Who is GEM Debt Law?

According to their website, GEM Debt Law is an established debt settlement firm. They purport to be Licensed Professionals but not Bankruptcy Trustees. GEM indicates that they operate as a law firm.

Why is this important to know? Because in Ontario, debt settlement companies must be registered under the Collection and Debt Settlement Services Act (CDSS Act). This Act legislates fees and services of debt settlement companies. However, lawyers, not-for-profit credit counselling agencies and Licensed Insolvency Trustees are exempt from the requirement to be registered and thus are not bound by the CDSS Act. While LITs are federally legislated and bound by the Bankruptcy & Insolvency Act (BIA), lawyers and credit counsellors are not.

At the time we published this post we were unable to confirm where GEM Debt Law’s lawyers are licensed as their website did not list the full names of their lawyers.

UPDATE January 2022:

Since the publication of our initial blog post, GEM Debt Law has modified their website to include the lawyer’s full name.

What does GEM Law do?

As has become a common theme with these contract reviews, GEM Debt Law charges a fee to help individuals with insolvency filings. Specifically, their contract states that they act as a Legal Representative for filing a consumer proposal, Division I proposal or bankruptcy and help select a Trustee (Licensed Insolvency Trustee).

As you can see, GEM Debt Law under this agreement does not actively settle debts for clients as they cannot negotiate binding agreements with creditors through consumer proposals. Remember, only Licensed Insolvency Trustees are legally able to file a bankruptcy or consumer proposal. Only an LIT can approve claims, count votes and get a binding agreement with creditors in a consumer proposal.

The question then becomes, do individuals need legal representation to help them file a consumer proposal, select a trustee or attend any meeting of creditors? In my opinion, in almost all cases, no. Filing a consumer proposal is a legal process, and LITs are licensed and trained in law and the regulations provided by the Office of the Superintendent (OSB) required under that process. LITs are Officers of the Court versed in the legal requirements of filing a consumer proposal. Interestingly, in Canada, lawyers are prohibited from being Licensed Insolvency Trustees.

So, what about any meeting of creditors? Should a debtor have a legal representative at that meeting? Again, in most cases, it’s not necessary. Firstly, not all proposals have a creditors’ meeting.  A meeting is only required if directed by the Official Receiver (seldom) or if creditors who hold a minimum of 25% of the debts request a meeting (again rare). If a meeting is requested, the purpose is two-fold:

• To allow the creditors, or the government, to ask questions of the debtor;
• To count votes.

Even if a meeting is requested, in my experience, anyone rarely attends. In most cases, the creditors simply don’t like the offer and wish for a higher payment. A new offer can be discussed and arranged before the meeting. If the debtor agrees, the new deal can be papered and sent, enabling a yes vote and eliminating the need for anyone to attend.

So, if you don’t need legal assistance in filing a consumer proposal, selecting a trustee or attending a meeting, what about the services where GEM Debt Law states they collect and review financial information, advise about debt relief options and anticipate the response of creditors? This is what is known as a financial assessment. Again, Licensed Insolvency Trustees are required by law to conduct this assessment and explain all options for dealing with debt to any debtor. The OSB has set out specific guidelines in Directive 6R3 stating what is required. Yes, a trustee can delegate the collection of information. However, most reputable trustees, including Hoyes Michalos, conduct this assessment in-house, for free, as part of the consumer proposal or bankruptcy process. There is no need to pay an outside third-party company to perform this assessment.

The last argument put forth by most debt settlement companies is that they can get a better deal because they work for the debtor.  In fact, on their website, GEM Debt Law states that “GEM’s fiduciary duty obliges us to serve the clients’ best interests, not the creditors or collectors”.

That brings us to cost. Let’s look at that.

What does this cost?

In this case, the client was requested to make 60 monthly payments of $334.67 for a total cost of $20,080.20.  These costs were broken down as $7080 in fees, taxes and bank fees to GEM and what appears to be $13,000 in suggested consumer proposal payments. 

The $13,000 is marked as ‘Savings’ in the Pre-Authorized Payment Agreement sent to the client. However, Schedule A of the agreement notes that the Retainer Fee payment consists of GEM  fee plus taxes and bank/eft fees and a ‘Creditor Fee’ to be calculated based on the client’s total debt and projected savings on debt reduction.

These payments were to be paid as 60 equal monthly installments of $334.67, with the first two payments entirely going to pay upfront GEM fees, tax and bank fees.  The remainder was split between ongoing GEM fees and creditor payments for an additional 58 months, which we assume to be the proposed proposal term.

Again, the total cost to the client with GEM would have been a minimum of $20,080. This is assuming the deal as recommended by GEM was accepted by the creditors. While GEM states in their contract that they “shall strive to achieve the best results for the Client, such as the lowest monthly payment and significantly reduce debts owing to creditors,” they acknowledge that “results may vary and no guarantees whatsoever shall be implied within this Retainer”.

In other words, if the creditors do not like a lowball offer, the cost to the client will increase.  This is true with all consumer proposals. However, if the creditors ask for more after being referred to the Trustee, it appears GEM Debt Law fees will also rise. GEM also has what appears to be a clause allowing them to collect their fees in advance if the consumer proposal start date is delayed.

If the client does not file a consumer proposal and files a bankruptcy instead, either because the creditors do not accept any offer or because the LIT recommends that a bankruptcy makes more sense, GEM can continue to charge the same retainer fee as assumed with a consumer proposal filing.

A first bankruptcy, for someone with no surplus income, can last as little as nine months and cost roughly $1,800 or $200 a month. If this were the situation, a client would still be required to pay $7,080 in fees to GEM versus $1,800 to file bankruptcy (including the trustee fees) unless GEM agreed to lower their fee.

Also in the agreement are several potential additional charges or fees, not included in the retainer agreement. One example is a $50 per credit report request, while we help clients obtain their free credit report as part of our process at no additional cost. I’ve attached an image of their fee schedules at the end of this post.

Consumer Proposal outcome with Hoyes Michalos

In this case, the individual was sufficiently concerned with the $7,080 in costs to be paid to GEM that they contacted our office for a second opinion.

After a full debt assessment, we recommended a consumer proposal of $250 a month for 60 months.

• Their monthly payments would be substantially less than the $334.67 proposed by GEM, making them more affordable.
• The monthly proposal payments with Hoyes Michalos would be the full $250 versus $224.24 in the GEM contract. As a result, the creditors would receive more, making the proposal more viable, all while the client paid less.
• Fees earned by Hoyes Michalos as LIT for administering the consumer proposal would amount to $4,634.95, significantly less than the $7,080 in the GEM contract. Trustee fees are legislated and are included as part of the consumer proposal payment, while GEM fees are unregulated and added on top.

In this case, our client’s total amount payable over five years amounted to $15,000, significantly less than the $20,080 proposed by GEM Debt Law. With total unsecured debts of roughly $47,000, this amounted to a settlement offer of 32 cents on the dollar. I am happy to report the proposal was accepted by the creditors.

Recommendations

To date, we have reviewed several third-party ‘consumer proposal advisory’ contracts. You can see two recent posts here and here, along with a client testimonial here.

We continue to advise consumers facing debt problems to talk directly with a Licensed Insolvency Trustee, especially if the agency mentions bankruptcy, consumer proposal or debt settlement. It is vital to get advice about insolvency proceedings, for free, from a professional licensed to provide those services.

We continue to ask that the Office of the Superintendent of Bankruptcy:

1. Place under administrative review any Licensed Insolvency Trustee consistently obtaining file referrals from, or in a related business with, any debt settlement companies or unlicensed debt consultant.
2. More strictly regulate the advertising and provision of consulting services around consumer proposals.
3. Amend Directive No. 6R3 to limit who a trustee may delegate the collection of information required to conduct an assessment under the Bankruptcy & Insolvency Act and that the cost of this assessment be borne by the Licensed Insolvency Trustee, not the debtor.

The post GEM Debt Law Contract Review appeared first on Hoyes, Michalos & Associates Inc..

As we have done in the past with other debt consultants, we will review the contract details as provided through our client (with their permission) to help others avoid unnecessary costs.  To protect our client, personal information has been removed from images taken from the York Credit Services contracts provided to us.

Services Provided

According to their contract, York Credit provides debt relief consultations, helps clients choose a ‘Third Party Professional’ and represents the client while implementing the chosen program.

In other words, they collect information, and when they suggest a consumer proposal, they refer you to a Licensed Insolvency Trustee.

For this review and referral, they charge a hefty fee.

How Much Does This Cost?

In this case, the consultation fees charged amounted to $4,920, payable as two installments of $400 each BEFORE the consumer proposal was filed, and 24 ongoing installments of $172.

On top of this, the client would pay proposal fees to the Licensed Insolvency Trustee bringing his total recommended payments to $13,920 on unsecured debts (as listed in his proposal filing) of $31,010.

• $4,920 payable to York Credit Services
• $9,000 for the proposal to his creditors

As many who read our blog know, a consumer proposal allows you to settle debts for less than you owe, and settlements as low as 20 cents on the dollar are possible. In this case, York Credit Services recommended monthly proposal payments of $150 a month payable over five years, or 29 cents on the dollar.

However, when you factor in their consulting fees, the total settlement cost increased to 45 cents on the dollar! That means going through a debt consultant increased the cost by 55%.

Whether the proposal payments of $150 a month were reasonable, I cannot determine as I did not conduct a debt assessment at that time. However, I can say that it was completely unnecessary for this client to pay an additional $4,920 for a referral to a Licensed Insolvency Trustee.

To be clear, Licensed Insolvency Trustees are required by law to conduct a complete financial assessment (more robust than the cursory services which appear to have been provided for by York Credit Services), and an LIT does so for free.  All reputable LITs provide free consultations. If you are not happy with the recommendation of one trustee, seek a free second opinion from another Licensed Insolvency Trustee.

As you can see from this scenario, debt consultants cannot get you a deal that is better than the one you can achieve going directly to a trustee, especially after factoring in their consulting fees.  Consultation fees by debt consultants can increase the overall cost by 50% or more.

Additionally, LITs do not require clients to make payments prior to filing a consumer proposal with the federal government. And when you work directly with an LIT, the ONLY payments required are those under the proposal, in this case, $150 a month.

This client continued to pay an additional $171.67 a month to York Credit because they thought these payments were required as part of the proposal process. They were not.

And yes, Licensed Insolvency Trustees do get paid to administer consumer proposals. That administration including filing the proposal with the government, collecting credit claims and counting votes, communicating with creditors, holding meetings if necessary, and making distributions to the creditors.

A $150 a month proposal for 60 months would result in total fees of $3,279 to the trustee plus costs (government filing fees and counselling fees) of $296.34.  I should also point out that Licensed Insolvency Trustees are regulated, and our fees are included in the monthly proposal payment. The creditors bear the cost since they receive a smaller distribution after the trustee has been paid.  Debtors do not pay extra.

That means, in this scenario, the Licensed Insolvency Trustee would be paid $3,279 over five years to administer the proposal while the ‘consultant’ was paid $4,920 to recommend a proposal!

Other Clauses

Also of note is a clause in the agreement prohibiting the client from retaining the services of anyone else conducting similar services, including consultations regarding their debt relief options. In other words, this contract tells a client they cannot engage another Licensed Insolvency Trustee since these are the services they provide.

While this clause may or may not be enforceable, it certainly capitalizes on the confusion, fear, and stress a client is feeling to prevent them from seeking a second opinion.

Another pressure clause we found was 8 (c) which indicates that failure to make payments will result in cancellation of the program.  Many clients may believe this means that if they stop paying York Credit, their consumer proposal will be cancelled. This is not the case. A consumer proposal is annulled according to law, and only when someone is behind three consumer proposal payments. The payments to York Credit are not part of the proposal and stopping payment to York Credit cannot impact an ongoing proposal. However, the fear of cancellation is enough to keep many people from questioning the extra payments to York Credit even after having filed their consumer proposal.

What happened in this case?

In this situation, the client filed a consumer proposal with another Licensed Insolvency Trustee in March 2021.  This was, of course, after paying $800 to the debt consultant prior to filing. They then continued to make payments to both the Trustee and York Credit for several months.

Unfortunately, the burden of paying an extra $172 a month was unaffordable, so this person turned to payday loans to keep up. To be clear, this person thought that these additional payments were part of the proposal. They did not know the charges by York Credit were not legislated payments.

After they contacted us a few months later, we advised that they stop all payments to York Credit while we conducted a new debt assessment. This individual then proceeded to file bankruptcy, which was a more affordable option for them.

Could this individual have afforded the $150 a month proposal? Perhaps, however, they could not afford those payments plus $800 upfront and another $171 a month on top of their proposal fees.

Recommendations

If you have contacted or signed an agreement with any debt consultant, we recommend the following to protect your interest:

1. Confirm their credentials. When seeking debt advice, be sure you know who you are dealing with. If the advisor recommends a proposal, ask: “Are you a Licensed Insolvency Trustee?” If you are uncertain, search the government website.
2. Never sign an agreement that requires fees in addition to your proposal payments which are payable to the Licensed Insolvency Trustee.
3. Never make payments before your consumer proposal is filed with the government and you receive your official insolvency filing documents, including estate number.
4. Stop paying the debt consultant if you have entered into such an agreement prior to filing a consumer proposal. Our position is that this is an agreement for services rendered prior to the signing of a consumer proposal and that the ongoing payments are money owing in the future for past services and hence should be included as an unsecured debt in the consumer proposal.
5. If you were paying these types of fees and were under the impression they were part of your consumer proposal, contact the Office of the Superintendent and file a complaint.

We also recommend that the Office of the Superintendent of Bankruptcy:

1. Place under administrative review any Licensed Insolvency Trustee consistently obtaining file referrals from debt consultants.
2. More strictly regulate the provision of debt assessment and consulting services for consumer proposals. Licensed Insolvency Trustees are tightly regulated, however, the advertising and provision of consulting services around consumer proposals are not. Like medical services, the service, not just the provider, should be regulated.

Licensed Insolvency Trustees have many years of training and practical experience, are required to take many courses and pass many exams and are regulated by the federal government.  LITs are the only professionals that can file a consumer proposal or bankruptcy in Canada.  We are the professionals.  Our fees are set by the federal government.  We are not allowed to charge up front fees.

Don’t be scammed.  If you have debt, get a free consultation from a Licensed Insolvency Trustee, not an unlicensed debt consultant.

And I’d really like for the government to protect consumers by taking action to fix this problem.

The post York Credit Services Contract Review appeared first on Hoyes, Michalos & Associates Inc..

We recently received a phone call from a very distraught individual, already struggling with debt, who paid an up-front fee to Trust Advisory Service (TAS) and then had second thoughts. We had to explain that no, Trust Advisory Service was not a Licensed Insolvency Trustee, and she did not need to pay this ‘consulting’ fee to get advice about a consumer proposal. You can see the outcome of her story at the end of this post.

Here are my thoughts on her ‘contract’, and why I think these types of fee charging debt consultants are bad for consumers. I hope this can help someone who may see similar advertising and offers.

Unnecessary up-front fees

I’m going to start with the up-front fee. I want everyone to understand that it is entirely unnecessary to pay a third-party company money to discuss a consumer proposal or a bankruptcy and to collect information to prepare the documentation.

Their services, as stated in their contract:

Once You sign the Agreement, we will contact Your creditors to obtain balances of Your debts to them. We will inform Your creditors that You have commenced the proposal process and most creditor calls should stop at that point. Where permitted by law, we will insist that Your creditors communicate with you only in writing. We will collect and organize your information and help you prepare the materials to present to our preferred Administrator. Although we will submit the materials on your behalf and will recommend an Administrator, the final choice of Administrator is Yours. The Administrator will receive the proposal package and submit Your proposal to Your creditors who will approve or reject the proposal.”

“As needed, we also will assist you with rebuilding your credit and personal budgeting and we will provide referrals for appraisers, mortgage brokers and others for specialized loans. We will take reasonable steps to amend your credit bureau information in accordance with any applicable legislation dealing with credit reporting activities. We will attend at creditors’ meetings on your behalf if needed and we will arrange for legal representation for you for any court claims relating to your debt and only if the claim commences after the Commencement Date.

These are all the services we provide to you and We do not perform any direct debt negotiation, debt reduction, debt consolidation or debt settlement on your behalf with your creditors. We also do not do any activities relating to a debt repayment agreement with your creditors or relating to obtaining credit from a creditor.

You will note they do not say they file a consumer proposal on your behalf. They will only collect information for the benefit of the Administrator – in other words, for the Licensed Insolvency Trustee.

What is this information?  Mostly a list of creditors and amounts owing as well as a list of assets. Every reputable Licensed Insolvency Trustee in Canada has an application that helps with this process – here is our fresh start application in pdf form. We make this process even easier on our clients by offering a mobile version and work directly with clients to collect this information, free of charge.

In the case of Trust Advisory Service, they want their fee. So much so that they say if:

You do not provide Us with timely, accurate, complete or consistent information or updates to information, especially as to your debts or income, as We may request of You;

You do not attend at the offices / location of the Administrator when scheduled, including if You choose to abandon or discontinue the process and receipt of Our services.

… we will not be required to refund any of Your Fees if Your proposal is rejected and We may also terminate the Agreement and retain all the Fee as liquidated damages and not as penalty.

In other words, if you decide not to file, they keep your $2,000.

If you work with Hoyes Michalos, or any reputable Licensed Insolvency Trustee, we might spend time collecting information from you so we can better understand your situation. We might then recommend you don’t file, or you might decide you don’t want to. That’s fine. The point is the collection of this information is part of a proper debt assessment and there is no fee. You are never out of pocket money if you don’t file if you work directly with a Licensed Insolvency Trustee from the start.

Collecting this information is the responsibility of the Licensed Insolvency Trustee. Section 66.13 (1) of the BIA says:

A consumer debtor who wishes to make a consumer proposal shall commence proceedings by

1. obtaining the assistance of an administrator in preparing the consumer proposal; and
2. providing the administrator with the prescribed information on the consumer debtor’s current financial situation.

As you can see this section says you must obtain the assistance of an administrator, which is a Licensed Insolvency Trustee to file a consumer proposal. The intention of this section is that you provide this information to a Licensed Insolvency Trustee to help them understand your current financial situation. It’s part of what we do. There is no reason to pay a fee to a middle man to forward this information to the trustee.

Are they ‘offering’ consumer proposals?

First, let me state that Trust Advisory Service are not Licensed Insolvency Trustees. They cannot legally file a consumer proposal.

However, TAS makes it appear that they are providing some form of proposal services. They are strong enough in their wording to say that the client is ‘eligible’ to file a proposal.

Here is what their contract says:

While they do not use the word ‘consumer’ it certainly looks like they are making a debt assessment and suggesting how much this client should offer in a consumer proposal.

Are they qualified to make these recommendations? No. To them, it’s a math formula. In truth, determining what to offer your creditors is based on your unique circumstances. A Licensed Insolvency Trustee will review your situation and base their recommendation on many factors, including your job situation, expenses, assets, and family situation. The reason for this is simple:

• Creditors will expect to receive more than they would in a bankruptcy, so we need enough information about your income and assets to understand what that would be
• Different creditors have different expectations. Royal Bank, for example, is notoriously difficult to deal with if they are a majority creditor. Revenue Canada can also have a stronger bargaining position if you owe a lot of tax debt.

Only a Licensed Insolvency Trustee has the knowledge from past accepted and rejected proposals to understand these nuances.  It is not just a simple math formula.

Talking with one of these consultants will not get you a better deal. As you will see later, in this case, the client would have overpaid.  If you don’t like the terms recommended by your Licensed Insolvency Trustee, then get a second opinion from another LIT – for free.

Other contract concerns

There are other aspects to the Trust Advisory Service contract that I am concerned about, similar to posts I’ve done in the past around debt consultant companies:

• The client is authorizing a very broad array of creditors, financial institutions, schools, employers, utility companies, the CRA and more to furnish information to TAS when requested. This clause is over-reaching, more than a Licensed Insolvency Trustee would even require.
• TAS accepts payment by credit card. In effect, people are encouraged to charge the fee on their credit card knowing they will be filing a consumer proposal. Charging $2,000 on your credit card for a bogus service immediately before filing a consumer proposal is likely to upset the credit card company, and may cause them to vote against the proposal, or request a higher payment in the proposal to compensate them for this loss.
• TAS fully understands that, until the proposal is filed, collection activities can continue. In fact, they acknowledge the possibility by indicating that they will “arrange for legal representation for you for any court claims” and “inform us right away, if a creditor has placed your account in collections, or have taken legal action, so we can help you to file a timely defence.” TAS is not filing a consumer proposal so it cannot provide a legal stay of proceedings, a big risk when someone stops making payments to their creditors. And do you really believe that for your $2,000 fee TAS is going to hire a lawyer to represent you in court against a Big Bank?  Not likely.
• TAS will also help with rebuilding credit and personal budgeting. Our experience is that many agencies provide questionably beneficial credit repair services for an additional fee.

It’s time to crackdown

The issue of debt consultants has been around for years. Provincial governments have tried to regulate away the up-front fee. In Ontario, for example, debt settlement companies are required to be registered under the Collection and Debt Settlement Services Act and are prohibited from charging up-front fees. However, this has not worked to prevent this kind of abuse. Companies like Trust Advisory Service specifically state they do not negotiate with creditors. They are charging for paperwork processing and advice.

How should we prevent innocent debtors from being scammed? The law should be enforced.  Any company not licensed by the Office of Superintendent of Bankruptcy as a Licensed Insolvency Trustee should be prohibited from charging for any services covered by the Bankruptcy & Insolvency Act (the BIA), including performing debt consultations to file a consumer proposal.

Section 202(1)(a) of the BIA states (highlights are mine):

A person who not being a licensed trustee, does any act as, or represents himself to be, a licensed trustee, … is guilty of an offence punishable on summary conviction and is liable to a fine not exceeding five thousand dollars, or to imprisonment for a term not exceeding one year, or to both.

While Trust Advisory Service does not say they are a Licensed Insolvency Trustee, they act like they are authorized to conduct a debt assessment and present a consumer proposal recommendation to a client.

The profession of charging for advice and services available under the Bankruptcy & Insolvency Act should be fully and completely regulated and licensed, similar to how the medical profession is regulated. Practicing medicine and providing medical advice without a license is illegal. The professional services of a Licensed Insolvency Trustee should be the same.

It’s time for the Office of the Superintendent of Bankruptcy (the OSB) to crack down on trustees who accept clients from these agencies. They’ve highlighted the issue before but have not effectively dealt with it, obviously.

Even beyond preventing trustees from benefiting from the work of unlicensed debt consultants, I would argue the OSB should exercise, or enhance, its power to prevent their activity in the first place.

Section 202(1)(f) of the BIA states that:

a person who directly or indirectly solicits or canvasses any person to make an assignment or a proposal under this Act, or to file an application for a bankruptcy order … is guilty of an offence punishable on summary conviction and is liable to a fine not exceeding five thousand dollars, or to imprisonment for a term not exceeding one year, or to both.

While this may be a liberal interpretation, with their marketing methods and clear confusion as to their authority among those who contact them, are they in effect indirectly soliciting consumer proposals? It is in the best interest of these companies to have everyone sign up for their ‘proposal’ services. They are under no legal obligation, and unlike with Licensed Insolvency Trustees, there are no ethical standards requiring them to ensure that they present, discuss and recommend all options.

If the OSB needs more indication that Trust Advisory Service solicits consumer proposals and provides services around consumer proposals, let’s look at some additional contract wording.

• The terms of service state that TAS will advise creditors that the client has commenced the proposal process, even though it has not yet been filed and the client has not seen a Licensed Insolvency Trustee
• Trust Advisory Service states in the contract that “We will attend at creditors’ meetings on your behalf if needed.” If a creditors’ meeting is called, the filer must attend. Someone else cannot attend on their behalf.
• Additionally, the contract has the client confirm that they “consider TAS to be one of my legal advisors.” How can a non-lawyer, non-trustee be a legal advisor?
• They also advise clients, “Although not mandatory, it is our suggestion that, while the proposal process is ongoing, you suspend any additional payments to the creditors without prior written instructions from TAS.” This seems to indicate that they consider the collection of information they are doing as part of the proposal process.

It is time the federal government find a way to prevent this form of obfuscation of authority and expertise around an area of practice that requires extensive training, certification, and licensing. It’s time we legislate unregistered, unregulated, and unlicensed debt consultants completely out of business to better protect consumers. All the public warnings don’t seem to be working.

Perhaps we need a definition of the practice of providing insolvency services under the Act, much like the Medicine Act of Ontario has a definition around the practice of medicine. Individuals practicing within the scope of this definition must be licensed by the OSB. Consultants providing, or implying they provide such insolvency services without a license should be held legally accountable.

In the meantime, please, if you are struggling with debt, talk directly with a Licensed Insolvency Trustee. Do not pay any fees, ever, until your proposal is formally filed with the government.

A consumer proposal is a legal process, governed by federal law. It can only be administered by a Licensed Insolvency Trustee, who is regulated by the government and has many years of experience. Our role is much more than simply being an administrator. The most important step in the consumer proposal process is completing a debt assessment. Talking with the prospective client to understand their situation, combined with using our training and experience with how different lenders react to proposals is what is expected of us when we get our license from the Office of the Superintendent of Bankruptcy.

These debt consultants do not have the experience to properly assess your situation. It’s a little like talking with your neighbour or co-worker about whether you should file a consumer proposal because they read something about it and know all the right words. The salespeople you talk with on the phone are not trained or licensed in consumer proposals, and have no real experience with getting consumer proposals filed or approved.

Would you pay some unlicensed stranger to give you medical advice if you are sick? No, you would not. A better analogy might be would you pay them to ask you a bunch of questions about your illness, then send you and that information to a doctor you don’t know yet (or they won’t tell you the name of until you pay). No, you likely would not. So why pay some salesperson to sell you their ‘help’ with collecting information to send you to a Licensed Insolvency Trustee.

Oh, and in this case, the individual in question will be filing bankruptcy. It’s better for her. She did not have enough income to generate surplus income and could not afford the proposal payments as presented. And she received that guidance from a Licensed Insolvency Trustee for free.

The post Trust Advisory Service Contract Review – What Is This? appeared first on Hoyes, Michalos & Associates Inc..

In the end, they do nothing except refer you to a Licensed Insolvency Trustee for a consumer proposal. But before they do, they also have you sign a contract to pay them thousands of dollars in fees for that referral. On today’s podcast, we get some insight from our special guest who experienced this exact scenario and explain how you can avoid falling into this same trap.

There are three main players in the debt advice business in Canada:

1. Licensed Insolvency Trustees (LIT): The only professionals licensed by the Government of Canada to administer personal bankruptcies and consumer proposals. However, trustees don’t just offer these solutions. As government regulated credit counsellors, our job is to explain all of your options so you can choose the best way out of debt for your circumstances.
2. Credit Counsellors: These are typically not-for-profit agencies and there are two types – small companies and national agencies. The small, local companies have accredited counsellors who will meet with you in person and offer you budgeting tips and money management advice, as well as, sometimes recommend a debt management plan. The larger organizations, on the other hand, operate as call centres, where you rarely meet with a counsellor in person and their primary business is to put you into a debt management plan.
3. Debt Advisors: Also known as debt consultants. They act as middle-men between the debtor and a Licensed Insolvency Trustee. They charge a fee for their referral and are able to exist  because their practice isn’t illegal in Canada. They market themselves using warm language to prey on emotional debtors.

The thing is, you do NOT need to be referred to a Licensed Insolvency Trustee. You can meet with one directly for a free, no-obligation consultation. And debt consultants can rarely get you a better proposal deal, regardless of what they say, and certainly not save you enough to warrant their high fees.

Two other things we’d like you to know:

1. Hoyes, Michalos does not have a relationship with these types of debt consultants. We are in fact advocating with the government to find ways to prevent what we consider to be abuse of already stressed out debtors and take every opportunity we can to make consumers aware of the pitfalls of dealing with a debt consultant.
2. In fact, most Licensed Insolvency Trustees do not support these debt consultants. In their review, the government found that only 50 LITs of more than 1,000 across Canada were found to commonly deal with unlicensed debt consultants.

An Actual Case Study

Our guest on today’s show, who agreed to be on the podcast but would like to remain anonymous, had $45,000 in unsecured debt. Knowing that he could not trust banks to help him and worried that he would only face bankruptcy by going to an LIT directly, he opted to work with an unlicensed debt consultant.

He fell victim to one of their many warm sales pitches on Facebook. He even tried to be cautious and explored their website. The ad appeared legitimate and had a very inviting and friendly tone. With website copy like, “we’re on your side”, unlicensed debt consultants market themselves as consumer advocates. They don’t make it obvious that they’re only middlemen and they do not disclose their fees. When you’re indebted and worried, their service appears as a sign of hope and relief. Unfortunately, that is not what actually takes place.

Our guest only met with his debt consultant twice. Once to established how much he owed in fees to the consultant and the payment schedule and gather some info. And the second time to be referred to the Licensed Insolvency Trustee.

So I met – the first time was all the info. And then we did work out the pricing, I believe, then. The second time, was actually when we met the trustee. So we had to email back and forth. I was asking about updates. I would like an update, what’s going on? And I kept having to harp on the person. And then eventually he brought his trustee in from wherever.

The consultant didn’t even do much in terms of the proposal process. These documents were prepared by the trustee.

And the documents were already created in a separate folder from the trustee itself. So I already had my one folder from this one consulting company, which was pretty thin. It just had the giant payment schedule and some services rendered. And then the big one from the trustee.

Our guest was charged $2,000 for this so-called service that the debt consultant provided, in which they did absolutely nothing.

The sad part is that our guest’s situation is quite common. Canadians pay unlicensed debt consultants for their referral services almost 10,000 times a year, according to a 2017 report by the Office of the Superintendent of Bankruptcy (OSB).

To avoid falling for the debt consultant trap, consider these two tips:

1. Know who you’re dealing with. You should always work directly with the type of advisor that provides the service you need. If you are thinking of filing a consumer proposal, work directly with a Licensed Insolvency Trustee. Skip the middleman. Ask for their credentials. If a debt consultant tells you they’re not the actual Licensed Insolvency Trustee, take this as a red flag, don’t sign any paperwork and don’t make any payments before your proposal is filed with the government.
2. Know what you’re paying for. A debt consultant provides no real service, yet charges a ridiculous fee. Ask yourself, “Why am I paying this? Did they do anything for me?” This should help you determine whether or not it’s really for your benefit.

For more detailed information on how unlicensed debt consultants persuade their customers to go to them for debt help and how to avoid their tricks, tune in to today’s podcast or read the complete transcription below.

Additional Resources

• Please Stop Paying for Consumer Proposal Representation
• Watch the actual interview with our guest on our Debt Free in 30 YouTube Channel
• Review of Government report quoted from on the podcast

FULL TRANSCRIPT – SHOW 220 The Cold-Hard Truth About Unlicensed Debt Consultants

Doug Hoyes:      For the first time ever here on Debt Free in 30, on today’s show I interview a guy who went to an unlicensed debt consultant, paid them a lot of money and only later did he realize that all they did was refer him to a licensed insolvency trustee to file a consumer proposal.  He paid a lot of money for nothing.  According to a government report this happens almost 10,000 times a year and Canadians are paying almost $24 million a year for nothing more than a referral instead of paying no upfront fee and going directly to an LIT.

So why does this happen?  Well, struggling with debt is not only about money, it’s about emotional turmoil.  Every day I talk with people who are dealing with significant stress because they can’t pay their bills.  They’re getting constant calls from collection agents or they may have a wage garnishment.  They’re overwhelmed with the struggle to keep up with debt payments and still have enough money left over for rent, groceries and everyday living expenses.

When they finally reach the breaking point and decide to find help, they’re desperate.  They want to find someone who’ll help them and explain their options in easy to understand language.  They want good debt advice and they want to talk with someone who won’t judge them.  They also fear the unknown, what will it cost, what will my life be like afterward and will I ever be able to credit again.

Now, as a listener to this podcast you may think, “Well, that’s easy, only an LIT licensed by the federal government to do bankruptcies and consumer proposals and so by law they can’t charge an upfront fee, so just go talk to them.”  Well, I agree but if you’ve never had debt problems before you may be worried that the LIT will suggest bankruptcy and you don’t want to do that so you look for other options.

Unfortunately this makes people with debt vulnerable to a good sales pitch from unlicensed, unregulated, unqualified debt consultants and with total household debt in Canada now at almost $2.2 trillion I’m here to tell you consumer debt relief is a big industry in Canada.  There are many different types of debt advisors offering debt advice across Canada, some accredited, some not, some good, some bad. Well, no one solution is right for everyone, unfortunately there are advisors who are leaving their clients worse off.

Today we’re going to give you a very quick overview about who offers debt relief advice in Canada and we’re going to spend most of the show showing you what can happen if you get bad debt advice.  We’ll close the show with our advice on how to find a good debt advisor.  I have Ted Michalos here in the Debt Free in 30 studio to discuss the big picture and I also have a very special guest who actually used a debt consultant and ended up paying more than they should have so you’ll want to stay tuned to hear his story coming up shortly.

So let’s set the stage with an explanation of the three big players in the debt advice business.  So, Ted, first and most obvious, are licensed insolvency trustees.  I think most of our listeners have a good understanding of what we do but let’s start with the 30-second explanation of what does an LIT do.

Ted Michalos:                  Right, so the LITs are the only professionals licensed by the federal government to administer personal bankruptcies or consumer proposals, so those are the legal options to deal with your debts, their role is to explain to you all of your alternatives.  So an LIT isn’t going to sit down and say, “You know, you’ve got to file bankruptcy” in fact, that’s the last option they’re going to discuss.  They’re going look at each of your options so that you get an informed decision, you can make the right choice for you.

Doug:                Okay, so that’s pretty simple.  So, the next category would be credit counsellors, so what do they do?

Ted:                  Well so, there’s a little confusion here.  Credit counsellors for the most part work for not-for-profit agencies and so they are trained to assist you with budgeting and how to provide relief of your debts, a better money management plan.  Now the term is also used by some less reputable people that aren’t licensed but I don’t think that’s what you want to talk about today.

Doug:                No, and we don’t have time to get into a, the whole details but, I mean, there are kind of the big ones and the little ones.

Ted:                  Right.

Doug:                The local ones are great because you can go in, meet with them, they help you with your budget.

Ted:                  If you can still find a local one.

Doug:                And that’s the problem.

Ted:                  Right.

Doug:                You just, you just can’t find them anymore because they’ve all been swallowed up by the, the big ones, you know, the call centres and so on.  So, and over the years you and I have dealt with many credit counselling agencies, in fact we’ve got six current people on our team who – including one of our trustees – who were credit counsellors working for not-for-profit credit counselling agencies in the past.

Ted:                  Right.

Doug:                So, obviously we’re very supportive of the work they do.  You and I are less a big fan of the call centres where there’s, you know, no in-person meetings and it’s all done over the phone and all the rest of it.

Ted:                  Right.

Doug:                But, again, we’ll, we’ll talk about that on another show.  So, so the final category of debt advisors is what you and I call debt consultants, that’s just a name we’ve made up.

Ted:                  Right.

Doug:                So, so who are they and what do they do?

Ted:                  Well so, for the most part they’re, I mean, they’re not regulated in any way, there’s no official definition of what a debt consultant is, as you said it’s a term that we made up, they could have any sort of background.  The important consideration is that they, they’ll charge you a fee and effectively in most cases refer you to a licensed LIT to actually solve the problem.

Doug:                And as you said at the beginning only an LIT can do a consumer proposal or a personal bankruptcy.

Ted:                  That’s right.

Doug:                So why is it then if there’s only one service provider that can actually do that kind of work, why are there so many of these other providers and specifically why is it these debt consultants exist?

Ted:                  Yeah, well each group responds to a different need and to a different piece of the market.  There are folks, as you said, that are simply, they’re afraid of the whole concept of dealing with a licensed insolvency trustee.  They think well the first thing the trustee is going to do is tell me I got to file bankruptcy and that’s not what they want to do.  The myth, of course, is that – or sorry, the truth is that very few people actually end up being referred to a trustee to file bankruptcy, it’s the solution we use when none of the others will actually work.

But that being said, the reason those other professionals exist is because they’re responding to a different type of person, a different need.  And the way that they answer the question is different than the way you and I are required to answer the question.

Doug:                Yeah, sometimes they don’t have to be fully forthcoming with the, all of the implications, so.

Ted:                  Well, and on top of that, yes, they can, and they can honestly say, “I’m not a licensed insolvency trustee.”

Doug:                Yeah, so they actually use that as a, a good thing.

Ted:                  That’s right.

Doug:                Hey, I don’t have to follow any specific rules, I can just, you know, tell you whatever I want to tell you.

Ted:                  Yeah.

Doug:                So, yeah, I mean, there’s, there’s lots of money to be made and that’s why these U.S.-style call centres have now come up to Canada and of course with the government changing the rules – which again we don’t have the time to get into in detail here, but that’s caused some changes.  And then of course, you know, the internet is, is great cause it’s, all the information is out there.

Ted:                  Right, if you know how to use it.

Doug:                Right.  And so these people can then do a lot of advertising and find people even though they may not have a whole lot in the way of, you know, actual bricks and mortar locations or whatever.

Ted:                  Right.

Doug:                So okay, so let’s get into the good stuff here.  A while ago I published an article on hoyes.com titled, “Please Don’t Pay for Consumer Proposal Representation.”  And shortly after that article was posted we got a message on our Hoyes Michalos Facebook account from a guy who said he used a debt consultant and he wasn’t sure if he got a good deal or not, he wanted me to check it out.

Ted:                  Right.

Doug:                Now, the debt consultant he used wasn’t the same company we mentioned in the blog post and I’m not going to tell you what company it was cause it’s not that, that’s not the point.

Ted:                  Right.

Doug:                There’s lots of them out there.  The point of today’s show is to give everyone listening today an insider’s view of how these debt consultants operate so you’re now going to hear how it actually happens.

Ted:                  Excellent.

Doug:                First time this has ever happened on this show.  Now this guy had around $45,000 in unsecured debt, so credit cards and a bank loan, he didn’t have any mortgages or car loan but he was not making great money at his job and he was getting behind so he wanted help.  So, let’s play the interview.  I started by asking him how did he look for help.

Respondent:            So you start seeing these Facebook ads, and I don’t know how Facebook is doing it these days with targeting these things, but I was Googling different consultants, trustees, I was trying to figure out what that heck I’d do to get started. And then the one that kept popping up on my Facebook page, one that just kept popping up, looked very, very friendly and approachable and you know, we’re on your team, we’re on your side. And so I just did the, you know, send message link, even – I think it was through Facebook. And that started a whole process after that.

Doug Hoyes:            And so you – why did you – so we’re not going to use names in this because it’s not relevant and –

Respondent:            It’s one of the bigger ones.

Doug Hoyes:            It’s some big company. So why did you – so you reached out to them and they were friendly and you – I mean did you check them out? Did you go to their website?

Respondent:            Yeah, their website looked fantastic. It looked like they were kind of the best of everything. They were counsellors, they could get your proposals through and they were on your side. They were on the consumer side, not sort of the middle man, so you want to go for something like that if you feel like you need a consumer advocate, especially when you’re down at your lowest level when it comes to credit and you’re wiped out and you just need a resolution. You want somebody’s going to be on your side, you don’t – because you’re distrusting already of the credit card companies.

And so they pop up and you know, going in I knew a lot already about the process because I talked to certain people and things just to find out what options are there. I just needed to find somebody to get the options through and get me the best possible outcome.

Doug Hoyes:            And when did you have your first meeting with them? Had you had lots of conversations back and forth or –

Respondent:            Just had some back and forth. It was – the emails seemed very light. They were just essentially, yeah, come on, here’s an example of what we can do. Here’s an example of somebody we’ve helped and here’s an example of a debt reduction that we’ve had. I’m thinking this is a no-brainer. I’m also thinking, there can’t be a cost. Or maybe there is a low cost, because I don’t know what this company really does. But man, they’re going to get it down that low, and he’s so friendly and super nice. So I go for it.

Doug Hoyes:            And so you went in for your first meeting with them and that’s where they gather the information, who do you owe money to. Is that how it works?

Respondent:            Yeah, so I brought – I came prepared, I brought in my statements, I knew that certain cards I’ve already cancelled but we’re still paying. Certain cards were still active. And I came in with all my ducks in a row really. I provided the statements. So it was very easy for them to just take the balance, take the credit name, give them my driver’s licence information so they have my address.

Doug Hoyes:            And how many meetings did you have with them?

Respondent:            I believe it was only two until I started meeting with the other trustee people – actual trustee people.

Doug Hoyes:            Okay. So you met with them, gave them some information, came back, gave them some more information, and then at what point did it become clear that there was going to be somebody else involved. There was going to be a trustee involved in this.

Respondent:            Essentially, in both meetings they mentioned, oh yeah, we’ll find somebody to put this through. And then they did say they weren’t trustees. But again I’m thinking, well it’s a – it’s maybe a service, it’s a coaching service. Maybe they have a really great trustee, I don’t know, in their back pocket. And again, in the back of my mind I’m thinking, it’s not going to cost me that much because I’m already in debt and I’m thinking, I just need a resolution. I’m willing to pay something, I suppose, if they make it easier, they get me that hidden deal or the hidden best trustee in the world. But you know.

Doug Hoyes:            So at the end of the second meeting, what happens next?

Respondent:            Essentially – the first meeting he took the information, the second meeting he showed me what he was going to ask for, or what he was going to send – he said basically what I could offer, essentially. And then you know, I had signed off on payment schedules and things to him, which – should I mention.

Doug Hoyes:            Well yes. I’d like to hear about that.

Respondent:            So they said that, oh, it’s a service, it’s based on, you know, your amount of debt, but we’re work out a great – we’ll get a deal for you, or a better deal. And so he’s in his computer, he’s in his computer and then he’s, like, scrolling down and he’s messing with the numbers and it comes up to about two grand. And I’m thinking in my head, whoa, whoa, whoa. Thinking in my head, whoa, that’s insane. Like maybe that’s my debt plus – or subtracted from that or something like that.

But no. Then it became, it’s okay, we’re going to make it work, going to do 300, 300, 300 and then a hundred dollars perpetually until it’s paid off including the taxes. And you just pay that to me, but you don’t have to worry about that. I’m going to get started on your file, which you would think is a lot of work and that’s why he’s doing me a solid here. But I had to pay him 300, then the 300, then the three – so the brunt of the $2,000 up front. And he was working on the file.

Doug Hoyes:            At what point did you meet the trustee then? So you had paid $300 and then you met with the trustee?

Respondent:            So I met – the first time was all the info. And then we did work out the pricing, I believe, then. The second time, I believe, was actually when we met the trustee, yeah. So we had to email back and forth just I was asking about updates. I would like an update, what’s going on? What’s going on? And I kept having to harp on the person. And then eventually he brought his trustee in from wherever. And the documents were already created in a separate folder from the trustee itself. So I already had my one folder from this consulting company, which was pretty thin. It just had the giant payment schedule and some services rendered, I suppose. And then the big one from the trustee.

Doug Hoyes:            And so you went in to see the trustee, signed a consumer proposal.

Respondent:            Multiple pages – no writing from the consultancy whatsoever. It was a completely separate organization. Completely licensed.

Doug Hoyes:            All done by the trustee.

Respondent:            Signing, signing, signing, signing, signing, signing, signing, signing, signing.

Doug Hoyes:            And the proposal ended up being accepted by your creditors.

Respondent:            Yeah.

Doug Hoyes:            It’s up and running. You’re – that’s all working fine.

Respondent:            Yeah.

Doug Hoyes:            And it’s – you know, not my firm you’re dealing with. It’s somebody else. You had reached out to me over Facebook, that’s how we got together.

Respondent:            Yeah, I wanted you to see what I had gone through because I know that you do talk about this stuff.

Doug Hoyes:            Yeah, I have a particular interest in how these debt consultants work, and so you had reached out, so this was interesting for me because it had nothing to do with me. I’d never met you –

Respondent:            Never talked to –

Doug Hoyes:            – you’re not one of our clients. Never – anything.

So you filed the proposal. You had already made one $300 payment to the debt consultant. You filed the proposal, but then your contract said, well you’ve got to keep making these other payments.

Respondent:            Yeah, so I was still waiting for the proposal to be accepted. I kept emailing my consultant for updates, when I guess I could have been emailing the trustee about updates, about how long it takes. And then the voting and all that stuff.

But yeah, I wasn’t making 300 and this is through the summer, so 300, so that’s a big bang out of my pocket. I’m already – they said, oh, it’s okay, but you can stop paying your creditors, which I guess is one way you can technically do it once the proposal’s through, so I just offset it. I didn’t think about it, right? Because normally you’d be like, that’s a huge hit. But if he says I don’t have to pay the minimum payments, great, I’ll just pay minimum payments, and just pay his giant fee for the three months.

Doug Hoyes:            So it really wasn’t costing you anything, because well, I would have been paying the creditors anyway.

Respondent:            So it’s an interesting – I guess it’s an interesting sales tactic, in that – you know you could stop that, so if you paid 400 or 500 a month in minimums, just pay me the three, three, three once we get it through. Now you’re paying – you’re still paying him something, I think it’s a hundred a month. And then the licenced solvency trustee you pay them the settlement or whatever.

Doug Hoyes:            Yeah. So your proposal that ended up being agreed to by the creditors was $100 a month for five years.

Respondent:            Yeah.

Doug Hoyes:            And the amount you paid – and obviously that’s not just going to the trustee, that’s also going to the creditors, that’s –

Respondent:            To pay it off. I wanted to pay something. I didn’t want to go whole hog bankruptcy. I know that works for some people but I knew that I have the capability of paying something. I just could not – never pay the amount that I had because unfortunately just the way the jobs are and even where I’m at now, which is a better work, it’s still probably not enough to pay off $50,000 or $40,000 in debt.

Doug Hoyes:            And that’s the kind of dollars we were talking about, it was like $45,000 or something in unsecured debt.

Respondent:            Yeah.

Doug Hoyes:            You know, basically banks, credit cards. Nothing unusual. So I just want to make sure we’re absolutely clear then on how the fees work.

So you paid $300 to the debt consultant, the proposal was filed and then because you had this deal to pay them 24, 25 hundred bucks, you paid another 300 and then another 300 and then went on a hundred dollar a month payment plan until the full amount was paid.

Respondent:            And part of the whole talk was, yeah, it will take a little while for your proposal, so again, you’re not paying those minimum payments. And then by the time your proposal goes through, if it’s a hundred dollars or maybe they reject it and it goes up higher, then you’ll be down to my hundred dollar amount. So it was like, there’s so many moving parts when it comes to the amounts that the process is I’m saving on the minimum payments, and then he’s got a proposal at a hundred, so his fee goes from 300 to 100 and it’s a $200 wash. It’s easy.

So, for me, I started getting really skeptical, especially in the early fall. And I looked at this and I talked to family and I talked to friends and they’re like, what did you do? What did you do? I’m like – I – uh, it’s hard to say.

Doug Hoyes:            You’re still not quite sure what you did.

Respondent:            Not quite sure. I felt good at the beginning. Because it’s that first meeting, I’m on your side, Team You. But then in reality when you look at the nitty gritty of paperwork and legal side of things you feel kind of taken advantage of because in the end, after the proposal’s filed you really don’t hear from them. Aside from the counselling sessions, but those are mandatory through the trustees anyway.

Doug Hoyes:            And so did you – and you’re right, in every consumer proposal there are two counselling sessions that are required. Did you go back to the debt consultant for those two sessions?

Respondent:            I went to their office. They had some other counsellor, I don’t know where they’re from but they came in and sat and did it.

Doug Hoyes:            Got you. So it was the debt consultant who arranged the counselling sessions.

Respondent:            Or maybe – I don’t know, maybe it was the trustee.

Doug Hoyes:            It’s unclear.

Respondent:            I don’t know who arranged it. I just showed up to be honest.

Doug Hoyes:            Okay. You didn’t show up to the office of the trustee.

Respondent:            No.

Doug Hoyes:            You showed up to the office of the debt consultant.

Respondent:            Yeah.

Doug Hoyes:            And the deal that was made – I mean we already talked about that, the $100 a month, so that seems somewhat reasonable. At what point did you say, hey wait a minute. Why am I paying this debt consultant once the proposal’s already up and running?

Respondent:            Yeah, I was thinking – that’s in the early fall because it was – all right I made the three giant chunks, which sucked because it kind of wrecked my summer because it was a big expense and my hours are kind of poor in the summer. And then I’m still paying – I’m paying the $100 proposal which is totally 100 percent acceptable. And fine, I’m glad it was at 400 – or sorry, $100. But then I’m still paying this fee and I’m looking at the payment schedule and I’m like, I’m going to pay it until next summer, next fall. And I’m like, but I’m not – I don’t hear from this person. They still say they’re happy they don’t do business with me and that’s great. That’s fine I suppose. But I’m not getting really anything from that.

And I’m thinking also looking at my budget, thinking I could reduce my expenses by $100 here because this is $100 I can’t justify right? So. And that’s what’s kind of –

Doug Hoyes:            So essentially you stopped paying them. You talked to them and said –

Respondent:            Yeah, I worked – got into a little bit of a back and forth and I said, look, this is crazy. And they still said that they did a great job and that they – they don’t think that proposal would have been a hundred dollars, but after discussing it with you and just looking at the facts of the matter, like, it might have been accepted at a hundred just based on my financial situation.

And even if it was 150, like let’s say it was $150 or $160, I was still paying him a hundred for a nice long period of time. So the savings would probably have not been realized by that much. Even if I saved, I don’t know, two grand over all, I would have paid him two grand. So it’s kind of a wash that way.

Doug Hoyes:            It just didn’t seem like a good deal to you.

Now how much time did you spend with the actual trustee then?

Respondent:            Just signing the paperwork in the office.

Doug Hoyes:            So half an hour or whatever.

Respondent:            I never met the trustee before they showed up and I signed a bunch of documents and that was it. I did email back and forth just with questions on how do I pay it off sooner? How do I find out what it’s at? Because I like to keep track of these things. But I had emailed back and forth with that association or agency, whatever it is. But that’s it. That’s the only interaction.

Doug Hoyes:            So your biggest interaction was with the debt consultant not the trustee. The trustee kind of did the paperwork and that was the –

Respondent:            And even then, if you look at the interactions as a whole, it was like one decent one-hour session with him, half an hour, 45 minutes with the trustee later, and then a consultant – or sorry, a counsellor for 15 minutes and I didn’t really get- I mean I got it was like three different hands of the same process which just seems a little off.

Doug Hoyes:            Wasn’t optimal.

Respondent:            No.

Doug Hoyes:            So upfront, when you reached out to the debt consultant and you had done some research and whatnot.

Respondent:            Just so I knew what options are out there for people who go bankrupt or – I thought maybe going there I might get a fifth option or something, thinking maybe I don’t have to a proposal or bankruptcy at all. So that was part of the idea, but of course there is no service outside of that really.

Doug Hoyes:            Yeah, and that’s what I was getting at is why didn’t you go directly to a trustee and I guess the answer was well, I understood that option but I thought there was some other option –

Respondent:            Of course I thought this was the be-all, end-all, it’s a flashy website, it’s a flashy service they have apparently. Appears no fee or appears low fee. And maybe there’s a fifth option. Because they always say, we go over every option out there. But in reality when you look at it and after talking even with these a little bit and just googling there’s really only, like, three, maybe four options depending on your situation. I don’t have a house or a mortgage so there’s nothing I can leverage.

But it’s proposals, bankruptcy, maybe it’s debt management but there’s really no savings, so it’s tough because you think there’s a fifth option out there, and there’s totally not.

Doug Hoyes:            There just isn’t

So if people are watching this or listening to this and I wanted to have you on to actually walk through how it worked, what advice would you give people? So upfront, how – knowing what you know now, how could you have not done what you did? I mean it sounds like everything you did made perfect sense. You saw the ad, you didn’t just instantly accept it. You went to their website you checked them out. It all seemed legit.

So how could you –

Respondent:            The only way to avoid something like this, especially because this wasn’t the only one that was on the Facebook feed or the web advertising, but is probably a flashy big giant ones that say they’re powerful Canada-wide. There’s really no – there’s no any regulation or block from it where it says, you know, even if it was on a website for Canada.com and they said please do not – like, when it comes to Canadians’ finances, do not use these services, it’s the same thing they do when it comes to immigration consultants, they say do not use an immigration consultant. There’s a direct way or proper way to do things. In this case there doesn’t seem to be any of that out there. So it’s kind of a Wild West.

And I know I was talking to you prior and I’ve used the word predatory and I don’t know if that’s PC but it just seems like it’s an unnecessary middleman and you’re paying so much more because you think, maybe 50 bucks or a hundred dollar consulting fee and I’ll feel great and they’ll help me out. Because I don’t think the amount of time it takes them justifies the amount – the $2,000 they charge. But there’s a minimal in there that doesn’t need to be there.

Doug Hoyes:            So if their fee had been a couple of hundred bucks, you’re fine with it.

Respondent:            I mean I probably would have had this conversation, because the proposal went through at $100 from the trustee side, which was great for me, because it was a reduction and that was money and it would probably came and went and I wouldn’t have to continuously pay it forever.

Do I think that even that $300 – if I paid $300 once or $200 once, if the laws are there, the regulations are there and they’re looking at what’s actually supposed to be the right way, which is using a licensed person, there shouldn’t even be the middleman. I don’t care if it’s $75 unless it’s your friend down the street who you’re paying for advice.

Doug Hoyes:            Yeah, so your biggest objection, obviously the biggest objection is you paid, or were supposed to pay 24, 25 hundred bucks. So that’s a big number. I get that. And your second biggest – I mean you used the word predatory. So what do you mean by that?

Respondent:            It just seems to be that – so when people are in their debt worst and they’re stressed out or like me, like anxious or you’re just trying to look at your 10-year plan or 5-year plan, you’re thinking this is never going to get paid off. You’re looking for any sort of advocate, shining light, guiding light that’s out there and these people – these organizations it seems they’re just there to give you a little boost, get you enticed, say all these things and then get you signed up, get you to sign the bottom line, talk about the payment plan, very small payments, don’t worry, stop paying your credit cards.

They’re using probably the same thing you guys might say to people saying don’t worry about paying your credit cards because we’re filing a proposal but yours is for a different reason. It’s to save you money while the proposal’s going through. And then there is no monthly payment on top, on top, on top, double stacked. This one is like, we’re going to find an angle in and we’re going to get those people who are worried and then we’ll figure out the payments and then it’ll be a wash. They won’t even notice.

Doug Hoyes:            Yeah, when you come in to see us, when the proposal starts the rule is you can’t pay anybody because everyone has to get treated exactly the same. Everyone gets exactly the same deal. So we’re telling you to stop paying because that’s what the law says. So the day you file a proposal, no more payments. The only payments you’re making are to the trustee who then, of course, distributing the money to all the creditors.

Respondent:            Yeah, once it’s finished.

Doug Hoyes:            But it sounds like that wasn’t explained to you.

Respondent:            No.

Doug Hoyes:            And if it was –

Respondent:            It was something in the cards because really if you hit your credit rating it’s going to go down anyway, and just stop paying it now and then sign here and we’re going to pay that $300 to me and you know, on your budget, which I do have a pretty good budget from Excel spreadsheet, you’ll see that the $300 savings or $400 savings on your payments, but you’re paying them. So it’s a wash. You don’t even notice.

But luckily for me I do notice because it’s a payment I would have had to make for a year and a half. I was thinking, like, no. I’m paying my proposal off as soon as possible. And I’m getting myself a house. I can’t have these other expenses.

Doug Hoyes:            And so what advice would you give to people, then, who are in the position you were in a year ago or six months ago, whatever it was, where I got a bunch of debt, I got $45,000 worth of debt, there’s no way I can ever hope to pay it off based on what my income is. I’ve got no other way. I can’t sell my house because I don’t own one. I’ve got nothing to sell, there’s nothing else I can do. What would your advice be for someone in that situation?

Respondent:            I’d say, like, just be honest with yourself. Take the stock of what you’re at. Look at a couple of years down the road. If that’s not going to be then either go to official websites like Canada Revenue or Canada Finance, like, from the government. Or just directly to a trustee. Because you’re not going to pay loads of fees. You’re cutting out the middleman and you can be honest with the trustee and just tell them, like, I am broke. Or I’ve got so little money that even if you put through an offer at this amount, I don’t know. Like, you just got to just – I don’t know, talk to a great trustee or a good trustee in your area and just do your research and try to avoid middlemen consultants.

Doug Hoyes:            There you go. Try to avoid middlemen. I think that’s – and that’s probably good advice in every area.

Respondent:            Any way. Yeah. Like when you go buy a car, I mean you could hire consultants to buy you a car, but you’re paying them and you could have just went there yourself. It’s just – it’s a classic story of, well that. Because I think probably through history there’s been these middlemen that pop up and then the government eventually regulates, regulates, regulates, regulates, but this seems to be one spot they haven’t targeted yet.

Doug Hoyes:            So. Do you think the answer is the government should regulate more, or do you think the answer is what you just said, that well, do your own research and – because I mean how much can the government possibly regulate.

Respondent:            I mean, I think honestly think it has to be both because you can do all the research and you could be very skeptical but some people are still going to be anxious. They’re still going to make a rash decision and they’re going to go to the flashy Facebook or the flashy ad online, and they’re going to start there and by the time they ‘re in and you’ve been talked to you’re just going to – that path may continue.

But I think honestly, if the government regulates, like, you know, I’m in travel now and they regulate the crap out of us and they cut out a lot of middlemen and scammers and people who take extra money for no reason. They need – they probably just need to do that to the same industry and say, like, we can’t have these people in the middle. Or regulate their fee to a low, low amount, because you have to look at the amount of work that’s actually being done comparable to the price. And it’s just astronomical.

Doug Hoyes:            And your perception there wasn’t a whole lot of work done.

Respondent:            It doesn’t seem to be because it was entering of information, calculating of his fees, and then suggesting what we could do for our proposal amount and then getting the trustee to do the rest, to do the work. So.

Doug Hoyes:            Now their other pitch is not only are we going to help you get a better deal on the proposal, we’re also going to help you in the future. You know, we’re going to help you rebuild and get back on track and all that kind of stuff.

Respondent:            But in reality they offer – they just say there’s similar secured cards out there. Sign up for this one or go apply to it. They offered Equifax subscription, which I wasn’t interested in because I do the free ones online.

Doug Hoyes:            And that Equifax subscription was a paid subscription?

Respondent:            They said they would have covered it for a year’s time, but even if you go to their site, it’s still nowhere near $2,000 for that plus there’s a ton of – on their online ones, that I even use that give you both sides, Equifax and TransUnion. So you don’t need that. And it may seem like an added perk but you’re kind of just duplicating what’s already out there for free.

That’s it. Like there really isn’t an ongoing communication, there isn’t ongoing coaching, there isn’t ongoing budgeting, there’ isn’t – so you go in thinking you’re paying this amount, it becomes this huge amount. You’re thinking, okay, well maybe I’ll cross my fingers and I’ll get an amazing deal and I’ll get some after care. It doesn’t really happen.

Doug Hoyes:            So what they promised up front wasn’t the reality.

Respondent:            No.

Doug Hoyes:            So, why is it these guys continue to exist then?

Respondent:            I just think, that, like I said, when you’re targeting people at their weakest or at their most vulnerable, people are going to look for the shining person to get them out of the mess. And maybe trustees don’t do enough advertising in that regard, or as the shining lights or the people who are going to get you out of the mess and maybe it’s just a matter of a little bit of marketing on their side, and these guys might be out of business. I don’t know. But this is what they do. They get you in the door and they praise you and then it becomes a sale of a large amount of money.

Doug Hoyes:            So I am a trustee obviously. So give me some advice, then. You know, you’ve been on the other side of the table. So – because I spend lots of money on advertising. I mean I’m on Facebook, I’m on the radio, I’m all over the place.

Respondent:            I don’t know. They just have a flashy way of doing it I think. And they promise you this and they say, you know, you’re this and you’re amazing and it’s not your fault and you know, there’s some responsibility for the customer, there’s some responsibility for the debt holders because they charge a lot of interest and it compounds.

But I don’t know. It’s tough. I think we just have to – we have to cut out the middlemen because otherwise there’s always going to be this wedge in the middle that it’s taking money, and if we talked figures, about what you were saying that might have cost the whole Canadian community of people who use these companies –

Doug Hoyes:            Yeah, well I know. The Office of the Superintendent of Bankruptcy issued a report saying that in 2016, which was the year they analyzed, 20 percent of all proposals went through a debt consultant. So your situation’s very typical. The amount of money that you were charged is almost exactly what the Superintendent’s office found was the average fee, somewhere in that 25 hundred dollar range. So when you do the math, it was like $23 million in fees that people paid to a middleman.

Respondent:            And if you look at the value earned or the return on the investment that you would have made with that, as a customer, there’s not much there that you could have gotten from trustee at zero cost. So that savings is not realized by all the people in Canada that use these guys because that could be money in their pocket.

Doug Hoyes:            Right. And you had to get the money basically by scrimping and saving. It’s like –

Respondent:            That’s right. It was a very tight summer for me.

Doug Hoyes:            Yeah and so you were maxed out on your credit cards. It’s not like you could take a cash advance and get them, so this was actual real money to use.

Respondent:            This is really dollars I could have used.

Doug Hoyes:            So your advice to me is, I’ve got to do a better job of getting the word out there.

Respondent:            Get the word out there and find a way to change the rules, or the laws because it’s not fair. Like I said, I’m in travel. [Antico] regulates this kind of stuff. These people don’t exist in the middle unless they’re providing a legitimate service or something tangible or whatever. So, it’s – they’re doing it for one industry, they need to do it for another one because especially with this industry when people are down in their dumps, come on. It’s really easy to take advantage or sell something, a bill of goods to people when they’re down in the dumps.

Doug Hoyes:            When they’re at their most vulnerable. Any final pieces of advice or words that you’d like either people who are in your situation to hear, or the government to hear on the regulation side?

Respondent:            Boost up the trustees because they’re the ones who did the paperwork and did the real work, and just cut the middleman out and go to a trustee. Or do your own research and maybe you can do it yourself through a bank consolidation loan if you have the capacity. Like, it’s not always you have to go bankruptcy. But you have to go to the people who are licensed and pay their dues and pay the regulations and follow the rules and you’ll get the same deal, or maybe you’ll get a better deal. My you’ll get a slightly higher deal, but at least you know it was done correctly and you’re not paying 20 million or whatever in excess fees that could have been in your pocket.

Doug Hoyes:            Excellent. Thank you very much. I appreciate you doing this.

Respondent:      Thank you.

Doug Hoyes: Wow, so that’s quite a story but sadly, it’s not a unique story, Ted, you and I have heard a similar story hundreds of times over the years.

Ted:                  Yeah.

Doug:                So let’s summarize what we’ve just heard here.  So what was the, the big take-away for you?

Ted:                  It’s really easy to see how this can happen, I mean, this guy’s obviously intelligent, he did his homework and he checked everything out and he simply liked the fact that they said they were on his side.  They were a consumer advocate, they were – he was looking for looking for somebody who’s going to be on his side because he already distrusted the credit card companies.  The website looked good, everything was slick, they were friendly and the initial consultation was very – what’s the word I’m looking for?

Doug:                Well, friendly, I think.

Ted:                  Yeah, friendly’s the right word.

Doug:                Yeah, yeah, I think that’s, that’s an excellent way.  And, I mean, you’re right, he, he used those words that, you know, they’re on their side.

Ted:                  Yeah.

Doug:                And, you know, you want someone who’s on your side and obviously he didn’t trust the banks and the credit companies and all the rest of it, so.

Ted:                  Well, and he’d done his homework so he knew about bankruptcy, he’d heard about consumer proposals and credit counselling and debt consolidation.  He also thought they had some fifth option, of course they didn’t.

Doug:                Well, and that’s, you’re right, that’s exactly right.  So, I, I think, it’s not really his fault that he got kind of, you know, sucked in, if you want to use that word.  I mean, they have a fantastic sales pitch, you know, “We’re on your side” and of course they don’t make it clear what their fees are up front.  And so is the fact that they don’t make clear what their fees are the biggest problem you have with them?

Ted:                  The biggest problem is that they don’t do anything useful.

Doug:                Well, that’s a problem.

Ted:                  I mean, they take the, take your information, they’ll send it to a trustee, the trustee does all the work because legally we’re required to.  So that means they’re preparing the paperwork, they’re communicating with your creditors, they’re processing all of the transactions that happen during your proposal.  The debt consultant makes a sales pitch to an unsuspecting individual, collects their fee and in some cases it’s many thousands of dollars, I mean, this guy paid all that money that he could have used for something else.

Doug:                Well, yeah, and as I said in the interview this is not just our opinion.  In April 2017 the Office of the Superintendent of Bankruptcy released a report that said that in 2016 in almost 10,000 consumer proposal filings the debtor reported having paid for financial advice before being directed to an LIT and over half of those cases involved two large volume debt consultants.  So it’s not little guys giving advice, it’s big sophisticated companies that have lots of money to spend on Facebook and Google ads, that’s how they attract people.

Ted:                  Right.

Doug:                This report also said that the average fee charged by the debt consultants was $2,400 which was almost exactly the fee that we just heard in the interview we just played.

Ted:                  Right.

Doug:                So, let’s do some math here, 10,000 people paying $2,400 up front for nothing, so that’s almost $24 million in fees paid to these unlicensed, unregulated debt consultants who provide no useful service.  So, what’s your advice on all of that?

Ted:                  Well, it’d be really nice if the government would do something about this.  I mean, they obviously, they know the numbers, they produced the report and yet these guys continue to operate.

Doug:                Yeah, and I’m working on it, I’m making phone calls and doing what I can to make the government aware of this and I’m actually going to send them the link to this podcast so they can see that interview, so they can see it firsthand and, you know, frankly I think it’s pretty simple to fix.

Ted:                  Right.

Doug:                There’s a few things, the rules already exist so I think the government could fix this pretty quickly.  But, well, and, and, again, let me read more from the report here.

Ted:                  Yeah.

Doug:                So this is an actual quote, the government report said, “Thirteen LIT firms, including one national-level firm, were found to have one or more LITs operating in a frequent and sustained relationship with two large volume firms.  For approximately 50 LITs within these 13 firms, more than 40% of their division 2 filings – that’s consumer proposals – were sourced from these debt consultants.  For approximately 20 of those LITs more than 90% of their consumer proposals originated with these two firms. With some exceptions the remainder of the observations described in this report pertain to the practices of the 50 LITs and 13 firms noted above.”

Now, I went on the internet and I looked up, we’re recording this in November 2018, there are currently 211 LIT firms and 1,049 individual LITs in Canada.  So if the government has identified 13 firms and 50 LITs, it’s a small sub-set.

Ted:                  Right.

Doug:                It’s not most LITs, it’s a very tiny sub-set so I think it’s relatively easy to fix.  So, we’ve already gone pretty long on this podcast and I don’t think any of our listeners want to hear what technical steps I think the government should take to fix this since it’s very technical.  So let’s go back to the most important question which is what advice would you give someone in debt, how can you avoid getting sucked in by these guys?

Ted:                  Alright, so the most important advice for anything is always know who you’re dealing with.  Are you dealing with a credit counsellor, a debt consultant or a licensed insolvency trustee?  Work directly with the type of advisor that provides the service that you need.  So don’t take advice about bankruptcies and proposals from a credit counsellor or a debt consultant.

Doug:                Or a barber.

Ted:                  They’re not the ones licensed to do it.

Doug:                Yeah.

Ted:                  And skip the middleman.  It’s an easy question, when you start talking to somebody if they tell you that they’re going to have to refer you to someone else to actually complete the work it’s a pretty good sign you shouldn’t be dealing with that person.

Doug:                Well, and you have to be very specific in your question.

Ted:                  Right.

Doug:                Who will I be dealing with, am I going to be meeting with you.  When you come to us, you know, they may, may meet with you up front and you’ll say, “Well, yes, I’m going to be back when you sign the paperwork or you’re going to be meeting with somebody who works with me.”

Ted:                  Right.

Doug:                “But, yeah, I’m the guy who’s going to have carriage of this all the way through.”  So you got to be specific and really pin them down cause I think you got the impression from the interview that they can be somewhat evasive.

Ted:                  Well, and they are, I mean, the – I equate these guys to payday loans and that’s a whole, we don’t want to go there.

Doug:                Oh, we’ve done some shows on that.

Ted:                  They make it really easy to use their services up front and you don’t realize that the, the pitfall, the trap that you’re falling into.  And, and as the evidence here shows it’s a $2,500 trap for most people and you don’t have the money to start, you’re already in trouble.

Doug:                And that’s, so those are the two points that, know who you’re dealing with.

Ted:                  Exactly.

Doug:                And know what you’re paying.

Ted:                  Correct.

Doug:                And that, that pretty much will allow you to see what’s happening.  So, okay, well I think that’s a, a great place to end, Ted, thanks for being here.  So let me emphasize that point one more time.  Only a licensed insolvency trustee is licensed by the federal government to file a bankruptcy or consumer proposal.  Not a financial planner, not a credit counsellor and certainly not a debt consultant.  They charge you a big fee and all they’re doing in most cases is referring you to an LIT who will actually do the work.  So skip the middleman, go directly to an LIT and save a lot of money.

That’s our show for today.  Links to the government report I mentioned and everything else we talked about can be found along with show notes and a full transcript at hoyes.com, that’s h-o-y-e-s.com.  This is a big issue so if you want to help us make the unsuspecting public aware of how these guys operate, please share this podcast with your friends.  And it helps if you like the podcast if you leave a review on iTunes and we also release the video on YouTube so please subscribe to our Debt Free in 30 channel so you don’t miss an episode.

Thanks for listening.  Until next week, for Ted Michalos, I’m Doug Hoyes, that was Debt Free in 30.

The post The Cold-Hard Truth About Unlicensed Debt Consultants appeared first on Hoyes, Michalos & Associates Inc..

Hoyes Michalos has written many blog posts, social media posts, and letters to our government in an attempt to spur some kind of action that will protect consumers from debt consultants who charge exorbitant, unnecessary fees to unsuspecting debtors to “help” them file a consumer proposal.

Yet debt consultants are still actively operating without bounds. We just recently began working with a client who experienced the horrors of dealing with a company who she signed a contract with to help her through the consumer proposal process.

Signing agreements with crazy clauses

Our client (who came to us on her own, not referred through a debt consultant), gave us permission to publish these documents she received and to share her story about her struggle with debt.

She reached out to Consumer Debtor Protection Services of Canada (CDPC) for help. As is normal for debt consulting companies, they required that she sign a contract for their services before doing anything.

Read Transcript

What’s even more alarming to me is the additional agreements she signed as part of the process. As you can see from the image below (client information removed), the terms of this agreement are somewhat alarming as the people of CDPS can contact on behalf of the debtor.

I’m concerned about this paragraph in particular:

I further freely and fully authorize any employer, former employer, landlord, school, university, any bank, caisse populaire, finance company, credit union, mortgage broker, condominium corporation, hydro company, telephone company, cable and/or internet providor or any other company with whom I deal on a credit basis, as well as any organization, municipality, police department, provincial or federal government ministry, institution or department, Canada Revenue Agency, social services, WSIB, Revenue Quebec, CSST, or any insurance company who has information about me, and to whom a signed copy of this authorization is delivered, to furnish any information, reports, or copies of records which may be required by CDPC, or its accredited representatives.

This seems like overkill to me to help someone deal with some debt and in all likelihood refer them to a Licensed Insolvency Trustee to file a legal process on the client’s behalf.

What’s worse, is these agreements were delivered and signed via email. I’m not sure how well most people understand exactly what they as signing under conditions of stress and concern about debt problems when they are presented over the phone or email.

Suing for unpaid fees

After paying $1,200 in fees and finding herself still in debt, with no foreseeable solution, our client came to see our Licensed Insolvency Trustee, Rebecca Martyn, in our Windsor Ontario office. This client has since chosen to file a consumer proposal with us.

Now she is being sued for “liquidated damages” of another $1,371 by Consumer Debtor Protection of Canada. Luckily for her, this debt will be included in her consumer proposal.

Warning: stay away from debt consultants

Unfortunately, Consumer Debtor Protection is not the only company charging debtors to collection documentation to file a consumer proposal. You can read our review of a similar contract and terms of service for a company called Trust Advisory Service as reported to us by a client.

While the government may not be doing enough to remove unlicensed debt consultants from the industry, I’ll once again provide a clear warning about debt consultants: They often charge money for a service that is not necessary and do not solve your debt problems, and their fees can reach thousands of dollars.

In fact, the Financial Consumer Agency of Canada has issued their own warning about unlicensed consultants who propose to help you pay off your debt. From their consumer alert which you can find here, and an excerpt from that warning states:

The Financial Consumer Agency of Canada (FCAC) is warning consumers who can no longer keep up with their debt payments to be cautious.

Some companies are misleading consumers by promising quick and easy solutions to help pay off their debt or repair their credit. In some cases, consumers may end up in a worse financial situation than before they got help.

Here are some of our recommendations:

• You do not need to pay a fee to see a Licensed Insolvency Trustee.
• ONLY Licensed Insolvency Trustees can file a consumer proposal.
• A debt consultant cannot get you a better deal in a consumer proposal.
• Licensed Insolvency Trustees are federally regulated, as are our fees.

Speak directly with a Licensed Insolvency Trustee. This client now wishes she had come straight to us in the first place, but hopefully this experience can help others make the right decision at the start of their journey towards becoming debt-free.

The post Debt Consultant Warning: This is Not a Pretty Picture appeared first on Hoyes, Michalos & Associates Inc..

Debt consultants charge consumers a fee for their advice. It sounds reasonable as many professions do that, except for the fact that they aren’t experts in the field of insolvency. Only a Licensed Insolvency Trustee can file a bankruptcy or consumer proposal on behalf of consumers in Canada. This means that only Licensed Insolvency Trustees have the thorough knowledge of the process and have a proven track record of helping people through an insolvency.

Debt Consultants: Upfront and Impersonal

Many people seeking advice from debt consultants have been hit with a pretty hefty price tag. If they found the information helpful, then it was worth it. But it’s also worth knowing that many debt consultants charge you for information you can get for free from a Licensed Insolvency Trustee.

In addition to charging upfront fees that are then pocketed by the debt consultant, they also push a one size fits all solution. Instead of impartially weighing your options, debt consultants will push you to the track that they profit off of. For the most part, that’s when they refer you for a consumer proposal. They’ve got a guy for that – in fact, they have 50.

For approximately 50 LITs within these 13 firms, more than 40 % of their Division II filings [consumer proposals] were sourced from these debt consultants.

The OSB is initiating a series of amendments over the next year that will address the risks and issues associated with debt consultants involvement in the insolvency process. Hoyes, Michalos & Associates does not generate business using leads from debt consultants. We also have personalized solutions for each client as each person’s financial situation is different. In many cases, people who come to speak with our team (for free), don’t end up filing a consumer proposal or bankruptcy.

How Can You Protect Yourself?

Our recommendations are simple. Know who you’re dealing with, and make sure to ask the right questions.

• Do not pay any upfront fees
• Do not sign a contract to pay anything until you have met with a Licensed Insolvency Trustee
• Only deal with the Licensed Insolvency Trustee
• Ask what fees you are being charged, and what you are paying for with those fees
• When in doubt, seek a second opinion from another Licensed Insolvency Trustee

Always ask whether or not the person you’re dealing with is a Licensed Insolvency Trustee. If you’re uncomfortable being so direct, the OSB has a LIT registry that lists off all LITs in Canada.

Resources mentioned in today’s show:

• Hoyes Michalos’ articles on Debt Consultants
• Office of the Superintendent of Bankruptcy’s review on LITs business practices involving Debt Consultants
• Contact OSB with a complaint regarding debt consultants
• Do you need a debt consultant? From the OSB

FULL TRANSCRIPT show #143 with Ted Michalos

Doug Hoyes: For the first time ever, the federal government just issued a bombshell report saying that it appears that two very large debt consulting firms in Canada are taking advantage of vulnerable consumers. Let me repeat the three most important parts of what I just said, debt consultants taking advantage of vulnerable consumers.

Civil servants don’t like to point fingers. So for the government to actually put this in writing makes this easily the most amazing report ever issued by the OSB.

Today, I’m joined by my Hoyes Michalos co-founder and business partner, Ted Michalos. So, Ted, you ready to say something that you’re going to regret later today?

Ted Michalos: Thanks. Unlike the civil servants, we’re quite happy to point fingers.

Doug Hoyes: [laughs] So, well, let’s get to it then.

Ted Michalos: Let’s see how it goes.

Doug Hoyes: So here’s the background. The Office of the Superintendent of Bankruptcy, the OSB, which is a division of the federal government is responsible for regulating all Licensed Insolvency Trustees in Canada. That’s Ted, and me and all of our Hoyes Michalos trustees. They enforce the rules and if we don’t comply, we could lose our licence and be out of business. So it’s serious business but it’s pretty rare that the OSB actually takes away someone’s licence. It happens maybe once or twice a year, so it’s rare.

Usually, if a Licensed Insolvency Trustee makes a mistake the OSB works with them to correct the issue. We deal with the OSB all the time and, for the most part, they’re quite reasonable, wouldn’t you say, Ted?

Ted Michalos: That’s a safe comment.

Doug Hoyes: So what has these reasonable government employees so riled up? Well, on April 28th, 2017 the Office of the Superintendent of Bankruptcy issued a report saying that some Licensed Insolvency Trustees have questionable relationships with debt consultants and that it’s costing consumers thousands of dollars.

Now, this doesn’t come as a surprise to Ted and I. We’ve been talking about this for years.

Ted Michalos: [laughs]

Doug Hoyes: In fact, I’ll put a link in the show notes to a YouTube video we filmed of a radio interview we did back in 2011, so that’s six years ago, where we talked about this exact issue.

So, Ted, before we review the OSB’s report let’s start with the definition, what is a debt consultant?

Ted Michalos: All right. So there’s no hard and fast definition for this. We all use it in different ways. I think what the government is saying is debt consultants are unlicensed professionals that are charging people fees to get the same sort of information or advice that they could get from a Licensed Insolvency Trustee for free. So they’re people that are specializing in accessing people’s fears. You don’t want to call a Licensed Insolvency Trustee because it’s scary but you will call somebody who says, “I can help you avoid bankruptcy and get rid of your debts.”

Doug Hoyes: Yeah. And you said the key word there which is “fees”. These are people who charge fees and we’re going to throw some numbers around.

Ted Michalos: And they can be really big fees.

Doug Hoyes: Because … yeah.

Ted Michalos: If you want to get me going, we can have some fun with that.

Doug Hoyes: Oh, we’ll get you going. I’ll quote some numbers in a minute.

Ted Michalos: [laughs]

Doug Hoyes: So why does the OSB care about this then? It’s … they licence us, Licensed Insolvency Trustees, obviously they don’t licence unlicensed debt consultants. So why is this an issue for the OSB?

Ted Michalos: Well, a consumer doesn’t recognize that they’re even is a difference here. So if somebody says they’re a debt consultant, they sound they’re some sort of professional and they’re assuming that somebody is regulating them, with some kind of controls, when in fact there are none.

So Licensed Insolvency Trustees, our obligation is to present an honest and objective analysis. So when we talk to somebody we’ll show them all their options, we’ll tell them these are the things that you can do, these are the ramifications of doing them.

Well, if I was just some person being paid a fee for landing new customers I might not be as forthright or honest. In fact, I know that they’re not. So if the only way I make a fee is if I convince you to do a certain procedure, I’m going to sell you to do that certain procedure.

Doug Hoyes: Yeah, whether it’s the right thing for you to do or not.

Ted Michalos: Right.

Doug Hoyes: So how big a problem is this? How prevalent is this association between Licensed Insolvency Trustees and debt consultants? So let me quote a few sections from the report. And this, again, the government report I’m quoting, I’m not giving you my opinion, this is from the government. “In 2016, in 17 percent of all Division II filings” … that’s a fancy word for consumer proposal …

Ted Michalos: Right.

Doug Hoyes: … “the debtor reported having paid for financial advice before being directed to an LIT.”

Ted Michalos: Right. So that means they spoke to somebody else first and they actually paid a fee for it.

Doug Hoyes: “Fifty-seven percent of 2016 consumer proposal filings” … and, again, I’m quoting from the government report here … “for which prior financial advice was reported were received from LITs who had relationships with two large-volume debt consultants.” So this is not some little, tiny conspiracy here where one guy, you know, meets a couple of people.

Ted Michalos: No.

Doug Hoyes: This is a very coordinated, very large, in essence, attack on the insolvency system.

Ted Michalos: Well, and let’s not hide stuff in all the percentages. So 17 percent of people paid a fee, more than half of those people paid it to two specific companies. So you’re talking about five or six thousand people paid one of these two companies an awful lot of money for advice actually that you can obtain for free.

Doug Hoyes: Well, let me quote one more time from the report.

Ted Michalos: Yeah.

Doug Hoyes: “Thirteen LIT firms,” that’s trustee firms, “including one national-level firm were found to have one or more LITs operating in a frequent and sustained relationship with the two large-volume firms.”

Ted Michalos: Yeah.

Doug Hoyes: And, now, the report does not name names, so I do not know for a fact which large national-level firm they’re talking about.

Ted Michalos: Do you think they use initials in their name?

Doug Hoyes: Well, it could be.

Ted Michalos: [laughs]

Doug Hoyes: And, I mean, because frankly there are all only one, or two or three large national level firms, so it wouldn’t be … isn’t too hard to figure out who it is.

Ted Michalos: Right.

Doug Hoyes: But, again, this … it brings the whole system into disrepute when the two big guys are in effect colluding to, you know, not provide great advice for vulnerable consumers.

Ted Michalos: Yeah.

Doug Hoyes: So, again, the takeaways from these findings, only 17 percent of proposals are affected by this. Well, I don’t know, is that a low number or a high number.

Ted Michalos: Yeah, I think … well, that’s … that report being affected by it.

Doug Hoyes: Right, that report being affected by it. Sixty-four percent of those files involved just two large debt consulting agencies, 13 LIT firms. And these are cases where the debtor unnecessarily paid for consumer proposal advice before talking to a trustee.

So let’s bring this home then. Why should someone … why would someone … let’s start with that. I think you, kind of, already addressed this. Why would someone contact a debt consultant before contacting an LIT?

Ted Michalos: Let me give you a story, somebody that came in to see me last week.

Doug Hoyes: Client stories, here we go.

Ted Michalos: So it’s a married couple, they were in their … if I had to guess, they were in their fifties. They went to see … they answered one of those ads that said you can avoid bankruptcy, we can help you deal with your debts, we can reduce them up to twenty percent. Sounded great, they went in and they sat down with a person.

And the approach was very friendly, right? It was … there wasn’t pressure involved, what it was “We can help you deal with your debts. Yeah, we can do all of that stuff. Here’s the first step, you know, give me $500.00 today. I want you to start out with some paperwork and we’re going to set you up a meeting next week with somebody else.”

All right. They went to the second meeting and it was, “All right, we think you need to do this and, in fact, we need another $500.00 payment and then we’ll get you started by referring you to the third guy.” The third guy was going to be a Licensed Insolvency Trustee but they didn’t know that at the time.

So they had two meetings, were supposed to pay a thousand dollars to meet with some guy to solve their debts. The reason they contacted them in the first place was … wasn’t … there wasn’t the intimating I’m meeting with a Licensed Insolvency Trustee, we used to be called bankruptcy trustees which was probably worse. But it was I’m just meeting with a guy who’s a debt consultant, I specialize in helping people solve their problems, as straight forward as that.

When they got in there they realized that, wait a minute, something about this doesn’t quite sound right, “Five hundred bucks and I can do away with my debts?” They owed $50,000.00, by the way. “Now we need another 500 bucks,” “Well, wait a minute, what was the first $500.00 for?” “Well, that was so we could meet with you and get you started,” “Well, what’s the second one for?” “Well, because we’ve got to get all this stuff ready and …” I mean, they just became suspicious because of the way this thing was unfolding.

And, to their credit, they did a little homework on the internet and they discovered, “Well, wait a minute, these guys aren’t Licensed Insolvency Trustees, these guys … they’re nothing, I mean, they’re not regulated by anybody, they’re asking us for a fee and now they’re sending us to this third guy.”

Doug Hoyes: Yeah, and to put it in perspective, so let’s say I’ve got a problem with my car.

Ted Michalos: Okay, you have a problem with your car.

Doug Hoyes: Thank you. So I’ve got a couple of choices, I can go to a, you know, certified class A mechanic … I think that’s what they’re called, right?

Ted Michalos: Yeah, yeah.

Doug Hoyes: And he can … he or she can take a look —

Ted Michalos: Unless they work for Canadian Tire, then they’re something else.

Doug Hoyes: Then it’s a different story. So they can take a look at my vehicle and tell me what’s wrong or I could pay an automotive consultant who isn’t a class A mechanic, who’s just some guy who could say, “Yeah, I think you need this, this and this,” I could pay them a fee and then go to the expert. Well, does that make any sense?

Ted Michalos: Right, just … well, you know, the perfect commercials are those LifeLock guys, right, “Oh, I’m not a dentist, I’m a dental monitor,” you know, you don’t want to talk about —

Doug Hoyes: I have not seen those. I have not seen those commercials.

Ted Michalos: It’s on TV. You go down, you sit down and the fellow, “Yeah, you got a really horrible cavity, I’m going to lunch now,” “Aren’t you going to fix it?” “Oh, I’m not a dentist, I just tell you that you have a cavity.”

Doug Hoyes: Yeah. And so if I’ve got a medical problem wouldn’t I just go right to the doctor, like, doesn’t that kind of make sense?

Ted Michalos: Right.

Doug Hoyes: So what you just described there then is exactly our problem with what debt consultants do, you go to someone who isn’t licensed, doesn’t have the training and the expertise, they charge you a bunch of money and all they’re actually doing is referring them to a Licensed Insolvency Trustee —

Ted Michalos: Right, correct. What they’re doing is they’re identifying that you’ve got more debt than you can deal with and they think you make enough money every month that you can afford to pay some fees to deal with those debts. So they’re not trying to determine if this is the best solution for you or even the right solution, they’re trying to determine do you fit their criteria for somebody that they can sell this product to.

Doug Hoyes: And so how does this differ from what we do?

Ted Michalos: All right. So as a Licensed Insolvency Trustee … more than half the people I speak to don’t end up having to file, so they don’t need to file a proposal to the creditors or file a bankruptcy, what they need is somebody to help them analyze where they’re at. So a Licensed Insolvency Trustee will consider your finances, so what do you own, who do you owe, how much income do you have coming in, what are you spending every month and then is there a way to solve this problem through the various tools that we have.

The first tool is can we just help you with your budget? Well, there aren’t any fees involved with this, this is helping you help yourself or should you be refinancing. In the current real estate market, it’s amazing how many people are just going out and getting second mortgages. And we can do a show on that, I’m sure.

Doug Hoyes: Oh, in fact I’m …

Ted Michalos: We probably have.

Doug Hoyes: … pretty sure last week’s show as on real estate. So the point is we’re not charging any upfront fees.

Ted Michalos: Right. And if we did we would get in trouble. I mean, that’s one of the advantages of dealing with somebody that’s regulated by the government, we’re not allowed to charge you upfront fees. If we do, we’ve got to disclose them to everybody and they come out of any eventual fees that we’re allowed to collect for the work we are licensed to do.

Doug Hoyes: Yeah. So if you were to do a proposal, and you’re going to file it next month and you gave us $500.00 today, we would have to take that $500.00 and put it towards your proposal payments.

Ted Michalos: Correct.

Doug Hoyes: It’s pretty much that simple.

Ted Michalos: And the debt consultant puts it in their pocket.

Doug Hoyes: So there’s a huge difference there. Well, we’re now hitting into the idea of the actual dollars involved. So, again, let me, you know, pull out the government’s report and read you a couple of paragraphs here, because this is kind of amazing. “Costs of insolvency for consumer debtors. Debtors” … and, again, I’m quoting from the government’s report here, these are not my words, not my opinions. “Debtors served by LITs who had ongoing relationships with debt consultants usually ended up paying thousands of dollars more for the administration of their insolvency than debtors who were not sourced through a debt consultant.”

Ted Michalos: Yeah, that makes sense, because you’re paying somebody twice.

Doug Hoyes: Like, that’s not hard to understand there, is it?

Ted Michalos: Right.

Doug Hoyes: They are paying thousands of dollars more. “Typically, debt consultants required a consumer debtor to sign a fee agreement for consulting services prior to being introduced to a selected LIT. Debtors typically understood the role of the LIT as being limited to meeting with the debtor to file the proposal developed by the debt consultant.”

Ted Michalos: Right.

Doug Hoyes: So and, again —

Ted Michalos: And that’s completely backwards the way that the system is supposed to work.

Doug Hoyes: That’s completely backwards. And so, again, we can talk about clients we’ve dealt with. And you, kind of, described it pretty well with the clients you met with recently, they go the debt consultant and the debt consultant says, you know what, the trustee is bad.

Ted Michalos: Well, the trustee doesn’t represent you.

Doug Hoyes: The trustee does not represent you, right.

Ted Michalos: The trustee’s not there to help you, the trustee’s there to make money.

Doug Hoyes: That’s right, the trustee is just there to make money. And, in fact, they’ll often say the trustee represents the creditors.

Ted Michalos: Right.

Doug Hoyes: And the reason they say that is you’re going to pay the trustee money and the trustee is going to give that money to the creditors, obviously, therefore they’re working for the creditors. Whereas me the debt consultant I only work for you, I don’t care about anything other than you, so you’re paying me as this unbiased advocate for you.

Ted Michalos: Yeah.

Doug Hoyes: What’s your response to that?

Ted Michalos: Well, the problem with that is that there’s very little advocacy going on. So the concept behind being an advocate is that you’re in somebody’s corner, you’re going to fight for them. There’s very little fight involved here. They get you to fill out some paperwork, they’ll forward that to the LIT that they have the relationship with and that’s what they’re going to do.

The LIT will tell them this is what needs to be offered for the creditors to agree. There’s no secrets here, there’s no magic, you know, you’re not dealing with a guy who knows something more than anybody else on the street.

Doug Hoyes: Well, but what about the argument that you work for the creditors?

Ted Michalos: Yeah, and we’re officers of the court, so we have a fiduciary responsibility to everyone involved, anyone who’s involved in the insolvency process, the individual that’s in trouble, the creditors that are receiving the payments from the trustee, the Office of the Superintendent and the courts. We have to maintain this middle of the road.

The analogy I always use is we’re referees. So think of us at … as a hockey game, right, we’re the guys who enforce the rules. We don’t write the laws, we tell you if you’re offside, if you’re onside. And it’s the same for either team, we don’t look at one side or the other. If we do, we’re not doing our job, you won’t have us back as a referee.

Doug Hoyes: Right. And that’s a key point. Upfront we tell you here are the rules, here are how they work, so you know what you’re getting yourself into.

Ted Michalos: Right.

Doug Hoyes: And this whole notion that we work for the creditors, well, no. Ultimately, you come to us, you select us to be your LIT and if we do a lousy job you’re going to be telling all your friends that we did a lousy job. If we treat you fairly and get the result that you want, you’re going to be telling all your friends that it worked out great. We’ve been in business since 1999 so that’s, what, eighteen, nineteen years now.

Ted Michalos: Yeah.

Doug Hoyes: And a lot of our work is referral work. People have dealt with us, they send their friends and their family members. So I can, pretty much, guarantee you the debt consultants aren’t getting a lot of referral work.

Now, let me read another paragraph, because this will blow your brains, from the … again, from the government report. “In the cases reviewed, the amount of the consulting fee portion of the agreement between the consumer debtor and the debt consultant averaged approximately $2,400 and reached as high as $4,200.” Like, what more do I need to say about that?

Ted Michalos: Right. So what you need to understand, anyway, listening to this is that what the OSB is doing here is trustees are paid a portion of what you pay to your creditors as an administrative fee. And they’re saying whatever you pay to this debt consultant before you pay any proposal payments is now an additional pure fee and they’re right.

So I’ll give you a numeric example. You’re going to pay back $20,000 on $60,000 worth of debt, about a third and that’s a pretty typical proposal.

Doug Hoyes: Typical proposal, yeah.

Ted Michalos: The fees on that $20,000 are going to run about 4,500 bucks, somewhere in that … does that sound right, 20, 18, 36 … no, about $5,100. There aren’t any upfront fees, that’s what the trustee will get paid over the four or five years while you pay it out.

If you went to a debt consultant first, they would charge you … probably on that size of debt, $1,500, three payments of $500 each. So now instead of paying fees of $5,000 you’ve paid fees of 6,500. So have you got so much money in your pocket that you can afford to pay an extra 1,500 that you didn’t have to pay. That’s really the question.

Doug Hoyes: It’s crazy. Well and let me read you one more sentence from the government’s report, “For lower-value proposals” … so that would be a, you know, proposal where maybe the total payments are 10,000, 15,000 something like that …

Ted Michalos: Right, right.

Doug Hoyes: … “the consulting fee commonly ranged from 20 to nearly 40 percent of the value of the proposal.”

Ted Michalos: Sure, because if you were paying back $10,000 … so let’s say you owed about 30 … the fees for that would be somewhere in the neighbourhood of $3,200. If you paid $1,500 in consulting fees up front, now you’re paying $4,700.

Doug Hoyes: But and to pay 40% more for something and get zero extra value is crazy.

Ted Michalos: Right.

Doug Hoyes: It’s like, well, you can go to this place and get your oil changed for a hundred bucks or you can go over there and pay a hundred and forty. Okay, if it’s the same thing, I think I’ll take the hundred, thank you very much.

Ted Michalos: Yeah. Well, and people have to understand that … this may come across as sour grapes because we have a bias, because we’re the Licensed Insolvency Trustees and we don’t deal with these guys. But the reason we don’t deal with these guys is because, frankly, I think they’re crooks. I mean, if you can get advice … competent advice for free or go to a not-for-profit and maybe they charge you 10 bucks … well, talk about that some more … what’s the point in paying somebody $1,500? Like, I just don’t get it.

Doug Hoyes: Yeah, their argument is we are looking out for you. And so you go to the trustee and the trustee is going to say, “Well, you need to file a proposal where you pay $300 a month for five years. Do you know what, you really only need to pay $150 a month.” The trustee is charging you more money because they make more money.

Ted Michalos: Right.

Doug Hoyes: But, guess what, it’s the creditors who vote on the proposal. So if we recommend that you file a proposal and pay 300 bucks a month, we can offer a proposal of $150 but the creditors are going to say, no, we want more money, we do a couple of hundred of these every month.

Ted Michalos: Right, yeah.

Doug Hoyes: And we’ve been doing them for years and years and years.

Ted Michalos: Right. So we keep track of what creditors vote which ways and what their minimum expectations are.

Doug Hoyes: Yeah. We’ve got a very detailed internal system … and you can’t see it because this is a radio show … but on the other side of these walls here we’ve got a group of six people who do nothing but proposals and they keep track of every single one we do. So if someone comes in to see me and they say, okay, I owe money to the Royal Bank, or to Canadian Tire or CIBC or whatever we can go … look in our system and see all the previous votes that company has done.

Ted Michalos: Right.

Doug Hoyes: And we know that, you know what, they’re going to look for this particular term, they want thirty cents on the dollar, they want fifteen cents on the dollar, whatever. So a debt consultant doesn’t have access to that kind of information.

Ted Michalos: Well, they never actually interrelate with the creditors.

Doug Hoyes: They never talk to them, no.

Ted Michalos: I mean, that’s the other part of this thing that really drives me crazy is they’ll tell you when you come see them, stop making your payments, stop answering the phones, oh, don’t worry about those collection letters. The reason they’re doing that is once you stop dealing with any of these … your debts in the normal course of business you’re pushing yourself down a road.

And so you’ve talked to the debt consultant, they’ve told you to do all these things but you haven’t made your decision yet how you want to solve the problem. Well, they’re forcing you into a decision. Once you stop making those payments it’s not like you can catch them up again.

So now you’re two months down the road you haven’t made a decision and somebody’s threatening you with a lawsuit. Well, it’s too late to just try and negotiate, or budget or do something else, you need a real solution and they’ve got you. They’ve got a hook in you now, they’re going to say, “Well, look, we’ll get you in to see our guy really quickly. You got to pay us that fee and get it done.”

Doug Hoyes: Well, it’s kind of like going to a real estate agent and saying, “I want to buy a house,” and they say, “No problem, we can get you a better deal on a house.” So I’ve got two different real estate agents who I’m thinking of hiring and one of them says, “We can get you that house for $300,000,” and the other one says, “No, that house is worth $450,000” okay, I guess I’ll go with the $300,000 one.

Ted Michalos: Right.

Doug Hoyes: I put in my bid at 300,000, well, guess what, it gets rejected. The buyer has no obligation to take something that’s well below market value.

Ted Michalos: Right.

Doug Hoyes: I mean, again, let me read from the government’s report. “The OSB took a look at proposals and the OSB’s comparison of the data identified a consistent difference in the frequency of files with very low proposed values,” that’s just what I just talked about, underbidding on a proposal.

Ted Michalos: Right.

Doug Hoyes: “LITs working with debt consultants filed five-year consumer proposals with payments under $100 per month about 14 to 19 percent of the time, this compares with only 4% of such proposals filed by the control group of LIT.”

So in your experience, Ted, I mean, okay, would you say that, yeah, it’s probably less than 4% where we’re doing a proposal, that’s four hundred … or a $100 a month or less?

Ted Michalos: Right. Yeah, I mean, the reason that somebody does a proposal that size is that, well, they’ve been … they’re afraid of the whole idea of a bankruptcy. And I don’t want to turn this into a bankruptcy versus proposal thing. But if you are on social assistance or a fixed income, limited means and somebody convinces you to pay $75 a month for five years when you could pay probably less than $100 a month for nine months who are they helping. I mean, they’re putting money in their pocket because they put you into a proposal, they got to charge you a fee. Probably the right answer for that person was a bankruptcy but that’s not what this show is about.

Doug Hoyes: Yeah, a bankruptcy or doing nothing. And, as I said earlier in the show, these debt consultants, overwhelmingly, are recommending consumer proposals.

Ted Michalos: They are because, in most cases, they don’t … they can’t charge any sort of a fee or … yeah, a consulting fee if you’re going to do a bankruptcy. So if the correct answer is that you need to file bankruptcy it’s hard to justify paying them $1,500 when the bankruptcy itself probably only costs $1,800.

Doug Hoyes: Yeah, the typical bankruptcy would do, if you have no surplus income, no assets, you’re probably paying a couple hundred bucks a month for nine months.

Ted Michalos: Right.

Doug Hoyes: The average fee that a debt consultant charges is $2,400, the OSB said that.

Ted Michalos: Yeah.

Doug Hoyes: So why would you pay $2,400 to a debt consultant who is doing nothing and then actually only pay the trustee $1,800, it makes no sense.

Ted Michalos: Right.

Doug Hoyes: They have to justify their fees and the way they do that is by putting you into a proposal, making a low-ball offer. And then of course what happens, the creditors come back and say, “Well, we’re not accepting four cents on the dollar, that’s crazy,” and then who gets blamed for it, oh, it’s the LIT, the debt consultant says, “Oh, sorry, I’m out of the picture now.”

Ted Michalos: Yeah. Well, and a worse example … so let’s say the creditors do agree to it, you get three years into paying $75 a month and you stop paying because it’s … you … it just wasn’t sustainable. Well, your bankruptcy would have been over a year and a half ago, you would have had all that money in your pocket and now you’ve got to file bankruptcy anyway because the proposal … you weren’t able to complete it. I mean, the debt consultant really doesn’t care because they got their fee upfront, they got their first transaction in. Once you’re … once they’re through with you it’s … I mean, they’re on to the next guy.

Doug Hoyes: Yeah. And the way we get paid … and, again, our fees are licensed by the federal government, regulated, every LIT gets the same percentage of the pot in a proposal, we get paid as we send money to the creditors.

Ted Michalos: Right.

Doug Hoyes: So the creditors accept the proposal and then every few months we’re sending them what’s called a dividend, a payment towards the debt, we get our fee at that point. So if the creditors vote no on the proposal we’re not getting paid, if we make the proposal too onerous that you can’t afford it and it fails we’re not getting any further payments after that point.

Ted Michalos: And, of course, the debt consultant was paid in full before they referred you to actually file the proposal.

Doug Hoyes: Yeah. So whether it works or not —

Ted Michalos: So their money has come and gone.

Doug Hoyes: Yeah, they don’t care whether it works or not. So okay. Before we get to the practical advice section of the podcast, I want to discuss what the OSB is actually going to do about this and what you think they should do.

So I’ll tell you what they say they’re going to do. They’ve issued this as a … kind of, a moral suasion, let’s throw it out there. From the OSB’s report they say that, quote, “Over the next year the OSB will initiate a series of amendments to OSB directives, BIA forms and compliance programs to address the risks and issues identifies … identified in this report. Areas of focus will include fulfillment of the LIT’s responsibilities and all aspects of the insolvency process,” et cetera, et cetera. So they’re saying that “we’re going to make some tweaks”.

Ted Michalos: Right.

Doug Hoyes: Okay. I guess making some tweaks is better than doing nothing. I mean, if there’s some murderer running around I don’t know if tweaks is the answer but —

Ted Michalos: But one of the challenges they have is the largest firm in the country is guilty of this, so …

Doug Hoyes: Yeah. As they said, that’s in their report that it’s a large and a —

Ted Michalos: So it would be interesting to see how they tweak the largest firm in the country.

Doug Hoyes: Yeah. It’s kind of like a banking regulator, knowing that the biggest bank in Canada is doing bad stuff, well, what are you going to do, shut down the biggest bank in Canada, that’s kind of hard.

Ted Michalos: Yeah. And that was just an example, we don’t know if the biggest bank in Canada is doing bad stuff. [laughs]

Doug Hoyes: No, no, I’m sure they’re perfectly reasonable people and doing everything fantastically but …

Ted Michalos: [laughs] Certainly.

Doug Hoyes: Okay. So what the OSB is saying is “we’re going to make some minor tweaks”.

Ted Michalos: Right.

Doug Hoyes: What do you think they should do? This is a very serious problem, they’ve identified the fact that consumers on average are paying $2,400 to these debt consultants who do nothing.

Ted Michalos: Well, it’s better than that. They can tell from filing patterns which trustees or which Licensed Insolvency Trustees are doing this. So, for example, if a trustee doesn’t have an office in St. Catharines and they’re doing 25 new files a month in St. Catharines, probably they’re getting work referred to them from somewhere, right?

Doug Hoyes: How is that possible, yeah.

Ted Michalos: They haven’t got an office but they’re doing all that work. So they easily know who it is that’s guilty of this. If a trustee does 95% of their files are consumer proposals and very few bankruptcies, well, probably they’re not seeing the public themselves, they’re getting their work referred to them.

Doug Hoyes: Because, on average, most trustees it’s a relatively even split between proposals and bankruptcy.

Ted Michalos: Yeah, pretty even split. And, intuitively, that’s what it should be. So, if you’re giving people the right advice, either you can help them without filing anything, or half the time they’ll file a proposal to repay part of the debt or half the time, you know what, file the bankruptcy, get on with your life more quickly.

If a debt consultant is not getting the fee for bankruptcies or telling them they don’t need any help, well, you know what they’re going to sell them. What should you do, the biggest single thing, don’t pay any fees up front.

Doug Hoyes: Well, but I’m asking —

Ted Michalos: If anybody … well …

Doug Hoyes: And we’ll get into that.

Ted Michalos: What can the OSB do.

Doug Hoyes: What should the OSB do?

Ted Michalos: Oh, that’s right, yeah.

Doug Hoyes: What should the OSB do. So I’m appointing you the superintendent of bankruptcy now.

Ted Michalos: Well, that’s great. Woohoo.

Doug Hoyes: That’s great, you’re the new guy.

Ted Michalos: Oh, and I want my eight weeks vacation. That’s a different conversation.

Doug Hoyes: Yeah. So what —

Ted Michalos: Do I get a pension?

Doug Hoyes: Yes, you get a pension. So what should they be doing?

Ted Michalos: All right. Well, again, so they can identify easily who they think are the … I’m going to call them the guilty LITs, the people that are acting in a way that’s not —

Doug Hoyes: The guilty parties. Okay, so they’ve got this list, they know who’s doing it.

Ted Michalos: — correct. Yeah, right. So the first thing they should do is moral suasion, okay, we know who you are, we’ve identified you, fly right.

Doug Hoyes: And that’s exactly what this report is.

Ted Michalos: Right, so that’s the first step.

Doug Hoyes: I mean, this is the first shot, the shot across the bow.

Ted Michalos: Yeah. So the second step is, if somebody’s not smart enough to pay attention to that, well … they call it a Chinese customs inspection. So the example is you send a load of produce into China and they’re not going to ban its arrival but it will sit on the docks until it’s rotten and then they’ll release it.

So the trustee, they just … all of our trustees fees have to be approved by the Office of the Superintendent before we can actually complete a file. So they could just slow down the paperwork and … it doesn’t have to be anything … what’s the word I’m looking for …

Doug Hoyes: Yeah, gum up the works is what you’re talking about.

Ted Michalos: Yeah, right.

Doug Hoyes: So what you’re talking about in a bankruptcy there’s a letter of comment that’s issued at the end of the file and that’s when we can draw our final fees. Well, right now for us that happens pretty much automatically, we push a few buttons on the computer, a few minutes later —

Ted Michalos: Comes right back.

Doug Hoyes: — comes right back.

Ted Michalos: Yeah.

Doug Hoyes: But, yes, they could do a manual review and it could take weeks, weeks or months.

Ted Michalos: And with a proposal they could … just they could simply start reviewing proposals.

Doug Hoyes: Well, they could request creditor’s meetings.

Ted Michalos: Yeah.

Doug Hoyes: And, in fact, they have been doing that in … we … you know, the discount clauses issue, which we’re not going to get into because we don’t have the time for that and it’s already been solved. But that’s exactly what they were doing. They identified an anomaly.

Ted Michalos: Right.

Doug Hoyes: And so they said whenever they see that anomaly we’re going to request a creditor’s meeting. And in most cases, in most consumer proposals we do there is no creditors meeting or, if one is required, it’s just a paper thing, you know, here, sign a piece of paper.

Ted Michalos: Right, it’s done by fax and email.

Doug Hoyes: Done by fax, nobody actually shows up. But the OSB could say “we are going to chair all those creditors meetings”.

Ted Michalos: Yeah.

Doug Hoyes: So for that big trustee firm that’s doing this and for those LITs that we know are getting most of their work from these guys, let’s have creditors meetings for every single one of your files.

Ted Michalos: And that dramatically increases the cost of the LIT doing the work, because we don’t get paid by the amount of time we put into a file. We get paid a percentage of the money that’s flowing through. So if suddenly have to do an extra five or six hours worth of work the file isn’t profitable anymore.

Doug Hoyes: Especially on … and it’s a real hassle for the debtor because now you got to take a day off work, you got to show up at this meeting, you got to answer questions —

Ted Michalos: Yeah. And there’s anxiety, why am I having a meeting, my friend did one of these with Hoyes Michalos down the road and there was no meeting.

Doug Hoyes: Hoyes Michalos. Everything was fine. They could also do examinations of the debtor.

Ted Michalos: Yeah, to find out how much did you pay and was it properly disclosed. But here’s the … I mean, if they really want to do something about this, if they find out that a fee was paid to a debt consultant they have the right to have it deducted from the trustee’s fees in the file. And so, suddenly, it’s not the consumer paying the fees up front, it’s the LIT paying the fees. And I think that would dramatically change things too. Because if you … if I was going to get paid $4,000 worth of fees on a proposal and I had to pay $2,400 … or had $2,400 deducted because I paid a consultant first, I don’t know that I would do the file.

Doug Hoyes: It gets to the … well, and if it was a $2,400 fee and the $2,400 deduction, you’re working for free.

Ted Michalos: Well … right.

Doug Hoyes: So at some point it doesn’t make any sense. Well, and I guess the other thing they could do is actually print a list of the offending parties.

Ted Michalos: Sure. I mean, if they published a list saying these are the guys that are performing this practice, without saying good or bad, just saying these are the people that are using debt consultants —

Doug Hoyes: These are the facts.

Ted Michalos: — you can decide for yourself if it’s worth the money.

Doug Hoyes: And you think word would get around pretty quickly, consumers would go, okay, and …

Ted Michalos: Yeah. We’ve been harping on this thing now for over a decade and they’re still in business. In fact, they’re probably busier than they’ve ever been, so …

Doug Hoyes: Right, and so that’s why we’re doing this podcast today in the hopes that we can actually get the word out that this is a serious issue … and, again, this is not just our opinion, the government has finally after … I mean, again, we’ve been on this case for five, six, seven years. They’ve finally done some research and issued a report that says, “We’re going to think about it, we might do something.” So hopefully it’s progress.

Ted Michalos: Yeah, yeah.

Doug Hoyes: Okay. So we’ve given the OSB advice, we know you’re watching, so hopefully you’ve taken these things into account.

Ted Michalos: [laughs] Listening, it’s radio.

Doug Hoyes: Absolutely. Well, this is going to be on YouTube as well if the video recording works, so …

Ted Michalos: So I should look up every once in a while.

Doug Hoyes: Exactly. So and … you know, for the OSB I’m … you know, Ted and I are more than happy to fly to Ottawa, and chat with you in person and give you our thoughts. But what about the person who is listening to us now, the actual individual who’s got some debt issues and they’re trying to figure out, okay, who can I trust, should I go to a debt consultant, what about you guys, how do I know if I’m being treated fairly, what practical advice can you give me?

Ted Michalos: Right. So this is where I was going before. So we jumped the gun a little bit. So let’s start this by saying that, at the end of the day, it’s your decision. If you decide that there’s value in paying these guys a fee before you actually talk to a Licensed Insolvency Trustee, we’re not going to stop you. I mean, it’s … you’re an adult, you got to decide what’s right for you.

But some warning signs for you. You shouldn’t ever have to pay an upfront fee. So if somebody meets with you for free and at the end of the meeting they say, “Well, okay, but now to go any further you got to give me 500 bucks,” wait a minute, trustee is not going to ask you for $500.00. That’s probably money that’s going to a debt consultant.

Doug Hoyes: And that’s real simple advice to understand.

Ted Michalos: Yeah.

Doug Hoyes: We do not charge upfront fees, number one, because we think it’s unethical but, number two, we’re not allowed to, the rules say we can’t do it.

Ted Michalos: Right.

Doug Hoyes: So you do not pay us anything until the paperwork has been filed with the government.

Ted Michalos: So there’s a test for you, right? So you met with somebody because they’ve done that first meeting for free, at the end of the meeting they ask for money, all right. So at this point you shouldn’t be signing anything. Don’t make any sort of commitments, you want to think about this some more.

The follow-up question as soon as somebody asks you for money should be, “Are you a Licensed Insolvency Trustee?” and if that doesn’t make you comfortable, “Are you actually going to do the work for me?” Because if they’re a debt consultant, they can’t. If the guy comes back and says, “Well, I’m going to refer you to my guy down the street. He’s going to actually do the filing,” okay, so why am I paying you money then.

Doug Hoyes: Yeah, when I go in for my surgery consult I would like to talk to the surgeon, not someone who knows the guy who knows the guy who knows the surgeon.

Ted Michalos: Right.

Doug Hoyes: I mean, I want to know who I’m dealing with. So don’t pay upfront fees, don’t sign a contract to pay anything until you’ve met with an LIT. Only deal with an LIT. And I guess, even more basic than that, ask “what fees am I being charged?”.

Ted Michalos: Right, what’s the upfront cost … what are you asking me to pay and why.

Doug Hoyes: And we’re happy for you to ask us that question too because, again, our fees are set by the government, we’re … it’s right in the proposal what we’re getting paid.

Ted Michalos: Right. And, again, if the guy says it’s 1,500 bucks and you think that’s $1,500 well spent, then I respect your decision to do that.

Doug Hoyes: Yeah, I mean, there are lots of people who will go talk to their accountant or their lawyer first and pay their accountant or lawyer money, okay, that’s fine, I’ve got no problem that, particularly if you’re in a business situation maybe it makes a lot of sense because there may be tax implications and whatnot.

Ted Michalos: Right.

Doug Hoyes: But in that case you know what you’re getting, they charge you by the hour, you’ve been dealing with them in the past and they have no incentive to refer you to one person or another.

Ted Michalos: Right.

Doug Hoyes: They’re probably giving you independent advice. But when you’re dealing with a debt consultant … and I guess the other question you could ask them … so, “Okay. You’re going to be referring me to someone. Do you only refer to one different party?”

Ted Michalos: Yeah, “Can I get a list? Who should I be taking to?”

Doug Hoyes: Right. I mean, with the not-for-profit credit counsellors that we deal with in most of the cities we’re in they have a list of three or four different LITs that they’ve met with, preapproved, they know they’re legit. So they don’t send everybody to the same person in most cases, they spread them around.

Ted Michalos: Right.

Doug Hoyes: So … okay, so I think that’s really good advice. What are your final comments then on anything to do with debt consultants, the OSB or people who are listening who may have issues with any of this?

Ted Michalos: Well, so I get the attraction, the debt consultant is allowed to, basically, play on your fears, not only of the debts that you have but of having to talk to a Licensed Insolvency Trustee. It was better for them when we were called bankruptcy trustees, because that’s an even scarier name. So they are playing on your anxiety and your fear, because you don’t want to do that. You want to do something better.

So any time a deal sounds too good to be true, it probably isn’t true. They’re going to meet with you for free up front, because the first time they meet with you it will be, “Yes, come on in for a free consultation.” And more and more these are being done over the internet or by phone now. But the conversation always end with, “Okay, I think we can help you. I need that 500 bucks.” And so they’ll immediately ask you for money and that’s your warning sign, wait a minute, you haven’t done anything yet, why do I need to give you money.

Doug Hoyes: Yeah, it’s pretty much as simple as that, don’t be signing anything, don’t be paying any money before something is filed, deal with a Licensed Insolvency Trustee. Simple as that.

Ted Michalos: Yeah. And you … and, yeah, you can use the second opinion thing on trustees. So you go to see a Licensed Insolvency Trustee and call another one, go see another one. I mean, we call that opinion shopping but, quite frankly, it’s your life, you got the right to look around and make sure you’re comfortable with the people you’re dealing with and you’re getting advice that you can live with.

Doug Hoyes: Well, and I think I met with two people in the last week who had been to see another LIT and they just weren’t comfortable, they didn’t understand the explanations they were getting, well, great, go see someone else then, we get a lot of work from that too, so …

Ted Michalos: Right.

Doug Hoyes: Excellent. Well, I think that’s an excellent way to end it, that’s our show for today, full show notes, including links to the bombshell government report.

Doug Hoyes: And all of the previous videos and articles we’ve written on this topic can be found at hoyes.com, that’s h-o-y-e-s-dot-com.

If you want to have your say, there’s a link on the OSB webpage so that you can send a message directly to the government explaining that you don’t think vulnerable consumers should be scammed by debt consultants who only want to take their money. So feel free to take advantage of that.

Thanks for listening. Until next week, I’m Doug Hoyes. That was Debt Free in 30.

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Read Transcript

I’ll start with an important reminder: a consumer proposal is a legal debt settlement process available through the Bankruptcy and Insolvency Act. This process can only be administered by a Licensed Insolvency Trustee.

Unfortunately it’s often difficult for a consumer, already under stress as a result of their financial situation, to decipher who they are dealing with when looking for debt relief. I recently came across a typical website someone looking for debt solutions may stumble across – credit720.ca. If you will notice from this screenshot, under their services tab they advertise consumer proposals and bankruptcies.

Telltale Signs

This website advertises consumer proposals and bankruptcies, yet no where on their site does credit720.ca identify itself as a Licensed Insolvency Trustee. All Licensed Insolvency Trustees and firms are required to identify themselves as an LIT under directive 33 governing advertising for Licensed Insolvency Trustees.

If you use their debt calculator you are provided with a cost comparison of different debt relief options. Theirs includes a consumer proposal, which is not unlike our own debt relief calculator on hoyes.com.

What We Found

To understand who the company was, and who potential debtors would be dealing with, we decided to inquire about their services through their online chat. Below is a reproduction of our live chat dialogue, which took place on March 22, 2017 (You in this conversation is Hoyes Michalos).

You — Please update your info

Who are you

Credit 720 joined the chat

Credit 720

Hi, how can we help you today? =)

You — Please update your info
what type of services do you offer?

Credit 720
we offer credit counseling, debt management, consumer proposal and bankruptcy.

You — Please update your info
oh – are you a bankruptcy trustee then?

Credit 720
we are a credit counseling firm.
we have trustees working with us.

You — Please update your info
will I see a credit counsellor or trustee?

Credit 720
initially you’ll be seeing a credit counselor and if required you may see a trustee later on in the process

You — Please update your info
how will you know if I have to see a trustee?

Credit 720
Depending on your situation and your file the counselor you in meet in our office will decide
would you like to book an appointment in any of our nearest office?

You — Please update your info
I’m not sure, I’m still not sure who will help me. Do the trustees work for you or are they another company. I’ve already run into this before

Credit 720
trustees are independent license holders. They work with us

You — Please update your info
OK I understand. What do you charge?

Credit 720
we don’t charge for the consultation.
after we go through the complexity of your file the counselor will decide on the fees.

You — Please update your info
What would he be charging me for?

Credit 720
The work required to get your file go through and to administer you file.

You — Please update your info
Go through who – the trustee? What if I don’t need a trustee?

Credit 720
There are other options available other then trustee
i would suggest that you come and our counselor so they can respond to your queries in an appropriate & satisfactory manner

You — Please update your info
Still uncertain – if the counselor is not a trustee what they will do for me. What kind of education do they have?

Credit 720
credit counselor are BIA licensed holders and trustee are CAIRP & LIT.

You — Please update your info
??? – the person I will meet with is a BIA licensed holder? What is that?

Credit 720
yes they are BIA License holder. BIA stands for Bankruptcy and Insolvency Act
you can ask your questions when you see them in person

You — Please update your info
OH so bankruptcy again. They BIA person works for you? And that’s who I would meet with?

Credit 720
All licensed credit counselors working in any credit counseling company or trustee firms are BIA accredited.
yes they work for Credit 720

You — Please update your info
OK I still am not sure as I want to file bankruptcy and that seems like all you are going to do is refer me to a trustee. So I’ll think about it

Credit 720
BIA license is not just limited to bankruptcy. As said earlier in the chat it includes debt management, consumer proposal and orderly payment of debts programme
once you decide you’re more than welcome to book your appointment with us.
Is there anything else i can help you with?

End chat.

As you can see, these companies advertise the services of a Licensed Insolvency Trustee, but are somewhat unclear when it comes to stating who will be working on your case, and how fees will be charged for the services. They advertise services that can only be administered by a Licensed Insolvency Trustee, and they are not Licensed Insolvency Trustees. This is very confusing to the public and can prove costly for consumers. Without the right knowledge, the debtor ends up paying unnecessary, and often very high, consulting fees.

We strongly recommend that anyone looking for debt help investigate the company, and individual they are dealing with before entering into any payment agreement. Confirm that you are working with, and only making payments to, a Licensed Insolvency Trustee, and not an unlicensed debt consultant.

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A History on Debt Consultants in Canada

Before addressing the issues raised by the OSB, I’d like to share a short history about the evolution of large scale debt consulting in Canada.

A few years ago American style debt settlement companies ran numerous advertisements offering to help consumers settle their debts for pennies on the dollar. Competing with consumer proposals, their debt settlement program came under fire because of the high upfront fees charged by these debt consultants, often for little or no work. Many of their clients were left worse off, and often came in to speak with us after having paid a significant amount of money to their debt consultant.

Eventually the Ontario government cracked down on these types of debt consultants – introducing debt settlement legislation in 2015. This legislation effectively stopped these companies from charging large upfront fees.

Rather than going away, debt consultant companies changed their business model.

One of their new approaches has been to become a referral source to specific Licensed Insolvency Trustees for consumer proposals. This is the practice being investigated by the Office of the Superintendent of Bankruptcy.

Understanding Consumer Proposals in Canada

In Canada only a Licensed Insolvency Trustee can administer a consumer proposal, which is a procedure available under the Bankruptcy and Insolvency Act. Today consumer proposals make up almost half of all insolvency filings in Canada.

Debt consultants know a consumer proposal is a better product for someone who is looking to make a debt settlement plan with their creditors. This is because a consumer proposal offers legal protection from creditor actions, like collection calls, and wage garnishments. This protection begins as soon as a proposal is filed. In addition to that benefit, fees charged by a Licensed Insolvency Trustee are set by the federal government. This allows for full transparency, consistency, and fairness for consumers in what they pay to file a proposal.

Debt Consultants Adding to Proposal Costs for Debtors

The report prepared by the OSB highlights several concerns with debt consultants offering consumer proposal advice to consumers for a fee.

Debt consultants increasing proposal costs for debtors.

Consulting fees charged by debt consultants “averaged approximately $2,400 and reached as high as $4,200”. I have spoken to debt consultants who tell me they can get a better deal for the debtor because of their knowledge of the system. That’s ridiculous and that’s why these fees are completely unnecessary. I do not believe that a proposal arranged through a debt consultant will result in a proposal costing less than one arranged directly through a Licensed Insolvency Trustee. Certainly not sufficient to warrant a $2,400 consulting fee.

At my firm, Hoyes Michalos, we have successfully negotiated thousands of consumer proposals, giving us far more knowledge of the process than a debt consultant who has never filed a consumer proposal. As noted by the OSB report “for lower value proposals the consulting fee commonly ranged from 20 to nearly 40% of the value of the proposal”. That cost should not be born by the debtor for a useless service, and those funds could otherwise be directed towards the creditors if the debtor can afford that amount of debt repayment.

Ancillary and confusing supplemental services increasing costs.

The OSB found that many debtors were sold extra services including credit rebuilding loans, proposal insurance, and loans to prepay a consumer proposal – all at a significant cost to the debtor. In many cases, the debtor was unaware of what services were part of the consumer proposal process, and which services were provided by the debt consultant.

Understand Who You’re Dealing With

There are roughly 1,000 active Licensed Insolvency Trustees in Canada. As noted in the report, only 13 LIT firms were found with a “frequent and sustained relationship” with two large-volume debt consulting agencies.

To be clear: Hoyes, Michalos & Associates Inc. does not have a referral arrangement with any debt consultant agency. 

Unfortunately these debt consulting agencies use confusing advertising, often advertising a consumer proposal, and the debtor does not know or understand who is providing the service.

Our recommendations

• Ask whether or not the person or agency you’re meeting with is a Licensed Insolvency Trustee. If you are not sure, research them on the OSB list of Licensed Insolvency Trustees.
• Do not sign a contract that requires you to make any payments prior to meeting with a Licensed Insolvency Trustee, signing your proposal documents and having them filed with the government.
• Ask the person you are meeting with what they will be charging you for. You should never have to pay someone to help you through the process or help you prepare paperwork to file a consumer proposal.
• If in doubt, seek a second opinion from another Licensed Insolvency Trustee. All reputable firms offer a free consultation and should not require a payment until your proposal has been filed. At Hoyes Michalos, we do not charge any fee until your proposal has been filed with the government.

The OSB has indicated it will continue to pursue this matter, including making changes to OSB directives that govern how Licensed Insolvency Trustees operate and amend consumer proposal documents and forms. I assume this measure is to increase disclosure for the debtor, creditors, and the OSB compliance review. I look forward to these changes, which will hopefully end the practice of these types of debt consultants and save unsuspecting consumers from unnecessary costs as they work towards debt relief.

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What is consumer debtor protection and what are they selling?

There are varying levels of disclosure about exactly what services are offered by these different debt help companies. What they propose is to help you eliminate your debt through some form of debt repayment program. This however is where things get a little cloudy. In almost all cases what they are selling is a consumer proposal and what they really offer is a consumer proposal referral program.

Some debt assistance companies are a little clearer in what they say they do, some a little less.

• The may be up front admitting that they have a consumer proposal representation program.
• Others are just advertising ‘government programs’ that can help you reduce your debts by up to 70% without admitting they really mean proposals through the Bankruptcy & Insolvency Act.
• The last group advertise consumer proposals, yet they are not licensed to administer such a program and do not make that clear.

What typically happens when you contact one of these debt help companies is you work with a debt manager or debt advisor, often over the phone, who will talk to you about your finances then have you sign a contract for their services. The person you are speaking to is more than likely a salesperson, whose job is to get you to sign on the dotted line and agree to make payments before going further.

What they do:

• They will ask you to sign a contract before doing any real work.
• They may or may not help you prepare a budget.
• They may or may not talk to you about all your debt relief options.
• They will ask you to complete various forms which provide the information necessary to complete the consumer proposal documentation required by the federal government to file a consumer proposal.
• One you have completed your paperwork AND you have paid all their fees, they will refer you to a licensed insolvency trustee.

In other words they are charging fees to manage the preparing of your debt proposal file, nothing more.

Can debt assistance advisors negotiate a better deal for you?

Here’s the funny part. All of the steps in the previous section (with the exception of the upfront fee contract) from reviewing your budget and financial situation, to helping you review all your options, and preparing the paperwork will be done by a licensed insolvency trustee for free.

So since your trustee will help you prepare the documentation at no charge, that begs the question, can these debtor assistance companies protect you by negotiating lower debt repayments?

First of all let’s start with the idea that the debt counsellor you are dealing with is negotiating with your creditors. In almost all cases they are not. They may look at your situation and help you decide how much you can afford to offer your creditors however that’s not necessarily worth the large fees they charge, especially when a trustee will do this anyway.

But wait, these debt assistance companies often say the trustee won’t negotiate on your behalf and that they are there to protect the debtor’s interests. While it’s true a licensed insolvency trustee represents the interest of all parties in a consumer proposal, including creditors and debtors, a reputable trustee will not negotiate a proposal that won’t work or make you file bankruptcy if that’s not the right solution. If you think they do either of those, get a second opinion – from another licensed insolvency trustee.

There are two criteria that need to be met when you offer your creditors a consumer proposal to reduce your total debt:

1. You need to offer the people you owe as much money (or more) than they would be entitled to receive if you were to file an assignment in bankruptcy; and
2. You need to offer the people you owe enough money to agree to the deal.

The first criteria is a mathematical exercise.  It is based on your income, family size, and the things that you own.  Your debts don’t actually factor into the cost of filing bankruptcy.

The second criteria is a bit more fluid – you need to offer the people you owe enough money that they are willing to accept the deal.  You’d think that as long as you offer more than they’d get in a bankruptcy that would be enough, but it is not.  The major Canadian banks and credit companies have unofficially agreed that they expect a minimum of 30% of what you owe as a proposal offer.  It is possible to offer less, but unless you have very special circumstances, they won’t accept anything less.

Offering a lowball proposal, or one with strange terms, can actually harm your situation, not protect you. The creditors may ask for even greater terms, or worse, vote down the proposal meaning you are no longer protected from the actions of your creditors. They will now begin calling for payment or pursuing legal action.

What to look for in debtor assistance ads and what is misleading.

There are typical terms and wording that you should be aware of that can help you identify who these types of unlicensed debt providers are.

• Consumer Proposal Representation Program. This is fancy language for we will charge you to fill out the paperwork.
• Bankruptcy trustees are mandated to represent your creditors’ best interests. This is not true. Licensed Insolvency Trustees are Officers of the Court and have a duty of care to all stakeholders
• Trustees must maximize the amount paid to your creditors. Similar to the point above and this is not entirely true. Trustees have an interest in assuring that the proposal will be successful. That means all parties, debtor and creditors, must be satisfied.
• Stay of proceedings. Anything that mentions stopping wage garnishments, credit calls or legal actions means they are referring to a program under the Bankruptcy & Insolvency Act, which can only be filed by a licensed insolvency trustee.
• Assistance in submitting a consumer proposal – this is a fee for service business to help you fill out the paperwork.
• Federal Government legislated option or program – the only federal debt relief programs are a bankruptcy or consumer proposal through a licensed insolvency trustee.
• We are not trustees in bankruptcy – my favourite, at least they are admitting they are not licensed.

Read Online Reviews and Complaints

If you come across any of these consumer debtor protection style ads, I recommend you do more research about how the company operates, including online reviews and complaints including those with the Better Business Bureau.

Here is a portion of just a few online complaints we quickly found for these types of debt help companies which highlight the lack of protection and service they can provide:

As you can see, the fees for this type of debtor assistance can be quite high. This more often than not would negate any potential savings they may be able to recommend to the licensed insolvency trustee when negotiating the terms of a successful proposal. More often than not, you will actually end up paying more.

What is also concerning in these reviews is that many of their clients did not understand the services offered, and did not know they were just paying to be referred to a trustee.

If you need protection from your creditors, your best legal option in Canada is a bankruptcy or consumer proposal.

My recommendation is that if you are considering making a proposal to your creditors, contact a licensed insolvency trustee directly. To be sure that the agency you turn to for debt assistance or advice is trustworthy:

1. Do a reputation check.
2. Make sure they are trained and certified
3. Make sure they are licensed and accredited to provide the services they are selling
4. Protect yourself by confirming they are a licensed insolvency trustee. Search their name, or the name of the company, with the Office of the Superintendent of Bankruptcy.

Another great resource for consumer protection information is the Financial Consumer Agency of Canada’s article “Debt reduction companies: Beware of too good to be true offers”.

It is in your best interest to know who you are dealing with and what exactly they are offering. Never sign a contract without doing a thorough investigation and review first.

Get The Right Debt Advice

Talk to A Licensed Insolvency Trustee.

Book A Free Consultation

The post Will Consumer Debtor Protection Services or Debt Assistance get you a Better Consumer Proposal? appeared first on Hoyes, Michalos & Associates Inc..

This spring I talked about why everyone seems to be advertising consumer proposals. Some of these companies are very subtle in their approach. They may not mention the word consumer proposal but instead will talk about a Canada government debt relief program. Don’t be fooled by this. The only debt relief program administered by the federal government is a consumer proposal.

To help clarify matters, today I am going to compare consumer proposals to some of the other services that are available and more importantly, being advertised to sound like consumer proposals. It is getting tricky out there with everyone promising to reduce your debt or your payments or both. The truth is, only a consumer proposal administered by a licensed insolvency trustee can deliver on these promises.

Let’s start by considering debt settlement companies. As recently as this past July, the Government of Ontario enacted new legislation to regulate – and presumably, greatly reduce – debt settlement activity in the province.

What is a debt settlement?

A debt settlement is an arrangement to repay your existing debt under new terms. The most common examples are to settle with your creditors for significantly less than you owe. The problem with these firms in the past was they charged all of their “professional fees” up-front, before they actually made any arrangements with your creditors. In almost every case, the creditors initiated collection and legal action before the debt settlement company even contacted them. Once legal action was started a settlement was no longer possible. Any fees you paid were simply lost.

The new debt settlement laws prohibit this practice. Instead, debt settlement companies get paid once the debt is settled and not before. Interestingly, almost all of them stopped operating as soon as the new laws were announced…

In their place, the debt settlement companies are changing into debt consulting or debt coaching firms. Now, instead of claiming to arrange a settlement, the companies charge you a fee to develop a plan to reduce your debts. The plan is called a consumer proposal and only Licensed Insolvency Trustees can act as consumer proposal administrators in a proposal. 

The debt consultants charge you a fee and then refer you to a trustee to implement the plan. This is particularly unnerving because it’s free to speak to a trustee in the first place.

What is a debt management plan?

Another solution that is being sold to the public is called a debt management plan, also known as credit counselling.

In Canada there is a network of large, national credit counselling agencies. Historically, credit counselling services were provided by local agencies. They spent time helping you build a budget and if necessary helped you make a plan with your creditors.

Today credit counselling agencies are massive national machines disguised as charities. Many are ‘non-profit’ but they are not actually charities. In fact, most of their funding comes from the banks. Why? Because the banks would prefer you to file a debt management plan over a consumer proposal. This is because in a debt management plan you must repay the debt in full.  You may be granted some interest relief, but you have to repay all of your outstanding debt. So the banks get more money if you file a debt management plan, which is why they fund credit counsellors.

Even these large credit counselling agencies advertise consumer proposals and have a lot of consumer proposal information on their websites. This is because they know a consumer proposal is a better deal for consumers, yet they still push people into a debt management plan first.

We have seen many cases where someone came to see us after making months of payments in a debt management plan only to find that the debt management plan failed to help them eliminate their debt.

Why a Consumer Proposal is better

Unfortunately, in most cases, a person would be better off filing a consumer proposal than a debt management plan. This is true for a number of reasons:

• The impact on your credit report is the same for a debt management plan and a consumer proposal
• A debt management plan usually has no interest charges going forward – a consumer proposal never does.
• In a consumer proposal you repay a portion of what you owe – in a debt management plan you repay the entire debt. The most common amount repaid in a consumer proposal is about 1/3 of your debt, but it varies depending on your circumstances. 1/3 is certainly less than 100%.

It is easy to see why a consumer proposal is a better solution than a debt management plan. In response to this, the massive national credit counselling agencies I referred to earlier, simply refer many of the people that contact them directly to a licensed trustee to file a consumer proposal (but not before taking a fee).

If anyone is offering to reduce your debt or your payments or both, ask them how they intend to do so. Specifically, ask them if they are going to recommend that you file a consumer proposal and if they are, ask if they are a licensed trustee or an employee of a licensed trustee’s firm. If they are not, ask them why you should pay their fee when the trustee is the person you need to speak to and the trustee will see you for free. It should make for a short meeting.

At the end of the day, you have to do what makes the most sense to you. I encourage everyone to investigate every option and understand how debt relief works before they make a decision about how best to deal with their debt. My only real caution is not to agree to pay any fees for “middle men” – make sure the people that you are speaking to can actually solve your problems, not simply refer you elsewhere for a price.

If you would like to explore how a proposal can eliminate debt while allowing you to lower your monthly payments and keep your assets, contact us today to book a free consultation with a Licensed Insolvency Trustee.

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