associates Inc..

There could not be two debt relief programs viewed more differently by consumers. Bankruptcy is considered to be the worst possible thing you could do for your finances, while credit counselling is seen as unbiased, free, and harmless. Neither extreme is accurate.

To help you decide, I’ll explain how bankruptcy and credit counselling work, compare their true costs and requirements, so you can pick the best option for you.

How bankruptcy and credit counselling work

What are bankruptcy and credit counselling?

Bankruptcy is a legal process to eliminate overwhelming debt. Its primary benefit is the complete removal of your existing unsecured debts (but excluding secured debts like your mortgage or car loan). Personal bankruptcy provides debt relief by completely discharging you from your obligation for debt repayment.

Credit counselling, on the other hand, is generally considered as a service that provides debtor assistance and teaches and guides people towards better money and debt management skills. People view a credit counsellor as someone who provides financial education and tools to manage their finances successfully. While some credit counselling agencies still do this kind of traditional counselling, today credit counselling is more about the enrollment in a debt management plan which is a program to pay back debts through a credit counsellor over a period of time.

How does bankruptcy work?

If you want to file for bankruptcy, you must set up a meeting with a Licensed Insolvency Trustee who will complete a debt assessment for you. During the debt assessment, the trustee will ask you a series of questions, including who you owe money to, how much money you owe, what your salary is and what type of assets you have.

If you are unable to pay your debts as they become due, you are insolvent, which means you are eligible to file bankruptcy.

A debt assessment is really about ensuring that personal bankruptcy is the right solution for you. As a Licensed Insolvency Trustee, I am obligated by law not only to explain bankruptcy but to provide you with information on all your options, including credit counselling. 

What bankruptcy does, that credit counselling does not, is provide creditor protection. After you file, your trustee will notify your creditor that you have gone bankrupt, resulting in a ‘stay of proceedings’ against your unsecured creditors. This stay:

• Puts a halt to collection agencies calling or suing you
• Can stop a wage garnishment
• Means you can legally stop paying your unsecured creditors going forward

Bankruptcy equates to a fresh financial start, but your trustee will still only recommend this as an option of last resort.

How does credit counselling work?

Chatting with a credit counsellor begins with a financial assessment where they look at your income, expenses, and debts to see if you can afford to repay your debts in full.  To qualify for a debt management plan (DMP), you do not have to be insolvent, but you must be able to pay back your debts in full within five years. 

When you opt for a DMP, you can consolidate your unsecured debt, including past due utility bills, unsecured loans, and credit card debts, into one monthly payment to the credit counselling company.

By repaying your debts through a credit counselling agency, you permit them to:

• Talk with your creditors on your behalf
• Consolidate your debts into a monthly repayment
• Charge a 10-15% fee for their work
• Deal with any collection calls and ask if the creditor wants to participate in the plan.

Credit counsellors don’t talk with your creditors until you sign the paperwork to do a DMP. Once that’s done, your counsellor will contact any creditors you decide to include in your plan, for example, your credit card company, your cell phone provider and bank.

Each creditor is in control of whether they agree to the plan, and it’s essential to understand that they don’t have to participate or agree to freeze or lower interest charges.

Unlike in a bankruptcy, if a creditor does not agree to work through the credit counselling agency, you must continue to make debt payments to that creditor. There is no stay of proceedings. If you don’t continue to pay creditors who do not participate in the program, they can send your account to collections and commence legal action against you to recover the debt.

Credit counselling also won’t stop a wage garnishment unless the creditor voluntarily agrees to revoke the order, which is highly unlikely if you are at that stage of collection.

How to determine whether bankruptcy or credit counselling is the right option for you

There are some key things to compare when deciding between personal bankruptcy or credit counselling such as eligibility, cost and effects to your credit score.

When is bankruptcy a good choice?

Bankruptcy is best worth exploring when you carry several thousand dollars in consumer debt, such as high-interest installment loans, credit card debt, lines of credit, tax debt and student loans. If you only have very small debts, then bankruptcy is likely not for you.

Bankruptcy is also an effective way to get help with payday loans. Payday lenders may not agree to participate in credit counselling, or if you owe more than one payday lender, it may be better to wipe the slate clean through bankruptcy.

When is credit counselling a good choice?

Consolidating debts over bankruptcy works if you have smaller, more manageable debts and this is where credit counselling can help.

And that’s the key. Credit counselling is only a good choice if you can afford the monthly payment required to pay back all of your debt. Credit counselling is a good idea for a couple of overdue bills and an averagely sized credit card balance.

Higher debt balances can equate to unaffordable monthly payments. Because people view credit counselling as better than bankruptcy without thoroughly investigating the differences. It’s not unusual for us to meet with someone in our office in the middle of a failed debt management plan they can no longer afford. Unfortunately, they’ve now discovered that they’ve wasted both time and money partially repaying debts that they could have eliminated through bankruptcy (or a consumer proposal) much cheaper and much sooner.

Furthermore, some debts simply cannot be included in a debt management plan, such as student loan debt, tax debts and some payday loan companies, so it’s best to look to bankruptcy or a consumer proposal for these.

What costs are involved in bankruptcy and credit counselling?

Neither bankruptcy nor credit counselling, are free.

The cost of bankruptcy is determined by your income, expenses, family size and assets and differs from person to person.

The minimum cost to file for bankruptcy is $1,800, payable in 9 monthly installments of $200. If you have no assets and earn below a set government income threshold, that’s all you’ll pay no matter how much you owe. Remember, once you file bankruptcy, you stop paying your creditors.

Credit counsellors usually charge a fee of 10% – 15% of your debts; however, you must also repay your debts, which makes the true cost of credit counselling much less affordable over time.

That’s why we say debts below $10,000 are generally better suited to credit counselling, and for debts above that amount you should talk with a Licensed Insolvency Trustee. Without a substantial income or room in your budget, it’s challenging to repay debts greater than $20,000 through credit counselling.

How do bankruptcy and credit counselling affect your credit score?

A common bankruptcy myth is that filing for bankruptcy will completely destroy your credit score, and you will never be able to borrow money again. But this isn’t true.

Bankruptcy remains on your credit report for 6-7 years after your discharge, and you often can get a credit card while bankrupt– just make sure to upkeep with payments so you can rebuild your credit score and NOT add to your debt.

In comparison, it’s a popular myth that credit counselling doesn’t affect your credit score. But this isn’t true. Any debt relief program will affect your credit.

If you file for a debt management plan, it will be stated on your credit report as an R7, like any other debt remediation program, including a consumer proposal. Depending on the credit bureau, it will remain for a maximum of 6 years from the date you began the program. So while credit counselling can sometimes be cleared from your report faster than bankruptcy, it has the same impact as a consumer proposal, which is a debt relief solution also available through a Licensed Insolvency Trustee.

The correct choice is one that offers the best path to financial recovery. If you are struggling with a lot of debt, bankruptcy is often the faster way to improve your financial situation because you can eliminate your debt much sooner. With fewer debt payments, you can begin to set aside savings, balance your budget, stop living on credit, and this can go a long way to helping you re-establish both your finances and your credit.

Alternatives to bankruptcy and credit counselling

You might have read this far through and decided that neither bankruptcy nor credit counselling is the option for you, and if that’s the case, don’t worry. There are alternatives to bankruptcy and credit counselling available such as:

• Consumer Proposal – This is an alternative procedure available through a Licensed Insolvency Trustee that provides the same legal benefits as claiming bankruptcy. And, you only repay a percentage of what you owe to creditors. This option is often better and cheaper than credit counselling, and creditors are unable to take legal action against you while you are in a consumer proposal, which is protection that doesn’t exist in a debt management plan.
• Debt Repayment Plan or budgeting– You can pay off your own debt by creating a debt repayment plan, complete with a final deadline with the right personal debt reduction strategy. However, for paying back debts on your own to be viable, you must have both discipline and a workable household budget.
• Debt Consolidation Loan – A debt consolidation loan is a more manageable way to repay your debts by lowering the interest rate on high-interest debt. You need to apply and qualify for it, but essentially it is a loan that is issued to pay off multiple small loans.
• Debt Settlement Plan – If you only have a small old debt, you could try to negotiate with your creditor or debt collector on your own. Another option is to work with a fee-for-service debt settlement company, but we do not recommend this as many charge high fees to refer you to a licensed insolvency trustee for a consumer proposal anyway.

How to get legal help with personal bankruptcy or credit counselling 

I know it can be challenging to make a decision on how to get out of debt, but making the right choice begins with who to speak to about these two debt relief options – a credit counsellor or licensed insolvency trustee.

Credit counselling is more suited for smaller, affordable debts that you know you can pay in full.

If you have more massive debts that you cannot meet payments for, then bankruptcy could be the best option. However, even bankruptcy is not your only legal option. It’s worth considering a consumer proposal because it could cost less.

That’s why it’s often better to speak with a Licensed Insolvency Trustee directly. A Licensed Insolvency Trustee is the only debt relief professional in Canada legally allowed to administer insolvency procedures regulated under the Bankruptcy and Insolvency Act (BIA).

Licensed Insolvency Trustees are licensed to file, manage and supervise bankruptcies and consumer proposals as well as guide the debtor through the entire process, dealing directly with the creditors on their behalf.

A Licensed Insolvency Trustee can also recommend an accredited counsellor if this is the right choice for you, so you avoid dealing with unlicensed agencies.

You don’t have to do this on your own! We can help you to determine if bankruptcy is the right solution, or if possibly credit counselling or a consumer proposal could be more fitting.

At Hoyes, Michalos & Associates, we are confident that we can help you resolve your debt in the best way because:

• We will explain all of your debt relief options
• We will find you a solution you can afford
• We provide as many consultations as you need, for free

Book a consultation with a Licensed Insolvency Trustee at Hoyes, Michalos & Associates today!

The post Bankruptcy or Credit Counselling. How Do They Compare? appeared first on Hoyes, Michalos & Associates Inc..

Should you consolidate your debt with a new loan or through a debt management plan with a credit counsellor?

And at what point are your debts too large for either of these consolidation options to be successful? When should you consider a consumer proposal or bankruptcy as a form of debt relief if your financial situation is more severe?

What is a debt management plan?

A debt management plan, or DMP, is a consolidation program arranged through a non-profit credit counselling agency where you make one manageable monthly payment to pay off certain unsecured debts. Your credit counsellor negotiates an agreement with your creditors to include your debts in the program and may also be able to arrange an interest reduction or interest freeze.

How does a debt management plan differ from a loan?

Credit counselling agencies do not lend money. A debt management plan may consolidate your payments, but it is not a new loan. Unlike with a debt consolidation loan, you are not transferring balances from one creditor to another when working with a credit counsellor to repay debt. You still owe each individual creditor while you are in the program.

There are advantages to consolidating your debt with a debt management plan over a consolidation loan:

• You do not need a good credit score to qualify
• You do not need any security to offer as collateral
• You will not need a cosigner
• A DMP can lower, and perhaps even eliminate, your interest costs, saving you money
• Your credit counsellor will negotiate directly with your creditors, so you don’t have to
• Credit counsellors provide additional advice and support on budgeting

While there is no interest rate with a DMP, an additional fee of approximately 10% of the debts consolidated in the program will be added to your monthly debt payments.

Since you are not paying existing debts off with the proceeds of a new loan, some creditors may decide not to participate in the repayment program, and this can leave you with some debts to pay outside the payment plan.

Debt management programs cannot include all types of debts. A DMP can be good for consolidating small credit card accounts, unsecured loans, and bill payments, however, if you need help repaying student debt, tax debt or secured debts like a car loan you will need to qualify for a large enough debt consolidation loan to deal with these larger debts.

Compare the risks of taking out a debt consolidation loan

A debt consolidation loan requires you to qualify for new credit. You are applying for a new loan to pay off existing debts, leaving you with one monthly payment to your new lender.

A debt consolidation loan will allow you to combine any type of credit if you can borrow enough to cover your current debts. There are, however, reasons why you may not want to consolidate student loans in Canada.

There are risks with unsecured debt consolidation loans compared to working with a credit counsellor to repay debts:

• You may not qualify for a low-interest loan, and bad credit loans can charge as high as 59%
• You risk losing your home or car if you use these assets to secure your consolidation loan
• You could be in debt longer if your monthly payments are too low
• You risk staying in debt if you build up balances on your credit cards again

What is the effect on your credit score?

Your credit score affects your ability to get new credit. If you are already having difficulty paying down debt, the best program for you is the one that improves your creditworthiness the fastest down the road once you get out of debt.

There are several credit score factors to consider with each alternative:

• A debt management plan will be reported on your credit report as a repayment program. This notice will remain as part of your credit history for a maximum of six years and can affect your ability to get new credit during this period.
• In contrast, a debt consolidation loan will appear as a new trade account on your credit report. As long as you don’t drive up your old credit card balances again, a debt consolidation loan can lower your credit utilization rate, which may help improve your credit score.
• Depending on the type of loan you use, a debt consolidation loan can also help improve your credit mix by converting revolving debt, like credit card debt, into an installment loan.
• Both programs can help bring past-due accounts current if you can afford the payment.

Debt consolidation vs debt management vs debt relief

There is a risk with both a debt management plan and a debt consolidation loan that you have too much debt for either approach to work.

With both alternatives, you must be able to afford to repay your debts in full plus any additional fees or interest. If you can’t afford to keep up with the payment terms under either option, then you risk further default, more hits to your credit score, and worst of all, you will be in debt longer.

An alternative may be to consider a consumer proposal. A consumer proposal can consolidate debt and provide debt relief. A consumer proposal is an interest-free debt settlement option that can improve your cash flow sufficiently to allow you to get out of debt sooner.

A consumer proposal has the same benefits of a debt management plan, yet your monthly payment is much lower. A consumer proposal has no worse an impact on your credit score, in fact, I would argue it is better because you pay less, allowing you to save more and rebuild your finances much fast.

A consumer proposal is not for everyone. You may be able to get a consolidation loan with a lower interest rate than your paying on your high-interest credit card debt today and save enough money to pay of your debts. You may benefit from working with a credit counsellor to deal with a few small outstanding accounts if you don’t have a good enough credit score to qualify for a new loan.

However, if you have a lot of debt, and neither option seems affordable, a Licensed Insolvency Trustee is the only debt professional accredited to explain the pros and cons of all debt consolidation options, including a debt management plan, debt consolidation loan and a consumer proposal. Contact a Licensed Insolvency Trustee for a free, no-obligation consultation.

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In Canada, there are 4 common bankruptcy options:

1. Personal bankruptcy for individuals and small businesses;
2. Business bankruptcy for incorporated companies;
3. Consumer proposal for individuals whose debts, excluding their mortgage, are less than $250,000;
4. Division I proposal for both businesses, and individuals with debts over $250,000.

All bankruptcy options under the Bankruptcy & Insolvency must be filed with a Licensed Insolvency Trustee.

You may have heard of a Chapter 7 bankruptcy and Chapter 13 bankruptcy.  These are bankruptcy options available in the United States only. Chapter 7 which is like filing personal bankruptcy in Canada and Chapter 13 which is like a consumer proposal.

Read Transcript

Personal Bankruptcy

Personal bankruptcy is a legal process where a debtor surrenders all non-exempt assets and makes specified monthly bankruptcy payments to the trustee, in exchange for which they are discharged from having to repay dischargeable unsecured debts.

The minimum threshold debt to file bankruptcy in Canada is quite low, only $1,000.  However, to be eligible for bankruptcy relief you must also be insolvent. Basically, this means you are unable to repay your debts.  If you can afford to repay that old credit card bill, bankruptcy is not the solution. However if you carry several thousand in consumer debt like credit cards, payday loans and you have no hope of repaying that amount in full, then bankruptcy is worth exploring.

Most personal bankruptcies last 9 months for a first-time bankrupt with no required surplus income payments.  The length of bankruptcy will be extended to 21 months if an individual earns an income above the threshold limit set by the federal government. 

If you have high surplus income, or may lose significant assets if you file an assignment in bankruptcy, you can opt for the second option available to individuals needing debt relief: a consumer proposal.

Consumer Proposal

A consumer proposal is an alternative procedure available through a Licensed Insolvency Trustee that provides the same legal benefits as claiming bankruptcy:

• Protection from creditor actions through a legal stay of proceeding
• Forgiveness of unsecured debt upon discharge or completion

The main advantages of a consumer proposal vs bankruptcy are that the debtor keeps all assets and, because payments can be spread out over a period of up to five years, monthly payments are much more affordable.

To qualify for a consumer proposal, your total personal debts, excluding the mortgage on a principal residence, cannot exceed $250,000.  If your debts exceed this amount, you can still make a proposal to creditors through a process known as a Division I proposal.

Division I Proposal

Like a consumer proposal, a Division I proposal is a negotiated debt settlement arrangement made between a debtor and a creditor. A Division I proposal can be filed by businesses and individual’s who debts exceed $250,000.

There are also some administrative differences between a consumer proposal vs division I proposal. For an individual, the biggest consequence of filing a division I proposal is that you are automatically deemed to be bankrupt if the proposal is rejected.  This is not the case with a rejected consumer proposal where the individual can choose to file bankruptcy, make another consumer proposal or continue to deal with creditors on their own.

Business Bankruptcy

There is occasionally confusion over what constitutes a business bankruptcy. In Canada, a sole-proprietor, self-employed contractor, or partner in an unlimited partnership files personal bankruptcy to deal with both business debts and personal debts.

Only corporations can file a corporate bankruptcy or can be petitioned into bankruptcy by a creditor. While a Licensed Insolvency Trustee is appointed to administer a corporate bankruptcy, most business bankruptcies also require the involvement of a bankruptcy lawyer to deal with any court issues that arise. Personal bankruptcies seldom require an individual to attend at court, and even most court hearings when they do occur are attended solely by the bankruptcy and the trustee.

If can’t afford to pay your debts, talk to a Licensed Insolvency Trustee about your situation. A trustee will explain not only your bankruptcy options, but review all alternatives to bankruptcy to ensure that the debt relief solution you choose is the right one for you.

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Prevent bankruptcy with these debt reduction strategies

If you have a few debts or perhaps one old account in collections, bankruptcy is overkill. Most people we help can work their way out of debt on their own. It’s not a quick fix, but with commitment and the right process, you can pay off debt. To prevent bankruptcy, consider these basic tips for finding money to put towards debt repayment.

1. Sell some assets
2. Cut expenses
3. Find a second source of income
4. Double up on payments
5. Negotiate repayment terms with your creditors

Combine all these actions, and you will pay down debt sooner. The objective behind good debt management is to increase payments to your unsecured creditors as much as possible.  If you can divert non-necessary living expenses toward debt payments, your principal will fall faster. This creates a snowball effect by reducing your interest expense every month, putting even more money towards principal reduction.

If you contact your creditors to make new payment arrangements, don’t be afraid to ask them to lower the interest rate.  This also ensures that a higher percentage of your payment goes towards principal reduction.

For help, use our free resources to build a get out of debt plan.

Avoid bankruptcy with these alternatives

If you have bigger debt problems, then you need more debt help than a few adjustments to your budget will provide – you need debt relief. Even then, bankruptcy should still be your last resort, and you should consider these bankruptcy alternatives first:

1. Borrow from friends or family
2. Consolidate debt with a new loan or second mortgage
3. Try a debt management plan
4. Make a settlement offer to your creditors
5. File a consumer proposal

Be careful when relying on friends and family to help you with debt or asking them to co-sign a new loan for you. Make sure you can afford to pay them back, so you don’t jeopardize their finances in addition to yours.

If your credit score is still good, you may qualify for a debt consolidation loan.  If you have collateral in the form of equity in your home, you can try to refinance with a second mortgage or home equity line of credit. Debt consolidation makes sense if you get a lower interest rate and can save money. Be sure you can afford to keep up with the payments; otherwise, you are risking the loss of any assets you pledge as collateral.

If you can afford to repay all your debts and want help negotiating a repayment plan, credit counselling can help you with this process. Please know that any debt management plan arranged through a credit counsellor will cost you 100% of your debts plus 10%. You must be able to afford to repay this amount for this option to work. Credit counselling will also appear on your credit report like any other formal debt payment program.

You can settle debts with a creditor on your own. If you do get everything in writing and be sure you can live up to the payments. I do not recommend working with a for-profit debt settlement company as they charge high fees and are often not successful.

File a Consumer Proposal

The #1 alternative to bankruptcy in Canada is a consumer proposal. A consumer proposal is an arrangement filed with a Licensed Insolvency Trustee to repay a portion of your debts.

If you file a consumer proposal, you are not bankrupt. This means you do not surrender your assets like you would in a bankruptcy. And, as a legal procedure, a consumer proposal binds all creditors if at least half agree to your proposal terms. These are just two of the many benefits of a consumer proposal in Canada.

Read More: How a Consumer Proposal Works

When is bankruptcy your only option?

The objective of personal bankruptcy is to provide a fresh financial start when you are unable to repay your debts and living with those debts is a financial hardship.

If your income is not high enough to make a proposal to your creditors, and you do not have any assets that would be seized by your trustee, then bankruptcy can be a good option.  Only 1 in 10 people we help end up filing bankruptcy. For them, bankruptcy was the right solution.

Bankruptcy stops collection calls, wage garnishments, and lawsuits. 

While bankruptcy does harm your credit score for a while, most people who file for bankruptcy already have bad credit. By getting rid of debts, bankruptcy can help improve credit scores. You can think of it as like starting with a clean slate on which you write a new, and better, credit history.

Get help from a professional

If you can’t pay your debts, bankruptcy is not your only option. Contact a Licensed Insolvency Trustee like Hoyes Michalos today to begin the process of exploring your options to avoid bankruptcy while dealing with your debt.

During your free debt assessment, your trustee will ask a few questions about what your debt looks like, how much you owe, and who your creditors are. We look at your budget to see how much you can afford to repay. From there, they will explore alternatives like debt consolidation, debt management programs and a consumer proposal to help you choose the best debt relief solution to get out of debt.

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Sondra (not her real name) owed a total of $66,500 in unsecured debts including two traditional bank loans and a Visa line of credit.  Sondra contacted a large national Canada credit counselling agency for debt help.  The credit counselling agency proposed a debt consolidation program that would require Sondra to make monthly payments totaling $1,232 for five years.

How was the cost calculated?

The credit counsellor took $66,500 in total debts and divided that by 60 months amounting to $1,108 a month to support debt repayment.

Credit counselling agreements require an additional “Monthly contribution of 10% of all funds deposited in trust”. 

In Sondra’s case this added an extra monthly payment of $123.20, bringing the total program payment to $1,232.

Interestingly that is a circular calculation. While the fee payment is 10% of all payments, in effect, Sondra paid 11% of her debts as additional fees ($123/ $1,108).

Is this affordable?

Is Sondra’s case, it was not.  The documents provided by the credit counselling company that Sondra signed showed her budget at the time had a cash flow available for debt repayment of $645 a month.

Sondra’s debt consolidation program payments represented 171% of her available budget as recommended by the credit counsellor.

Within two months of signing up for the program, Sondra was unable to keep up with her payments.  The credit counselling company rewrote her program to deal with the missing payment, proposing to increase her monthly cost to $1,253 a month.

How does a consumer proposal compare?

While Sondra’s case is extreme, not everyone in a Debt Consolidation Program or Debt Management Program owes $60,000 in unsecured credit, it highlights the flaw in trying to eliminate large levels of debt through credit counselling.  Credit counselling agencies purport to provide budgeting help, yet in this case, the counsellor recommended a program that was clearly unaffordable.

Eventually, Sondra contacted our office to discuss a consumer proposal. Including accumulated interest, Sondra now owed $63,000 in debts.

Based on her income, we recommended a proposal to creditors which would see her repay $24,000 of her debts, at a monthly cost of $400 per month.  This amount was well within her budget, and her creditors voted to accept this proposal.

Saving money by filing a consumer proposal instead

The result was that Sondra was saving $832 a month for 60 months by choosing a consumer proposal rather than continuing with her credit counselling program. Sondra saved $49,920 over five years.

Additional consequences of credit counselling

Potential ongoing interest costs

I understand many people are afraid to talk with a Licensed Insolvency Trustee and view credit counselling as a softer, less damaging program.  However, this is not always the case. Let’s look at some of the contract terms that Sondra signed.

“I understand that this agreement does not guarantee the suspension or cancellation of interest or service charges for accounts listed in the program.”

“I have been given written confirmation of the estimated length of the DCP. Estimated months to payout: 60 months + interest.”

Participation in credit counselling programs is voluntary, and not all creditors will agree to waive interest. While traditional banks and lenders often do, many financing companies will not wholly waive interest costs. This means that after the program, the debtor may continue to owe money to their creditors.

Credit impact of credit counselling

Credit counselling agencies like to say that the effects of a debt consolidation program (or debt management plan) are less harmful than either a consumer proposal or bankruptcy.  I’d disagree with this statement.

The credit counselling contract we reviewed contained two clauses regarding the credit impact of entering a debt management program:

“Entering into a debt repayment program may lower your credit rating or credit score.”

“We agree not to accept or apply for additional credit while on this Debt Consolidation Program.”

In fairness, a consumer proposal has similar implications. Like a debt consolidation program, a consumer proposal is reported on your credit report.  If you file a consumer proposal, you must say that you are in a proposal if you apply for credit above $1,000. We always recommend that our clients avoid taking on new credit while in a proposal since the objective is to get out of debt.

Credit counselling agencies like to say that a debt consolidation program is removed from your credit report sooner than a proposal. This is because of reporting differences between TransUnion and Equifax. While TransUnion removes the note for credit counselling after two years, Equifax leaves the note on your credit report for three years for both a consumer proposal and credit counselling. Effectively, there is little immediate credit score difference between a consumer proposal and credit counselling.

Repairing credit sooner with a consumer proposal

It is the long-term impact where the true difference lies.

In our case study, if Sondra could afford to repay $600 per month (still half the cost of credit counselling) she could complete her proposal in 40 months or just over three years. That would mean her recovery could begin much sooner.  The note on her report would be removed roughly six years after signing her proposal, one year faster than it would be removed in a debt consolidation program or debt management plan by TransUnion and two years sooner for Equifax.

Most importantly, by paying back 70% less over time through a consumer proposal, Sondra will be much further ahead financially. She’ll have more savings in the bank and will not need to rely on credit to survive.

Is credit counselling right for you?

I’ll repeat what I’ve said before; I’m not against all credit counselling programs.  For the right person, it’s a great way to work out a repayment plan with the help of a credit counsellor. Credit counselling can be the right solution if:

• You owe a small amount to a few creditors;
• You only need help with one or two debts, and the remaining are manageable;
• You are not insolvent, perhaps because you have more equity in your home than debts;
• You can afford the total monthly cost of the program through to completion.

In all other cases, it is in your best interest to talk directly to a Licensed Insolvency Trustee to see if a consumer proposal would cost you less than credit counselling.

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If you have payday loans on top of credit card debts, student loans and other debt, or you carry multiple payday loans, a consumer proposal is usually the better solution for debt elimination.

Here is one actual client example to explain why.  We’ve hidden and changed the name of the client, and some details, for confidentiality.

Mary visited a credit counselling company in 2018, struggling under the weight of 11 different payday loans.  You may wonder how this happens?  It’s simple, really and not uncommon.  Like many others, Mary took out her first payday loan to have money to survive until the next payday. Unfortunately, that meant she was short again the following pay, which meant visiting a second payday lender to pay off the first and borrowing more to pay the rent. Carrying more than one payday loan is easy when you consider the number of online payday loan lenders like MOGO, Credit700.ca, and BC-Loans.com. These companies don’t report to your credit bureau so there is no registry to show you already have many loans outstanding. The cycle continued until Mary owed 11 different lenders almost $16,000.

She thought credit counselling would help her repay all this debt by consolidating it into one new simple payment, spreading the monthly payments over 60 months. She hoped this would break the cycle and allow her to get back on track financially. She signed up for a debt management plan.

The credit counselling agency Mary worked with built a repayment plan as follows:

Payment Schedule

Unfortunately, the debt management program created by her credit counsellor was unaffordable. A review of her finances reveals why credit counselling was a bad option for Mary to deal with all this payday loan debt.

1. The monthly payments were front end loaded making for high initial payments, more than she could afford.
2. In aggregate, credit counselling would still have required Mary to make payments totaling $15,897.71, including interest and counselling fees of $6,578.
3. The debt management plan excluded all of Mary’s other debts, so she still had to keep up with all those payments as well.

When Mary came to see us for payday loan help, we did a full debt assessment, reviewing all her debts to determine what she could afford to repay. A full assessment showed that she had $71,000 in unsecured debts, including:

Based on Mary’s situation, it was impossible for her to keep up with all these payments. Based on her monthly income and debts, Mary could offer her creditors a settlement proposal in the range of $420 per month for 60 months. This would be all the payments Mary would be required to pay against all her debts. In total she would repay $25,200, including all fees and costs to eliminate $71,000 in debts. You may notice that the monthly proposal payments would be significantly lower than those required in the first 18 months of her debt management plan, which only dealt with her payday loan debt.

If you have significant debts, including multiple payday loans, a consumer proposal is almost always the cheaper alternative. This is because a proposal allows you to make a deal for less than the full amount owing, while a debt management plan requires you to repay 100% of the debt plus fees.

In the end, based on her unique situation, Mary filed for bankruptcy. Her precarious income made keeping up with proposal payments difficult. Again, this was an option available to Mary because she talked with a Licensed Insolvency Trustee. Through a discussion of her situation, it was clear that bankruptcy was a better option than the debt management plan.

If you, like Mary, have complex debts, including payday loans, we encourage you to contact a Licensed Insolvency Trustee to review all your options to find the best plan for you financially.

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Credit counselling offers a consolidation program called a debt management plan (DMP). To qualify, you must be able to afford to repay you debts in full within five years.  A DMP is a voluntary repayment program arranged through a not-for-profit credit counsellor. 

Credit counselling is generally best for individuals who:

• Carry small debts totaling less than $10,000 or up to $20,000 if they have enough income to support repayment plus additional up to 10% – 15% credit counselling fees; or
• Have too much equity in their home to be eligible to file a consumer proposal but cannot qualify for a second mortgage or debt consolidation loan; and
• Can afford to repay 100% of their debts but need a break on interest costs;

A consumer proposal is a government regulated debt settlement program filed with a Licensed Insolvency Trustee.  You make an offer to repay less than you owe and can spread those payments over five years.

Consumer proposals are best for those who:

• Cannot afford to repay 100% of their debts;
• Want to repay a portion of their debts based on what their budget will support;
• Have large unsecured debt balances, tax debts, student debt, multiple payday loans;
• Want to avoid bankruptcy

Both programs will affect your credit. Both appear as an R7 and note will show you are in a program to repay your debts.

Both a consumer proposal and credit counselling begin with a free initial debt assessment. The primary difference is that a credit counsellor will review your budget to determine if you can repay 100% of your debts, the primary requirement of a debt management plan. A licensed insolvency trustee will review your finances to determine how much you can afford to repay and what you may be able to offer your creditors, and will review all of your options.

Regardless of which you choose, be sure to work with a qualified, experienced, reputable advisor. Consumer proposals can only be filed with a Licensed Insolvency Trustee. Since they are government programs, you should always talk to a LIT about how they work.  If considering credit counselling, be sure to contact a not-for-profit credit counselling agency. It may even be wise to seek two opinions to ensure you are making the right choice.

Below is a comparison of the features of both credit counselling and consumer proposal options.

Consumer Proposal vs Credit Counselling – Pros & Cons Comparison

If you would like help choosing between a consumer proposal and credit counselling, contact us today for a free, no-obligation consultation.

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You might be shocked to learn that some big not-for-profit credit counselling agencies are now operating the same way. In fact, they are registered with the Ontario government as debt collection agencies. Credit counselling agencies have changed. Many are no longer registered charities. Some credit counselling agencies don’t do a lot of budgeting or actual in person counselling anymore either. Credit counselling organizations in Canada today are often big, national call centers. Now when you call a credit counselling call centre, you may be sold a debt management plan (DMP), where you repay 100% of the debts you owe, but with a lowered interest rate.

We take a deep look at why not-for-profit credit counselling agencies have become nothing more than debt collectors. We also examine the implications for you as a debtor in need of help.  But it’s not all bad news: we believe that not-for-profit credit counsellors can serve a very important role in educating and helping Canadians manage their money.

Not-for-Profit Credit Counselling Agencies As We Know Them No Longer Exist

Not-for-profit credit counselling agencies used to be small, local organizations with trained staff that provided money management and budgeting advice in their communities. While they had the ability to provide a debt management program to their clients, local credit counsellors were also experts who could deal with the causes of financial problems like addiction and mental health issues. These local counsellors would also take the time to review your financial situation in full, only suggesting a debt management plan if it fit your needs. 

If you file a bankruptcy or consumer proposal, there are two credit counselling sessions included as part of the process, to help you get a fresh start.  For twenty years, Hoyes Michalos referred many of our clients to local not-for-profit credit counselling agencies to receive these counselling sessions, and often to also avail themselves of other counselling to help them solve their underlying issues (such as with marriage counselling, addiction counselling, and so on).

In 2018 the federal government made changes to the rules, making it virtually impossible for a trustee to refer a proposal or bankruptcy client to a not-for-profit credit counsellor for the required BIA counselling sessions.

Sadly, with the rise of for-profit debt consultants, the government became concerned that credit counselling was becoming a revenue source for debt consultants, so to prevent outside individuals from being involved in the bankruptcy process, the Government of Canada effectively restricted Licensed Insolvency Trustees from partnering with or providing any funding to third-parties. This included local credit counsellors. Hoyes Michalos used to send our clients to local agencies to complete mandatory credit counselling sessions as part of a bankruptcy or consumer proposal discharge. We liked to do this because, in addition to budgeting help, local credit counselling companies offered a broad array of supporting services that could help our clients. But this new restriction to counsellors resulted in a significant loss of funding for them. Many of these local counsellors went out of business as a result. 

For the record, Hoyes Michalos now has 17 licensed insolvency counsellors on staff, in addition to our Licensed Insolvency Trustees. 

As the local agencies closed, the only remaining players to offer credit counselling in many areas of Ontario were three large non-profit organizations. Their main source of funding are debt management plans, sponsored by banks and other lenders. They rarely provided actual in person credit counselling. The problem, however, is these large agencies continue to label themselves as “non-profit credit counsellors.” Until recently, many operated as a charity (and some still do), even though there is no offer of real counselling or charitable work in the community. The labels, however, make these agencies appear wholesome and helpful to the unsuspecting consumer, when in fact their primary source of revenue is collecting debts for big banks.

Unfortunately, there is also no regulation surrounding the title “credit counsellor.” 

5 Reasons Not-for-Profit Credit Counselling Agencies Are Now Just Debt Collectors

Since traditional, local credit counselling agencies no longer exist as they used to, the remaining not-for-profit credit counsellors are now nothing more than debt collectors:

1. Current not-for-profit credit counselling agencies are funded almost exclusively by lenders. When you make payments in a debt management plan, the credit counselling agency sends the funds to your creditors, who then send back a return payment to the counsellor. (It’s called a “fair share contribution”, but in essence it’s simply a payment from the banks to fund the operations of the credit counsellors).  The more money a counsellor can send, the higher the payment in return. This is how a debt collector makes money too. For further proof, take a look at the supporters for Credit Canada, one of these large agencies, under “Sponsorships & Special Projects.” Their primary supporters are banks and lenders.
2. They are registered as collection agencies. In order for these credit counselling agencies to be allowed to administer debt management programs, they must be registered as a collection agency by the Ontario Ministry of Government in Consumer Services. Why? Because they are effectively collecting debts on behalf of creditors. You can search here for the name of any non-profit credit counselling company to verify their registration as collection agents. This will give you more insight into their intentions and services.
3. They provide a one-way service, as opposed to a two-way conversation. Non-profit credit counsellors are now primarily interested in having you sign up for a debt management program to repay as much of your loans in full as possible. Like debt collectors, they do not give you all of your debt relief options so you can make an informed choice. 
4. They’re not really “credit counsellors.” As mentioned, credit counselling agencies no longer exist to do any real counselling for their clients. These large agencies are essentially a call centre that will ask you to list your debts, and then they will come up with a repayment plan where you pay back your loans in full with a slightly reduced interest rate.
5. They are hardly “non-profit charities.” A non-profit means that as a company, you are not trying to make a profit. However, one of the biggest agencies, Credit Counselling Society of British Columbia – which is still registered as a charity – reported a total revenue in 2019 of $15,436,129. To be clear, that revenue is from collecting money via debt management plans in both fees from the plan and kickbacks from banks and lenders. They issued tax receipts for just $69,962 in donations.

It’s also important to note that two other large agencies recently had their charitable statuses annulled. Credit Counselling Services of Atlantic Canada and Credit Canada Debt Solutions can no longer operate as charities since Canada Revenue Agency (CRA) deemed to have granted that status in error, even though the agencies held it many years before annulment.   CRA views them as a business, not a charity.

Why All This Matters If You Have Debt

By calling themselves charities or non-profits, credit counselling agencies appear to be on your side, when really their primary obligation is to the banks who pay them. An even bigger risk to you is that by using their services, you may be heading down the least efficient path for dealing with your debt problems. 

You should know that a debt management plan is not ideal for anyone who owes more than $10,000 in unsecured loans to multiple creditors. Here’s why:

• A debt management program isn’t legally binding on all your creditors. CRA does not participate in a DMP, and some payday loan companies don’t either. So, while you may get a plan for some of your debts, you’ll have to deal with your creditors outside of a DMP too.
• You’re repaying the entire debt balance. Ultimately, a debt management plan isn’t providing real relief from your debt. While you may get a reduced interest rate, you’re still going to be making large, unaffordable monthly payments to pay down your loans in full. 
• You don’t receive legal protection against creditors. If you’ve been behind on your debt payments and are now facing legal repercussions, know that a DMP won’t protect you against them. This means you could still get a wage garnishment, face a lawsuit or get harassing phone calls from creditors while in a DMP. As mentioned, the plan is in no way legally binding.
• A DMP has the exact same credit rating impact as a consumer proposal. In an effort to get you to sign up for a DMP, these agencies will tell you to avoid seeing a Licensed Insolvency Trustee because a bankruptcy or proposal will ruin your credit rating. You might be surprised to learn that a consumer proposal has the exact same credit rating impact on your bureau as a DMP (an R7). But the difference is with a consumer proposal is your monthly payments are much smaller because you’re repaying only a portion of what you owe, while getting legal protection. You can also eliminate all unsecured debts in a proposal, including payday loans and CRA tax debts. The best part is, you get to achieve debt relief more quickly and then be on a path to rebuilding your finances.

Is it always wrong to get a debt management plan?

Not necessarily. If you only have a couple of small loans and you know you can manage the payments, but would like interest relief, then a debt management plan could be the right option for you. You would still need to ensure that all creditors are onboard and that the interest relief is worthwhile before signing up.  

A Licensed Insolvency Trustee is regulated to act impartially

Unlike unregulated credit counsellors, a Licensed Insolvency Trustee, by law, has to explain all of your debt relief options to you before you make any decision. We can never force you into a bankruptcy or consumer proposal. What’s more, we are not paid by creditors to carry out either debt relief option. As officers of the court, we act as a referee between you and your creditors, with an equal obligation to both sides. Our fees are regulated by the Government of Canada and no creditor can give us incentives or kickbacks for carrying out our duties. 

Is there a role for not-for-profit credit counsellors?

Yes.  For 20 years we were happy to send clients to local not-for-profit credit counsellors for advice on budgeting, spending, saving and money management.  Many people get into debt trouble when their marriage breaks down, or they have to deal with drug or gambling addictions, so in the past we were always happy to refer clients for specialized counselling to help them get a fresh start.  With the new rules, that is much more difficult to do.

The problem, obviously, is that a not-for-profit counselling agency needs to pay the bills.  They have staff salaries and rent to pay, and with many other worthy charities vying for the public’s charitable donation dollars, it’s difficult for them to raise money in donations.  Their only option is to go where the money is: the big banks and credit card companies, and get sponsorship dollars and debt management plan fees to fund their operations.  That’s perfectly understandable, but is it in consumer’s best interests to be getting debt advice from an agency that is funded by lenders?

What’s needed is a different funding model.  Currently in every bankruptcy and consumer proposal filing we pay a filing fee to the Office of the Superintendent of Bankruptcy ($75 for every first time bankruptcy, $100 for every consumer proposal we file).  What if that filing fee was increased by $10, or $20, and that money was used to create a fund to provide funding for not-for-profit, charitable, local, credit counselling organizations to provide budgeting and other money management advice?  What if the big creditors also contributed to this fund?  With a centrally administered fund there would be no direct influence, so the credit counsellors could focus on providing advice for the benefit of consumers, not the lenders.  That may not be the solution, but at least it’s a proposal to start the conversation.

For more detailed information on issues surrounding not-for-profit credit counsellors and their similarities to debt collectors, tune in to today’s podcast with guest Ted Michalos.

Additional Resources

• Collection and Debt Settlement Services Act
• Ontario Ministry of Government and Consumer Services, searchable database of all registered collection agencies
• CRA Status: What Annulled Means
• The Cold-Hard Truth About Unlicensed Debt Consultants
• Difference Between a Registered Charity and a Non-Profit Organization
• Debt Free in 30 YouTube Channel

FULL TRANSCRIPT – Show 232 Are Not-For-Profit Credit Counselling Agencies Now Just Debt Collectors?

Doug Hoyes:    We haven’t had a show yet this year where we’ve gotten ourselves into a lot of trouble with our theoretical opinions, so today Ted Michalos and I will make everyone mad by answering a seemingly click-baity question. Are credit counselling agencies really nothing more than debt collectors? Let’s start by talking about what debt collectors do. A debt collector obviously is someone who collects debts. I can think of two obvious attributes of a debt collector. First, they work for the creditor, they don’t work for you. A debt collector works for the company that is owed the money. So if ABC Bank loans John some money and John doesn’t pay, ABC Bank can hire a collection agency to collect that debt. Obviously the collection agency is a debt collector because they are hired by the bank to collect the debt. The debt collector doesn’t work for you, they work for the bank. They provide a service to the bank and in return the bank pays the debt collector.

                          The second attribute of a debt collector is that they want to collect as much money as they can from you. That’s pretty simple, right? A debt collector wants to collect the maximum amount of money from you. That’s what they’re hired to do. The bank wants to recover as much of their loan as possible regardless of what you can afford. And the more the collection agent recovers on behalf of the bank the more they get paid since most debt collectors are paid by commission. So how does all this apply to credit counsellors? And, to be fair, what about licensed insolvency trustees? Here’s my take on this. Debt collectors, credit counsellors and licensed insolvency trustees fulfil different roles in the debt recovery business. However, when you look at the outcomes, credit counsellors act more like debt collectors than debt relief experts.

That’s what we’re going to explore today. To explain it, let’s have Ted Michalos join the conversation. Ted, you’ve sat patiently while I went through that introduction.

Ted Michalos:   Quietly, I’ll add.

Doug Hoyes:    And quietly. Very good. So let’s start with the basics. What does a not‑for-profit credit counsellor do?

Ted Michalos:   Their first responsibility is really educating the public. So they give budgeting advice, spending patterns, how to improve the way you’re using your money and they also do something called a debt management program.

Doug Hoyes:    Explain that.

Ted Michalos:   A debt management program is a voluntary process whereby your debts, not all of them, but some of your unsecured debts are pooled together, so you make a single monthly payment to the not-for-profit who then makes payments to your creditors. An example might be you owe a couple of credit cards and maybe an old phone bill, $10,000. Instead of trying to make three payments every month you only make one payment to the not-for-profit.

Doug Hoyes:    And we don’t do debt management plans.

Ted Michalos:   We cannot. It’s a conflict of interest, even if we could, because of the nature of our licences. So a debt management plan, you’re going to repay 100% of the debt, probably you’re going to get relief from the interest and you’re going to do it over preferably four years maximum, although they can stretch into five.

Doug Hoyes:    In a consumer proposal, the maximum period would be five years. So the big difference though is, in a consumer proposal you’re not, in most cases, paying your debts in full –

Ted Michalos:   That’s right.

Doug Hoyes:    Maybe you’re paying back a third or some lesser number.

Ted Michalos:   In almost all consumer proposals you’re paying back less than 100% of what you owe. Because a proposal is an alternative to bankruptcy. It’s not an alternative to a debt management plan. So the debt management plan, the assumption is you can afford to repay 100% of your debt. Whether or not that’s the right financial answer is a different conversation.

Doug Hoyes:    And we can get into that. So the obvious difference is, in a consumer proposal you’re not paying back 100 cents on the dollar and in a debt management plan you are.

Ted Michalos:   Correct. That’s a simple . . .

Doug Hoyes:    So what are the other big differences between a consumer proposal and a debt management plan?

Ted Michalos:   The biggest single one is a consumer proposal is a legally binding process. You are taking advantage of the law, so it provides you a level of legal protection. By that we mean when you file a proposal there’s an automatic stay of proceedings, people can’t continue with any legal actions they’ve started against you. So they can’t take you to Small Claims Court or Superior Court, they can’t garnishee your wages. If they’re already started garnisheeing your wages, a consumer proposal will stop them. So a debt management plan isn’t the legal procedure, it doesn’t have any of those features.

Doug Hoyes:    It’s a voluntary procedure, in effect.

Ted Michalos:   That’s right.

Doug Hoyes:    The creditors agree “Fine, I’ll take 100 cents on the dollar and I’ll leave you alone.”

Ted Michalos:   Well, and there’s certain types of creditors that have publically said they’re opting out. Like payday loan companies want nothing to do with debt management programs. Revenue Canada generally is not involved in a debt management program, but they are by law included in a consumer proposal.

Doug Hoyes:    And that’s a big difference. Okay, so, with that background, let’s get to today’s question. Are credit counselling agencies nothing more than debt collectors? I want you to answer this question by giving both sides of it.

Ted Michalos:   Okay.

Doug Hoyes:    So let’s have you start by telling me why credit counselling agencies are not debt collectors?

Ted Michalos:   Alright. We started by saying that one of their main functions is to educate the public, to teach people about budgeting. Well, I’ve never heard of a collection agency offering to help someone with their budget on the phone, except to say that “you need to find $200 a week to pay me.” I mean that’s the extent of it. Similarly, credit counsellors generally will talk about spending habits, how to improve where your money goes every month. I’ve never heard of a collection agency offering to do that either. In the area that they get into difficulty is that one of their primary sources of funding traditionally always was these debt management programs and that really is – Well, so I’m not answering your question anymore, this is the way that they’re like collection agencies.

Doug Hoyes:    Okay. And we’ll get to that. So we’ve dealt with not-for-profit credit counsellors for years and years and years.

Ted Michalos:   Yeah. Can’t find any anymore, but sure.

Doug Hoyes:    And why is that?

Ted Michalos:   Well, the government, bless their hearts. That’s what I was told that the people in the south say when they want to call somebody an idiot. But they revised the laws effectively last year whereby credit counselling, not-for-profit credit counselling agencies can’t provide some of the services that they used to provide. Or at least they can’t do it easily. One of their sources of funding was always doing insolvency counselling for licensed insolvency trustees and whenever you file a bankruptcy or consumer proposal you’re required to attend at least two credit counselling sessions so that we can try to re-educate you and prove your financial management. Firms like ourselves, we used to subcontract all of that work, because in our opinion the credit counsellors were better suited towards providing that type of service. It’s the kind of education that they wanted. It’s not that we couldn’t do it, we thought there was value added in funding these not-for-profits to provide this service to people.

Doug Hoyes:    And if someone comes in to see us and they’ve got debt problems, those debt problems may be caused by other things. It could be an addiction issue, it could be gambling, it could be marriage problems.

Ted Michalos:   They almost always are caused by – I mean you don’t just accumulate debt. It had to –

Doug Hoyes:    Something happened.

Ted Michalos:   Yeah.

Doug Hoyes:    So if we can send you to a not-for-profit agency that can do the credit counselling but also has other counsellors and other specialities, that’s better for you, because you’re getting a more all-encompassing –

Ted Michalos:   Yeah. That’s the way we always used to think about it. So they changed the laws last year, the government’s been trying to reduce the involvement of debt consultants in the insolvency process. Now a debt consultant is somebody that basically charges you a fee and says “Yeah, you just file a consumer proposal with a trustee.” And many of the debt consultants are disguising themselves as credit counsellors. The issue being that nobody owns that term ‘credit counsellor’. So the government didn’t licence credit counsellors, they had no control over who called themselves one. So the government’s objective, at least I think this was their objective, to reduce the impact of debt consultants, they took a major swing at credit counsellors. And the not-for-profits, well, the vast majority of them no longer provide any credit counselling services, because the funding model’s dried up.

Doug Hoyes:    Yeah. I want to talk about that funding model and we’ll get to that. I think you and I would both agree that over the last 30 years that we’ve been doing this kind of work we’ve seen a huge change in the credit counselling world, the local agencies, where you used to be able to go in, sit down, face-to-face like we’re doing here and have someone walk you through budgeting, looking at your numbers, you know, it’s just not a thing anymore. Now, you alluded to the government changes up until October 1^st 2018, if we had a bankruptcy or consumer proposal client who wanted some detailed budgeting advice or, like I said, needed some specialized counselling, we wouldn’t hesitate to send them for their credit counselling sessions to a full service not-for-profit agency. Now the rules are so cumbersome that it’s very difficult for us to send them outside. I’m not going to go into the changes to the rules, suffice to say it’s much more cumbersome for us to do that. Now, in some ways that’s good for our clients because they stay in-house, we can help them all the way through.

Ted Michalos:   Yeah.

Doug Hoyes:    And we now have, I think, something like 17 licensed BIA Bankruptcy and Insolvency Act insolvency counsellors on staff, in addition to all of our LITs who are also fully accredited. So that’s over 35 people in-house who can do credit counselling. So, in most cases that’s great for our clients, but, like you said, there are cases where it would be good for our clients if we could easily get them additional help and that’s very difficult with the current rules. But, I’m digressing.

Ted Michalos:   Right.

Doug Hoyes:    So, let’s get back to the topic. So you’ve explained why traditionally credit counselling agencies were not debt collectors. Give us the other side of the story, why do many people now consider credit counsellors to really be debt collectors.

Ted Michalos:   So let’s focus on what’s been left in the not-for-profit credit counselling community. Two or three very large national firms that derive almost all of their funding from the fees that they receive from the lenders for completing debt management programs. So the model is this, they negotiate a debt management program, which really isn’t much of a negotiation, you’re going to repay 100% of your debt over four or possibly five years and once those payments are made the lenders, the creditors, the people that you’re indebted to. Like on a donation, a contribution, any kind of payment –

Doug Hoyes:    A fair share voluntary contribution.

Ted Michalos:   Right. So they make a payment back to the agency. I’ve got no problem being paid to do their work, but now the only thing they’re getting paid for is to collect on debts. One of the definitions of a collection agency is they get paid for collecting on the debts.

Doug Hoyes:    Well, and they have to be registered with the Ontario government as a collection agency.

Ted Michalos:   Well, that’s the kicker on this. Because now all of these national agencies are licensed as collection agencies, even though they’re credit counselling agencies, so the line has completely disappeared.

Doug Hoyes:    For any of our listeners who want to fact-check us, I’ll put a link in the show notes to the Ontario Ministry of Government in Consumer Services and you can go there and you can type in the name of any not-for-profit credit counselling agency and you can see whether or not they are registered as a collection agency. So, why do you think it is that credit counsellors are required to register as collection agents?

Ted Michalos:   Because, effectively, they are collecting on behalf of a creditor. The reason that they government created the registration system in the first place was so there’s some sort of accountability, there are regulations in place, there are rules because, quite frankly, a lot of collection agencies have pretty poor reputations for some of the tricks and techniques that they use. They used to send out documents that look so much like they’d already been to court to scare people, that actually the lawyers had to step in and ban that practice, the lawyers that were associated with it. It’s just so easy to manipulate people on the phone or by text or over the internet, to scare them into doing things that they shouldn’t, that licensing is required and regulations are required. Now those same regulations apply to these national credit counselling agencies, because effectively they’re collecting for creditors.

Now, given the choice with somebody dealing with a not-for-profit credit counselling agency as a collection agency versus some of these people I was just describing, you’d much rather deal with the not-for-profits, but they don’t get your account. I mean, they don’t buy accounts from the creditors. You go to them asking for help and effectively it’s kind of a reverse collection agency. You’re voluntarily saying “I need help paying these things” and so you hire them to do it as opposed to the collection agency hiring them, but it’s still the creditors that are paying them.

Doug Hoyes:    Yeah. And it’s the Ontario Collection and Debt Settlement Services Act, which is where this is defined, I mean it defines a collection agency as anyone who obtains or arranges for payment of money owing to another person. So, you’re right, if a credit counsellor arranges for you to make payments through a debt management plan, to your creditors they’re acting as a collection agency.

Ted Michalos:   Now, you’d think then that that would apply to us. Because effectively we are collecting money to repay debts. Of course, we’ll only be paying a portion of the debt or none at all, depending on the situation. But there’s a specific prohibition in the law excluding licensed insolvency trustees.

Doug Hoyes:    Section 2, Sub 1, Sub C. You’re exactly right. And it says that the act does not apply to a trustee licensed under the Bankruptcy and Insolvency Act. It’s a law. So why do you think then that the government, when they drafted this law, specifically said that a credit counsellor is a collection agency, but a licensed insolvency trustee is specifically not a collection agent?

Ted Michalos:   I’m not going to try and second-guess politicians, because I don’t know that I can dumb myself down that much. But, effectively, let’s look at who’s initiating the contact, who’s paying who for what service.

Doug Hoyes:    Follow the money.

Ted Michalos:   Always follow the money. So in a debt management program the not-for-profit agency sets up the program, holds the funds for you and advances it to the creditors, the creditors then make a return payment to them. That’s how the money actually flows. It goes from you to the not-for-profit to the creditor, the people that you owe, back to the not-for-profit. So it’s a pretty clear stream where the money goes. With a licensed insolvency trustee the money is held in trust, a fee is deducted before any monies are released to the creditors. But the trustee’s obligation is to the entire community. So we have an equal obligation to you, the person in debt, as we do to the creditors that are owed the money. The best way to think of an LIT in my opinion is that we’re referees. We’re there to design and monitor and control the legal remedies for people to get relief from debt. Whereas the debt management program and a credit counsellor doesn’t have that – it’s not the same relationship at all.

Doug Hoyes:    Yeah, and I guess that goes back to the first attribute of a debt collector. They work for the creditor, not you.

Ted Michalos:   Yeah.

Doug Hoyes:    And, you know, that’s why you follow the money, if you want to figure it out. So whomever is paying you is who you are working for and credit counsellors earn the majority of their income from the banks they are collecting for. Now, everyone’s listening and they’re going “Okay, that makes sense, but you guys, licensed insolvency trustees, you don’t work for free when you do a consumer proposal.”

Ted Michalos:   That’s true.

Doug Hoyes:    “And you end up sending money to the same creditors or sending to the same banks and whatnot, credit card companies.” So doesn’t that also make us a collection agent then?

Ted Michalos:   Again, the difference, and maybe you’re thinking this is just semantics is the actual flow of the money. So we don’t have any kind of relationship with any of the lenders, any of the credit granters. You come to us, we contact your creditors and we say Jane Doe is going to offer to repay a portion of their debts.” And they do that by making payments to us which we hold in trust and then we deduct a fee before those funds are released to whatever creditors the person owes money to.

Doug Hoyes:    So the banks, unlike with the credit counsellor, are not sending us money.

Ted Michalos:   Right.

Doug Hoyes:    We’re sending money to them. So explain in simple terms how do we get paid then.

Ted Michalos:   Let’s talk about a proposal first, because that’s what we’re comparing to the debt management program. In the law it simply says there’s an administrative fee of 20 cents on the dollar for any money to be sent to creditors. So, we are getting paid by whomever is making the payments into the proposal. So, if I make $100 payment and I was going to send that $100 to your creditors, well, the $20 will get paid to me for doing that first. There’s no contractual relationship between trustees and the creditors. Now, there is a contractual relationship between the not-for-profits. I mean they signed that fair share contribution agreement with the – I think it’s the Canadian Banking Association.

Doug Hoyes:    Yeah, I think they now do it on an individual basis. Each one negotiates their individual one.

Ted Michalos:   Right.

Doug Hoyes:    But, you’re right, our relationship is federal law. There’s this federal law that says if a consumer proposal is accepted then we get this percentage. And, you’re right, it’s a percentage of what’s in the pot. So if we’ve got a dollar, some of it goes to us, some of it goes to the government, because they’re regulating this process and obviously the rest goes to the creditors.

Ted Michalos:   And we’re not setting up a 100 cents on the dollar program. There’s some finesse to this. When you talk to a licensed insolvency trustee, we’re going to compare with what your proposal needs to be by what would your creditors realize in a bankruptcy. And, again, folks, if you’re not familiar with bankruptcy you’re saying “I can’t repay any portion of my debt.” So there’s very specific rules on how much you have to pay under what circumstances. Proposals are going to offer a better repayment to the creditors than a bankruptcy. That’s one condition. The second is that it has to offer enough money that the creditors will agree. You earlier said it’s about a third and most of the Canadian banks have told us “We want at least a third of our money back.” That’s dramatically different than 100% in a debt management program. There’s no finesse involved there. It’s “Give us our money.”

Doug Hoyes:    Yeah. And a third is a ballpark number. There are lots of proposals we do that are 15 cents on the dollar, there are lots that we do that are more than that.

Ted Michalos:   Correct.

Doug Hoyes:    But, you’re right, it’s not just a blanket you’re paying everything back. It’s not as simple as that. So, okay, we get a percentage of what our client pays and the rest – the government gets some, the rest goes to the creditors. We send money to them, they don’t send it to us. So it’s pretty obvious, I think, we’re not working for the creditors.

Ted Michalos:   Right.

Doug Hoyes:    I want to go back to something you had said earlier. When all of these not-for-profit agencies started they were not-for-profit agencies and technically they still are and that’s the difference between us and them. We are not not-for-profit.

Ted Michalos:   That’s right.

Doug Hoyes:    We are a business.

Ted Michalos:   We are a for profit corporation. If we don’t provide value to our clientele then they’ll look for future services someplace else.

Doug Hoyes:    It’s as simple as that.

Ted Michalos:   Yeah.

Doug Hoyes:    Okay, so we are not not-for-profit, we are also not a charity.

Ted Michalos:   Correct.

Doug Hoyes:    And there’s a difference between those two words. This is something that kind of grates on me a little bit, because you can be a not-for-profit organization and not be a charity. Not-for-profit just means that you are not trying to make a profit.

Ted Michalos:   You know what you could put in the program notes, we had a couple of these large national credit counselling agencies lost their charitable status.

Doug Hoyes:    Well, let’s talk about that, because you’re right. So a charity is an organization that is engaged in charitable works. I actually looked it up on the Canada Revenue Agency website, because they regulate this and I’ll put the link in the show notes. They say that registered charities are charitable organizations that must use their resources for charitable activities and have charitable purposes that fall into one or more of the following categories. The relief of poverty, the advancement of education, the advancement of religion, other purposes that benefit the community. So a charity is doing something good for society as a whole.

Ted Michalos:   Right.

Doug Hoyes:    Makes sense. That’s different from a not-for-profit organization that’s doing something good for its members. So examples of a not-for-profit organization would be things like a social club. I’m sure you’re –

Ted Michalos:   The kid’s soccer league.

Doug Hoyes:    The kid’s soccer league, exactly right. A sports organization, something like that. Now, in the past not-for-profit credit counselling agencies as you alluded to were also registered charities because they were doing education and helping people with their money and their debt, which, of, course benefits the community and oh, fewer people under stress, that sort of thing. But, today, most of the big credit counselling agencies are not registered charities. For example, Credit Counselling Services of Atlantic Canada is a large not-for-profit credit counsellor, obviously in the Maritimes, and they became a charity in 1993, but their charitable status was annulled in 2013.

Again, let me be clear, I’m going to quote from Revenue Canada CRA’s website, “When a charity’s registration  is annulled, it is deemed to have never been registered.” Annulments generally occur when registration was granted in error, an organization whose registration had has been annulled can no longer issue donation receipts for income tax purposes and is no longer eligible to receive gifts from registered charities.” So that means that the organization was not doing charitable works. That makes sense, because if what you really are is a collection agency, that’s a business and you’re getting paid for doing that business, so obviously you’re not a charity.

Ted Michalos:   Right.

Doug Hoyes:    Another big credit counselling agency is Credit Canada Debt Solutions. They were registered as a charity in 1967 and their charitable status was annulled on September 27^th 2018. That is amazing to me. They were registered as a charity for over 50 years and then someone realized the registration was an error and it was annulled. I mean something kind of strange is going on here.

Ted Michalos:   But if you look at the financials for each of those organizations it becomes immediately obvious that they’re not charitable organization. I’m not saying that they’re for profit, actually I will say that they’re for profit, but they don’t satisfy the criteria. The vast majority of their revenues and the vast majority of their operating expenses were going towards the management of these debt management programs. It wasn’t to providing educational services or community support of any of those other charitable activities.

Doug Hoyes:    Well, you’re actually right. Because I did some research on that exact topic and I’m going to put some links in in the show notes to this. One of the biggest credit counselling agencies in Canada, probably the biggest, is the Credit Counselling Society of British Columbia. In 2017, and these are financial statements, they are still registered as a charity, so you can pull these off Revenue –

Ted Michalos:   It’s public information.

Doug Hoyes:    It’s public information. You can pull them off Revenue Canada’s website. In 2017 they issued tax receipts for $71,000 in donations, they earned investment income of $228,000 and their total revenue from the sale of goods and services was over $13.5 million. That sounds like a business to me, not a charity. Let me be very clear. They earned 13 and a half million dollars largely collecting money on behalf of banks and lenders. Now, before we get all high and mighty, probably too late, I think I’ve been high and mighty now for the last five minutes here, but are we overstating this, are we making a mountain out of a molehill. Hoyes Michalos & Associates is a business. We help people deal with their debts.

Ted Michalos:   Right.

Doug Hoyes:    The big credit counselling agencies or businesses, they help people deal with their debts. So what’s the big deal here?

Ted Michalos:   Fundamentally, the question is are you going to be more inclined to deal with a not-for-profit or a charitable institution to deal with your situation than you are a for profit corporation. I think there’s a bias in the language that you assume that, well, it’s a not-for-profit, it’s a charity. They’re not there to try to make a buck. Their only real impetus is to try and help me. The issue is, of course, that I’m not sure that’s an honest representation of what they do. If you had $71,000 worth of charitable donations and $13.5 million dollars worth of revenue from banks, I’m pretty sure they’re working for the banks.

Doug Hoyes:    And, in fact, you can go to their websites and look to see who their supporters are, who supports their educational programs and whatnot and it is largely banks, credit card companies, that sort of thing. This show, we’re not here to trash anyone, although, I guess that’s what we’ve done for the last –

Ted Michalos:   Yeah, we pretty much have.

Doug Hoyes:    Last 10 minutes. But we’re here to give practical advice. And you’ve already alluded to this, there is a bias that oh, you’re a not-for-profit, you’re a charity. I want to go talk to you, I don’t want to go talk big, bad Ted Michalos who’s in this to make money.

Ted Michalos:   Right.

Doug Hoyes:    If you have debt, how do you decide if you should call a not-for-profit credit counsellor or a licensed insolvency trustee? I mean if we all make money for helping you with your debts, is there really any practical difference?

Ted Michalos:   Maybe at the end of the day there isn’t. I mean a licensed insolvency trustee has a fiduciary responsibility to explain to you all of your different options. That’s going to include talking about debt management programs. So if you’re an individual that can afford to repay 100% of your debt, well, then maybe the debt management program is the right solution for you. It’s going to have the same hit on your credit report as a consumer proposal and a consumer proposal you’re likely going to pay less than 100 cents on the dollar, but there are times when it was the right solution. Now, I have to be honest, I don’t recommend it much anymore, because all the local agencies are gone.

Doug Hoyes:    But let’s talk about that then. So there are times when a debt management plan is the right solution.

Ted Michalos:   Right.

Doug Hoyes:    So give me some examples then. It’s not obviously a bad idea all the time, there are cases where a debt management plan might actually be the correct answer.

Ted Michalos:   Yeah.

Doug Hoyes:    So, when? When would that –

Ted Michalos:   I always thought when the local offices were in place the debt management program was the correct solution, if you had a limited amount of debt. So maybe you owed a couple of credit cards and a utility, maybe an old landlord that the local agency knows is receptive to these kind of deals. Because you can’t force people into one of these programs. So let’s say you owed maybe $10,000 or $12,000, you need time to get back over a hump, because something bad happened. You’re off work for a couple of weeks, you got sick. It really doesn’t matter what the reason is. $12,000 over four years you’re looking at $250 a month. It’s a number that’s manageable. You get into the 30, 40, 50, 60 thousand dollars and you’re trying to do a debt management program, suddenly they don’t make as much sense. If you’re paying back 100 cents on the dollar on $50,000, your monthly payment over four years is 1,000 bucks. It’s not manageable for most people anymore.

Doug Hoyes:    So a debt management plan would make sense if your debts are moderate. Yeah, okay, I could get them paid off in a couple of years. I need a break on the interest. And obviously it has to be with favourable creditors.

Ted Michalos:   Right.

Doug Hoyes:    So like you said, the local agency knows the local hydro company, the local, you know, whatever. They can work something out.

Ted Michalos:   And, automatically, payday loans will refuse to participate and automatically the government’s not going to participate. Although there were debt management programs focused on student loans. Maybe that’s a different program when we talk about student loans again.

Doug Hoyes:    But, again, if it’s a government guaranteed student loan, then the government has to be agreeable to it.

Ted Michalos:   Right. Now I think those debt management programs are gone, by the way. Because they were provided by the local offices and I just don’t think – I mean, the local offices are gone.

Doug Hoyes:    Yeah, this is the problem. We used to send people to – well, Guelph would be a classic example.

Ted Michalos:   Right.

Doug Hoyes:    And you’ve been in Guelph for decades and decades. And they just don’t exist anymore. There is no one there to send someone to.

Ted Michalos:   That’s right.

Doug Hoyes:    To sit down, work out a budget, work out a debt management plan, whatever it is. Now you alluded to a couple of reasons why someone would want to go to a not-for-profit agency. One is they’re not-for-profit, they’re a charity, so obviously they’re pure.

Ted Michalos:   Mm-hmm.

Doug Hoyes:    The other reason was “Well, it’s going to look better on my credit report.”

Ted Michalos:   Right.

Doug Hoyes:    You’re saying no.

Ted Michalos:   No. A very quick credit report lesson, folks, is the rating from 1 to 6 are your payment frequency on your debts. So if you make regular payments every month it shows as a 1, two months it’s 2s, 6 is used if you haven’t paid in five months. Seven is used when you’ve entered into some sort of settlement on your debt. And there only really are two types. It’s a consumer proposal or a debt management program. So regardless of whether or not you’re paying 100 cents back on the dollar on the debt management program or 30 cents on the dollar in a consumer proposal, it shows the same on your credit bureau report.

Doug Hoyes:    Yeah, there’s no big advantage to going the other route.

Ted Michalos:   No. Again, this is another program, but don’t ever make your debt relief decision solely on what happens on your credit report. Because people are so confused and misunderstand how credit reports work that it’s just a bad basis for a decision.

Doug Hoyes:    Yeah. A better basis is if I do a debt management plan I’m going to have to pay $1,100 a month and the example you gave and in a consumer proposal maybe I’m paying 300.

Ted Michalos:   Yeah, that’s a perfect example.

Doug Hoyes:    So, okay, that’s not a hard decision to make, particularly when they’re both going to show up essentially the same on my credit report.

Ted Michalos:   Yeah. And which one is going to solve the problem? Probably the $1,100 a month isn’t going to solve the problem –

Doug Hoyes:    Because I can’t afford it.

Ted Michalos:   And in six months you’re going to file the consumer proposal anyway.

Doug Hoyes:    So a consumer proposal is a better option than when your debts are large.

Ted Michalos:   Your debts are large. If you got government debts, payday loans. If your situation is complicated. And by that I mean if you got more than three or four creditors. Because the more creditors you have, the more difficult it is to get any kind of debt management program agreed to. I mean it’s a voluntary program, you’re paying back 100 cents on the dollar, but you can’t compel people to.

Doug Hoyes:    Yeah, and if you have 10 different creditors and they can make a deal with eight of them, that still leaves two who are yelling and screaming and threatening to take you to court. In a consumer proposal, if the majority of the dollar value agrees, everyone else has to take the deal, so it’s a lot easier to make it compelling.

Ted Michalos:   Yeah.

Doug Hoyes:    So, because as debt management plan requires the debtor to pay back 100% of their debt it’s often not the best outcome for the debtor and, again, we talked about debt collectors wanting to collect as much as they can from you. That’s what a debt management plan does. And, of course, that’s not the objective as you’ve explained in a consumer proposal. Our goal is let’s get a reasonable number. Now a lot of people say “Well, yeah, but you trustees, you already explained that you get a percentage of what’s in the pot. So you’d much rather the person pay $1000 a month than 500.” And I say no, I would much rather you pay what a reasonable number is, that we can get the creditors to agree to. Because if I force you into some $1000 a month plan that you can’t afford, it’s just going to crash anyways and you’re not going to be able to pay it. So that makes no sense either. So, again, we explain your options and hope we come up with the correct option for you.

So what is the difference then, we’ve talked about the difference between debt management plans and consumer proposals, what’s the difference between a licensed insolvency trustee and a credit counsellor.

Ted Michalos:   So the most obvious difference to me is there’s no such thing as a licensed credit counsellor. So anyone who wants to can call themselves a credit counsellor. Nobody owns that term and I think that’s the mistake the government made 30, 40 years ago, that allowed the debt consultants to migrate away from that term, debt’s bad, to credit counselling sounds good. Biggest single difference is the vast majority of licensed insolvency trustees are also chartered professional accountants. That’s not to say that those that aren’t chartered professionals accountants are any lesser or different. But we are professionally trained to deal with finance, accounting, debts, debt relief, debt restructuring. It’s what we do. It’s why we’re paid the big money. You can look to see what my credentials are, you can check to see that my licence is still valid, that I’m not in some sort of abeyance or under some sort of restrictions. That would be a pretty rare thing, but there’s nowhere to check if a credit counsellor is actually legitimate or not.

Doug Hoyes:    Yeah, you can go on to the Office of the Superintendant of Bankruptcy’s website, do a search for a licensed insolvency trustee, punch in Hoyes Michalos, punch in Hoyes, Michalos, whatever and you will see that we exist there.

Ted Michalos:   Yeah. And about half the people we talk to don’t require our services. We’re able to assist them by either pointing them in the right direction, maybe sending them off to refinance their home or they just needed some budgeting advice. You’re not going to find a credit counsellor that turns away half the people who call them. Because you call them, because you got a debt problem, they’re going to put you in a solution.

Doug Hoyes:    They want to help you. And your point about the word credit is right and I was thinking “Yeah, didn’t I talk about that in my book?” Yeah, I did.

Ted Michalos:   There you go.

Doug Hoyes:    I had to get the book in here somewhere. Myth number 4, give credit where credit is due. And basically I made the point that you just made, that credit is a positive term.

Ted Michalos:   Yeah.

Doug Hoyes:    So I don’t want to be called a debt counsellor, I want to be called a credit counsellor, because that’s a more positive thing. So, okay, let’s cut to the chase here. You and I have worked with not-for-profit credit counsellors for over 20 years.

Ted Michalos:   Right.

Doug Hoyes:    They, I think we both agree, can be great money educators, they can be great at helping people with budgeting and other money management issues. I object to them suggesting debt management plans when a consumer proposal or some other option would be better for their clients. That’s what you just said as well.

Ted Michalos:   Yeah.

Doug Hoyes:    And I definitely object to them hiding behind the words not-for-profit and charity when really what they are is a business, because I think people go to a not-for-profit counsellor instead of an LIT for the reasons you just said, it sounds more pure. I think if credit counsellors were honest and told their clients upfront that most of their funding comes from the big banks, people would perhaps think twice about using them. Again, the point that you just made. Now, I get it. They need to pay their staff, they need to keep the lights on, they need some money coming in. People in debt don’t have money to be paying for advice.

Ted Michalos:   Right.

Doug Hoyes:    So credit counsellors can’t charge them a fee for advice. They’re aren’t like, you know, fee-only certified financial planners who charge you by the hour and, you know, aren’t selling you anything, so you’re getting relatively unbiased advice. A credit counsellor only has two obvious ways to generate funds. They either do debt management plans and get the contribution back from the bank or they take sponsorship money directly from the banks.

Ted Michalos:   Right.

Doug Hoyes:    Because that’s where the money is, but obviously that’s the problem. Not-for-profit credit counsellors have a funding problem.

Ted Michalos:   Definitely.

Doug Hoyes:    This is the big issue. I believe that the vast majority of them are very good people, they really want to help people, they want to do good, but they also need to have money to do these good works.

Ted Michalos:   Right.

Doug Hoyes:    So what is the solution? How can credit counsellors help people without appearing to be on the payroll of the big banks, which, in my mind is a conflict of interest.

Ted Michalos:   I think that the – I mean, the government really screwed up when they made the changes last year. Because they took out one of the legs of the stool, one of the funding models that credit counsellors had, in that we would pay them to provide insolvency counselling to all of our clients. Now we’re not even allowed to make donations to them or contributions to have a trade show or something now, because it looks like we’re trying to curry favour or buy bias from them or something. Until they can settle on a model where they’re paid for their services to give unbiased financial planning education, I don’t know that there is a funding model for them anymore.

Doug Hoyes:    And that’s kind of the difficulty.

Ted Michalos:   Right. And our communities are much worse off. I mean we went to providing our own service because we had to. We honestly believe that the communities were better served by the not-for-profits giving this advice, because they could always talk about substance problems or gambling problems or relationship issues or maybe I got a problem with my landlord. All these community knowledge-based things that they were tied to that we are not tied to as well. We are professional accountants, we’re going to restructure your debts, we’re going to solve your financial problems. But there’s always an underlying issue in your life that would be nice if somebody helped with you that too.

Doug Hoyes:    And that’s the crux of the problem.

Ted Michalos:   Yeah.

Doug Hoyes:    Ted, thanks very much. I know some of you are watching this and thinking that Ted and I don’t like credit counsellors. You’re thinking that we want you to come to us, not to them, so we’re saying bad things about them. No. We’ve worked very closely with many agencies for more than 20 years and I would love it if they could find a way to fund all of the good work they do without having to resort to having the big banks as their main source of funding. On this podcast we talk about the dangers of credit cards and big car loans and mortgages. Those are products offered by the big banks. Would I be willing to say bad things about credit cards if my main source of income was the big banks and credit card companies? Probably not. In my book Straight Talk on Your Money I made a lot of points that the banks don’t want you to hear. That’s how you know I’m not on the payroll of the big banks.

So, what’s the solution? How can we support not-for-profit credit counsellors so they can give unbiased advice to Canadians who need help with money management and don’t want a sales pitch from the banks? I don’t know the perfect answer, but how about considering changing the model entirely. Let’s have licensed insolvency trustees who are federally monitored and regulated and who don’t work for the creditors do debt relief programs. Let’s have not-for-profit credit counsellors do what they are good at, education. So, how can we fund it? Perhaps a coalition of members of the financial services industry could find a way to provide long-term sustainable funding. We could even funnel money from licensed insolvency trustees to credit counsellors, either by allowing us to send credit counsellors work to them again, as Ted mentioned, or perhaps through a supporting funding model.

LITs pay a fee to the Office of the Superintendent of Bankruptcy for every consumer proposal and bankruptcy we file. This year there will over 120,000 filings in Canada. What if the fee we pay was increased by $10 a file and that money was distributed to not-for-profit credit counsellors registered as charities whose sole purpose was to educate and help the public. That’s over a million dollars of funding. And what if the banks agreed to kick in some money? They make literally billions of dollars in profit every month. A few million a year shouldn’t be a big deal and it shouldn’t only be done under the hidden agenda of having the credit counsellors act as debt collectors for them. And if they were registered as charities anyone who wanted to improve the financial literacy of Canadians could make a donation and get a tax receipt just like they can do with any other charity.

Will this be a better model for consumers dealing with debt issues? I don’t know, but it’s time to start the discussion and come up with some answers. Hopefully today’s show is the start of that process. That’s our show for today. I’ve got links to everything we talked about today, you know, legislation, Canada Revenue Agency and a full transcript of today’s show notes over at hoyes.com. That’s HOYES.com. Thanks for listening. Until next week, I’m Doug Hoyes. That was Debt Free in 30.

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