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

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

How bankruptcy and credit counselling work

What are bankruptcy and credit counselling?

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

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

How does bankruptcy work?

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

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

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

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

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

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

How does credit counselling work?

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

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

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

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

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

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

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

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

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

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

When is bankruptcy a good choice?

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

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

When is credit counselling a good choice?

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

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

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

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

What costs are involved in bankruptcy and credit counselling?

Neither bankruptcy nor credit counselling, are free.

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

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

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

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

How do bankruptcy and credit counselling affect your credit score?

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

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

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

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

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

Alternatives to bankruptcy and credit counselling

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

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

How to get legal help with personal bankruptcy or credit counselling 

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

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

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

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

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

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

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

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

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

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

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

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

How was the cost calculated?

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

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

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

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

Is this affordable?

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

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

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

How does a consumer proposal compare?

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

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

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

Saving money by filing a consumer proposal instead

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

Additional consequences of credit counselling

Potential ongoing interest costs

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

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

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

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

Credit impact of credit counselling

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

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

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

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

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

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

Repairing credit sooner with a consumer proposal

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

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

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

Is credit counselling right for you?

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

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

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

The post The True Cost of Credit Counselling appeared first on Hoyes, Michalos & Associates Inc..

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

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

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

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

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

Payment Schedule

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

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

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

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

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

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

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

The post Why Credit Counselling Doesn’t Help with Payday Loans appeared first on Hoyes, Michalos & Associates Inc..

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

Credit counselling is generally best for individuals who:

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

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

Consumer proposals are best for those who:

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

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

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

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

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

Consumer Proposal vs Credit Counselling – Pros & Cons Comparison

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

The post Credit Counselling vs Consumer Proposal – Which Should You Choose? appeared first on Hoyes, Michalos & Associates Inc..

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Why All This Matters If You Have Debt

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

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

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

Is it always wrong to get a debt management plan?

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

A Licensed Insolvency Trustee is regulated to act impartially

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

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

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

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

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

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

Additional Resources

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

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

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

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

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

Ted Michalos:   Quietly, I’ll add.

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

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

Doug Hoyes:    Explain that.

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

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

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

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

Ted Michalos:   That’s right.

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

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

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

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

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

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

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

Ted Michalos:   That’s right.

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

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

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

Ted Michalos:   Okay.

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

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

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

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

Doug Hoyes:    And why is that?

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

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

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

Doug Hoyes:    Something happened.

Ted Michalos:   Yeah.

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

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

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

Ted Michalos:   Yeah.

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

Ted Michalos:   Right.

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

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

Doug Hoyes:    A fair share voluntary contribution.

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

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

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

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

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

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

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

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

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

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

Doug Hoyes:    Follow the money.

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

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

Ted Michalos:   Yeah.

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

Ted Michalos:   That’s true.

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

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

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

Ted Michalos:   Right.

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

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

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

Ted Michalos:   Right.

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

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

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

Ted Michalos:   Correct.

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

Ted Michalos:   Right.

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

Ted Michalos:   That’s right.

Doug Hoyes:    We are a business.

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

Doug Hoyes:    It’s as simple as that.

Ted Michalos:   Yeah.

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

Ted Michalos:   Correct.

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

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

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

Ted Michalos:   Right.

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

Ted Michalos:   The kid’s soccer league.

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

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

Ted Michalos:   Right.

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

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

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

Ted Michalos:   It’s public information.

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

Ted Michalos:   Right.

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

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

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

Ted Michalos:   Yeah, we pretty much have.

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

Ted Michalos:   Right.

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

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

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

Ted Michalos:   Right.

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

Ted Michalos:   Yeah.

Doug Hoyes:    So, when? When would that –

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

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

Ted Michalos:   Right.

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

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

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

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

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

Ted Michalos:   Right.

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

Ted Michalos:   That’s right.

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

Ted Michalos:   Mm-hmm.

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

Ted Michalos:   Right.

Doug Hoyes:    You’re saying no.

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

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

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

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

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

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

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

Doug Hoyes:    Because I can’t afford it.

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

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

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

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

Ted Michalos:   Yeah.

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

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

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

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

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

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

Ted Michalos:   There you go.

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

Ted Michalos:   Yeah.

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

Ted Michalos:   Right.

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

Ted Michalos:   Yeah.

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

Ted Michalos:   Right.

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

Ted Michalos:   Right.

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

Ted Michalos:   Definitely.

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

Ted Michalos:   Right.

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

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

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

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

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

Ted Michalos:   Yeah.

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

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

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

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

The post Are Not-For-Profit Credit Counselling Agencies Now Just Debt Collectors? appeared first on Hoyes, Michalos & Associates Inc..

To help you decide if credit counselling can help you get out of debt we look at:

• Who can benefit from credit counselling;
• What credit counselling costs;
• How credit counselling will affect your credit;
• What credit counsellors do and who they work for;
• What qualifications your credit counsellor should have;
• When to consider other debt reduction options.

I have always been a supporter of local, full service, not-for-profit credit counselling that requires qualified individual counsellors to meet with people face-to-face, help them deal with the underlying causes of their financial difficulties and teach useful money management skills. Unfortunately, credit counselling services across Canada have changed. Local organizations have been on the decline, being overtaken by large, national, call centre credit counselling agencies.

I’ll begin by saying I am a Licensed Insolvency Trustee. Full disclosure that means we compete with credit counsellors. However, I’d like to present this view of credit counselling, both the good and bad, in the hopes that you make an informed decision about what debt reduction program is best for you.

This is a long post, with plenty of information, so grab a coffee or scroll through the headings to find what’s useful to you.

Who can benefit from credit counselling?

What is credit counselling all about? Credit counselling is generally thought of as the process of teaching people better money and debt management skills, getting help with personal budgeting and dealing with consumer credit problems. Today, the term ‘credit counselling’ is often used as a softer, less scary label for the service they really do – a debt management plan.

A debt management plan is simply a debt repayment plan arranged through a credit counsellor. It is just one possible debt solution for those struggling with consumer debt. In a debt management plan, you can consolidate your unsecured debt, including credit cards, lines of credit, unsecured loans and past due utility bills into one monthly payment to the credit counselling company.

There are advantages to repaying debts through credit counselling:

• Your credit counsellor is dealing with your creditors and working out a repayment plan for you
• You consolidate several payments into one monthly payment
• You can refer collection calls to your credit counsellor
• You may qualify for an interest freeze or reduction in the interest rate charged

Yet credit counselling, or more specifically, debt management plans, are not as painless as they are made out to be.

There are two specific implications of using a credit counsellor that should be considered:

1. To qualify for a debt management plan, you must be able to afford to repay your debts in full plus fees, usually an additional 10% to 15% on top of your monthly debt payments.
2. Credit counselling will affect your credit. There is a widespread view that credit counselling is a way to deal with your debts without any negative impact on your credit score. This is not true. If you file a debt management plan, it will be reported on your credit report like any other debt remediation program.

So, the question should not be will credit counselling help me get out of debt, but rather, how does credit counselling compare to the cost and impact of other debt relief options? In other words, is credit counselling the best way out of debt for me and is a credit counsellor the right person to explain all the alternatives?

Let’s explore some of those questions.

How much does credit counselling cost?

Credit counselling works when you can afford to make a payment each month that will satisfy all your debts over a maximum period of 5 years. On top of this you will be required to pay a monthly fee of 10% to 15% of your payment and often a sign-up fee, typically $50.

You can calculate the cost of a debt management plan easily on your own:

Monthly payments = Total debts / 48-60 months * 1.10 (for fees)

For example,

If you owe $18,000 in credit card debts and outstanding bills, you will need to pay $300 every month for 60 months to your creditors assuming they agree to freeze the interest on your accounts. In addition, you will need to pay $30 a month for credit counselling fees, making your total monthly payment $330 to erase $18,000 in debts over five years through a debt management plan. This means you will repay your full debt balance plus $1,800 in credit counselling fees in this example.

The truth is that a consumer proposal is often a better, and cheaper, alternative to credit counselling, because with a consumer proposal you can offer your creditors less than you owe and there is no extra fee on top – trustee fees come out of any monies paid to creditors.  While every situation is unique, based on your income and assets, a settlement of 35 cents on the dollar through a formal proposal is typical. Credit counselling requires you to repay everything.

Comparison of the monthly cost of credit counselling to proposals:

1. Repaid over 60 months including 10% to 15% fee
2. Settled at 35 cents on the dollar, fees included.

You can use our debt options calculator to compare your payments across several debt reduction programs including debt consolidation, credit counselling, and a consumer proposal for your debt levels.

How much debt do I need for credit counselling to work?

So, when should you consider credit counselling?

There is no debt limit to a debt management plan however in general credit counselling works best for individuals with unsecured debt balances of less than $10,000 or, if you have enough income, up to $20,000. If for example you have a few overdue bills, have a small old debt in collections, a manageable credit card balance but need help organizing payments, credit counselling can be a good idea.

While you can do a debt management plan for higher debt amounts, this is unusual and not recommended because:

• Higher debt balances can make your monthly payments unaffordable.
• Debts like student debt and tax debts, which are often larger, cannot be included in a debt management plan.
• Payday loan companies don’t always participate and may not waive interest costs. Dealing with multiple payday loan debts is much better done through a consumer proposal or, if you can’t afford that, bankruptcy.

How will credit counselling affect my credit report & credit score?

As mentioned earlier, many people are surprised to learn that credit counselling has the same impact on their credit as a consumer proposal.

A debt management plan will be listed as an R7 on your credit report. A notice will appear at the bottom of your report that you are in a scheduled repayment plan and, depending on the credit bureau, it will remain there for 2-3 years after completion of the program.  Each debt included in your plan will have a notification that it is included as part of a scheduled repayment plan. The debts themselves will fall off your report 6-7 years after the last activity date.

This is the same reporting as a consumer proposal.

Since both credit counselling and a consumer proposal have the same results in terms of your credit and credit score, it only makes sense to compare the pros and cons of credit counselling vs a consumer proposal.

How does credit counselling work?

The credit counselling process begins with a financial assessment, where your counsellor will look at your income, your expenses and your debts but the primary objective to qualify for a debt management plan is to see if you can afford to repay your debts in full.

If you decide to work with a credit counsellor to repay your debts, you will be required to sign an agreement outlining your monthly payments with the credit counselling agency and typically pay a sign-up fee, usually around $50.

It is essential to know that your credit counsellor has not yet talked with your creditors. Once you sign the paperwork to do a DMP, your counsellor will begin to contact the creditors you decide to include in the plan. You might include your credit card company, your cell phone provider, utility company, bank, or credit union. It usually takes two to three weeks, depending on the creditors, to obtain agreement to participate. Others may take longer, depending on the size of the organization and workload; however, typically a month to have the creditors say yes or no is normal.

Usually you make your first monthly payment before the credit counsellor has an agreement with your creditors. Each month the credit counselling agency takes your payment amount and distributes this money among the participating creditors. If at the beginning some creditors don’t sign up, your credit counsellor may have the money paid to a single small creditor to get that small debt out of the way or encourage the creditor to agree to sign on.  They may also choose to pay off an interest-bearing account first. While the underlying principal of DMPs is that all participating creditors receive a pro-rata share of the monies collected, what is to prohibit a credit counselling agency from paying off creditors in a different order and issuing an earlier payout to a bank or creditor that provides a more substantial fair share donation back to the counselling agency?

This distribution process differs significantly from the legal, government regulated consumer proposal process. In a proposal, you do not make payments until your proposal terms, the ones you want to offer, have been written down and filed with the government. No monies are paid out to one creditor ahead of another. By law, all creditors receive a pro-rata share of your proposal payments.

Can credit counselling help you get out of debt?

One of the disadvantages of credit counselling is that participation is entirely voluntary and is uncertain. Your creditors may or may not agree to accept a revised repayment plan, and they don’t always agree to freeze or lower your interest. You do not necessarily make a deal that works for you. Each individual creditor is in the driver’s seat.

The non-binding aspect of a DMP can mean that not all debts are paid off at the completion of the program. Some creditors may not participate, which means you will still have to keep up with these payments plus any interest charges. If too many opt-out, this can impact your financial ability to complete the program.

Again, this differs dramatically with a legally binding proposal filed with a trustee. All unsecured creditors are bound to the same proposal terms offered by you once accepted by the majority of creditors and interest is frozen on all accounts.  Creditors are stayed from taking any legal action against you while you are in a consumer proposal. No such protection exists in a debt management plan.

In addition, a DMP does not deal with tax debt; CRA will not settle tax debts in a DMP, but because a consumer proposal is governed by federal law, they are required to consider all consumer proposals.  If you have significant tax debt, a DMP is not an option.

An outsider’s view 

In a conversation with Richard Dunwoody, a consultant with 30 years’ experience working with creditors in the financial service industry, including their policies and practices dealing with credit counsellors, he points out this flaw in the debt management plan process and why this puts consumers at risk.

Transcript:
Richard Dunwoody: So, Doug I just want to clarify one of your points you made in explaining a debt management program and I think this is a critical point, is that not all debts are paid off at the completion of debt management program. So, a debt management program will span typically a 48 month period, not all creditors will reduce interest or just wipe out the interest on the payments. That leaves consumers at the end of the 48 month debt management program with some residual debts still owing to the consumers. And we saw this back in December in a Toronto Star article where an unfortunate lady had gone through 48 months, paid off most of her debts, but still owed $5,600 at the end of that program.

The Toronto Star reported on one such case where an individual, working with Credit Canada, made payments of $657 a month for 48 months yet her largest, and high cost debt, with CitiFinancial was not included. Working with a credit counsellor meant that CitiFinancial was not obligated to participate.

“While in credit counselling, Borden says she agreed to pay $675 a month toward meeting all her obligations. It meant working two jobs, seven days a week, plus overtime, for nearly four years. By 2012, she had wiped most of her record clean. All except for her debt with CitiFinancial.”

Working with a credit counsellor didn’t reset this person’s financial situation. She was left with a large, expensive debt at the end, was making higher monthly payments during the program than she would have needed to in a consumer proposal, and still has to deal with the financial and credit impact of her CitiFinancial account.

Richard recommends that you know exactly what your deal is going in. Ask questions along the way.

1. What are my creditors agreeing to?
2. Which creditors opted out of the program?
3. Which creditors agreed to reduce my interest rate and by how much?
4. At the end of the program, what if anything will I still owe to my creditors?
5. What happens if I don’t complete my payments?

Phone in debt advice

Traditionally credit counselling was done through a face-to-face meeting with your local non-profit credit counsellor who would meet with you, look at your financial situation and work through your budget to determine how you can save money and, if needed, find a way to repay your debts. Having this second set of eyes on your personal finances can be a good idea.

Unfortunately, today much of credit counselling, and enrollment in debt management plans, is done over the phone.

One large credit counselling agency, Consolidated Credit, even outlines the online & phone counselling process on their website: https://www.consolidatedcredit.ca/about-us/who-we-are/expect-1st-session/ including this screen shot of their commentary.

Their credit counselling process is geared towards a phone consult, or even impersonal online form as you can see from the material below quoted from their website:

“Essentially, the credit counsellor will request all of the same information you would enter into the Free Debt Analysis form online – they just walk you through the process. In general, if you use the phone option, the full debt analysis will take about 30 minutes on average, so the counsellor can get a complete picture of your financial outlook. If you choose the online method, you complete this part on your own time and then a counsellor contacts you to follow up and finish your evaluation.”

“At the end of your credit counselling session – whether you started directly with a credit counsellor over the phone or submitted your information online for a counsellor to review – you will have a clear idea of which debt solution is the right choice for your unique financial needs. If that solution is a debt management program through the credit counselling agency, the credit counsellor will also be able to tell you exactly how much you will pay each month on your reduced debt payment and how long it should take to complete the program.”

While there is no harm in enquiring and asking questions over the phone, I do not believe it is possible to do a comprehensive debt assessment entirely online or in a phone conversation, and the Office of the Superintendent of Bankruptcy agrees. Licensed Insolvency Trustees are required, by law, to conduct an in-person debt assessment with every individual who files a consumer proposal or bankruptcy.  At our firm, we generally meet with clients 2 to 3 times (for free) before they sign up.  We do this to ensure you are making the right decision, you understand the pros and cons of all options and are fully educated about the implications and process.

What exactly is the success rate of a debt management plan?

To review this, we’ll go back to our conversation with Richard Dunwoody. Credit counselling agencies themselves have reported that the completion rate for debt management plans is around 43%. That means that less than half of all individuals who start a DMP are able to complete their payments.

Transcript:
Doug Hoyes: Okay. So, now back to what you were saying which was the second point, success rate. So, what is the overall success rate on a debt management plan?

Richard Dunwoody: Well, in order to explain the success rate when I’m going to reference is a comment or a statement made in a research paper of a graduate law student here in Toronto. And it comes from a comment that he received from the director of one of the credit counselling organizations where they provided the success rate of the files closed in that 42.7% had successfully completed a program. That’s astonishing, only 42.7%.

Doug Hoyes: So, about 43%, so you’re talking about people who start the program only 43% complete it three, four years later whatever that is. And you find that astonishing because it’s such a low number.

Richard Dunwoody: Well, you have greater than a 50% chance of being unsuccessful in the program.

If you fail to complete a debt management plan, creditors can cancel any interest reduction component leaving you with a larger debt to repay.

What’s in a name? Debt consolidation, credit counselling, or debt management plan?

So, we learned that credit counselling agencies can help you get out of debt through a debt management plan. We also learned that a debt management plan is a way to pay off 100% of your debts over time.

Let’s add to the confusion of ‘terms’.  Credit Canada has a page on their website that talks about a Debt Consolidation Program or DCP. By their definition this is a “process of combining two or more debts into one. The result is a single debt payment and lower total interest costs.”

In other words, this is a debt management plan. Credit counsellors have once again ‘softened’ the name of their program to appeal to those experiencing debt problems and reduce any negative connotation with the program.  My concern, however, is that this further confuses consumers. If this is a consolidation program, does that mean it’s safer? Does that mean it will not impact my credit report?  The answer to both those question is no – it’s the exact same program as a debt management plan, just with a better marketing name. 

But what about financial counselling services?

Proper credit counselling addresses the underlying issues that lead to financial difficulty. This requires multiple meetings to go through your budget, help you review your expenses, and correct the behaviours that got you into debt in the first place.

While some agencies still provide this service, most people contract with a credit counselling agency to perform a debt management plan. There is no legal or legislative requirement for credit counselling to provide face-to-face, ongoing financial education and advice.  Phone-in debt management plans rarely provide this type of personal support.

Contrast this with working with a Licensed Insolvency Trustee. If you file a consumer proposal or bankruptcy, you are required to attend two mandatory credit counselling sessions. During these sessions, we spend time with you to review your budget for ways to reduce expenses and balance your finances. We review your credit report with you and walk you through ways to correct errors on your report and rebuild your credit score. At Hoyes Michalos, if you want a third session, we are happy to provide that for you for free. We firmly believe that financial credit counselling is an essential part of the recovery process and should not be skipped in favour of simply repaying your creditors this once.

Which brings me to who should you talk to about your debts?

Choosing a credit counsellor

In Canada, there are generally three options for working with a credit counsellor.

1. Not-for-profit credit counselling agencies
2. For-profit credit counselling companies
3. Licensed Insolvency Trustees also provide credit counselling services.

Accreditation

If you do decide to work with a credit counsellor, it is vital to ensure that they are accredited and qualified to provide the services you are looking for and need.

Unfortunately, there are no consistent initials that go after a credit counsellors name, no formal CC designation, making it difficult to access the credentials of your credit counsellor. Unlike with Licensed Insolvency Trustees, who are government regulated and licensed, accreditation of credit counsellors in Canada is self-regulated. However, self-regulation isn’t always enough.

Let’s look at the three largest, national, credit counselling agencies in Canada.

On Credit Canada’s website you can see a list of 13 credit counsellors (as of May 2019) who work for the agency. Each lists their accreditation as follows:

• Accredited Financial Counsellor Canada (AFCC)
• Bankruptcy and Insolvency Act (BIA) certified

One of the other major credit counselling agencies in Canada, The Credit Counselling Society (or No More Debts), does not list their credit counsellors. They do state that “All of our Credit Counsellors are professionally trained. They are also required to become certified through the Accredited Financial Counsellor Canada Program [SIC AFCC] which is administered by the Association for Financial Counselling and Planning Education.” Interestingly enough the link provided refers to a financial counseling and coaching training program operated out of the United States.

Another large agency in Canada offering debt management programs is Consolidated Credit. Their website does not provide a list of credit counsellors or information about individual staff accreditation, although the agency is also a member of CACCS and OACCS.

Let’s look at these credentials.

The first, their counsellor certificate, is provided through something called the Accredited Financial Counsellor Designation program. Financial Fitness provides this certification program. Financial Fitness is a brand name, launched in recent years, for the Ontario Association of Credit Counselling Services. OACSS is associated with the Canadian Association for Credit Counselling Services, launched in recent years as well. Confused? You should be. These are all ‘regulatory’ bodies, yet they are interlinked, self-created associations or collaborative groups set up for, and by, the credit counselling agencies themselves. The result is a circular reference of certification, logos and accreditation.

As to the second credential listed, “Bankruptcy and Insolvency Act Certified” it appears they are referring to the BIA Insolvency Act Insolvency Counsellor’s Qualification Course run by the Canadian Association of Insolvency and Restructuring Professionals (CAIRP).

As of 2019, the government mandated that bankruptcy counselling be managed and completed by credit counsellors registered with the Office of the Superintendent of Bankruptcy under individual Licensed Insolvency Trustees. You can read the new counselling direct 1R4 here. Unregistered, outside agencies are no longer able to provide BIA counselling. We looked up each credit counsellor on Credit Canada’s website as of May 2019, and none were registered as BIA Insolvency Counsellors with the government.

My bigger objection is with the way they refer to this designation as Bankruptcy and Insolvency Act (BIA) certified. To be clear, there is no such BIA designation. Credit counsellors and credit counselling agencies are not trained, licensed or experienced in providing insolvency advice. Only Licensed Insolvency Trustees have the extensive training to assess and perform bankruptcy and consumer proposals. The BIA counselling certificate was initially designed to allow local, full-service credit counselling agencies to provide the budgeting, credit repair and financial literacy education material required in mandatory credit counselling. It is not training in the legal aspects of bankruptcy and proposals and should not be presented or perceived that way.

Richard Dunwoody also raised concern about the lack of regulatory oversight in terms of credentials. He believes that it is crucial to have a nation program of accreditation for credit counsellors, not provided through self-regulation, supported at the Federal or Provincial level.

Transcript:
Doug Hoyes: Well, let’s pick on some of those things then. So, qualifications, I am a Chartered Accountant, I’m a licensed bankruptcy trustee, it took me many years to get my qualifications. I had to take many years’ worth of programs, many exams. I assume credit counselling is the same, extensive background like tell me what accreditation they have to go through?

Richard Dunwoody: Well, that would be the natural assumption of a consumer approaching an organization is that these folks have accreditation and they’re self-regulated bodies often talk about the accreditation programs that their members have to go through. But research has shown and has been clearly evident that if we take the top two credit not-for-profit credit counselling organizations in Canada, one of them had zero employees that were certified, had any qualifications. And the second one only had 67% of their counsellors had any certification.

So, there isn’t that regulatory oversight. It’s a self-regulatory body that’s governing them. They don’t have to have any background credentials. They can walk in, sit down at the desk, answer the phone and start telling consumers how to manage their finances. And that’s what’s concerning.

Doug Hoyes: So, obviously some of them are accredited. It’s not like they have – some of them have no experience. And again, the people who I’ve had on this show and I mentioned their names earlier, Heather and Sue, they’ve both been in this business for many years. They’ve obviously taken courses; they have various forms of accreditation. But what you’re saying is, the person you’re talking to on the phone may or may not have any kind of formal accreditation. So, are you saying then that the first question you should ask is, what’s your background, what’s your accreditation? Is that a valuable question to ask?

Richard Dunwoody: I think that’s a critical question to ask. And to ask if their accreditation comes from their self-regulatory body or does it come elsewhere?

Doug Hoyes: And in Canada, is there an elsewhere?

Richard Dunwoody: In Canada there isn’t an elsewhere, but some of the counsellors will say well I took a math course or I took a budget course in high school and they feel that’s their accreditation.

Doug Hoyes: So, what you’re arguing for is what? A national accreditation program, a provincial program, what would you like to see?

Richard Dunwoody: Well, I think it’s important to have a national program, ok, that is not provided through a self-regulatory regime, but is either supported at the Federal or Provincial level. The Financial Consumer Agency of Canada (FCAC), has a number of programs that they offer. Those programs should be endorsed in more of a certified process.

So, as you can see, ‘credit counsellors’ is an undefined term. Agencies can pick and choose accreditation programs or operate their own as they see fit and the individual you speak to on the phone may, or may not, be fully trained and certified. Self-regulation without third-party oversight brings into question the value of these certifications.

Why do creditors promote and fund credit counselling agencies?

In addition to the 10% to 15% fee you pay to your credit counsellor, credit counselling agencies receive additional funding through something called a ‘fair share donation”. This contribution can run anywhere from nothing, which is common for certain collection agencies, to a maximum of 22% with the major banks.

The major banks and credit card companies like credit counselling. Banks and lenders would prefer someone try a debt management plan because they can recover more of their money. Even if a debt management plan fails part way through, and the person ultimately files a consumer proposal or bankruptcy, the creditor is happy because they have continued to receive monthly payments for a longer period of time. This is why credit counselling agencies like Consolidated Credit, Credit Canada, and The Credit Counselling Society are largely just debt collectors for the big banks.

Does this mean you should not work with a credit counsellor?

No. There are many programs that can help Canadians get out of debt, including credit counselling. Each have their place. It is important to choose the program that works best for you whether that is debt consolidation, a debt management plan, consumer proposal or bankruptcy. However, choosing the right option means understanding:

• The qualifications of the person you are working with and their ability to answer your specific questions or give advice on a particular program;
• That you will meet face-to-face with that professional and ensure you will have enough, personalized, ongoing support to succeed both during and after the program;
• The likelihood that you can afford the payments and will be successful in completing whichever plan you put in place;
• That you are informed enough, by a licensed, accredited expert, to assess all your options before making a final decision.

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Credit counselling is the term used to describe the two money management sessions you are required to take when you declare bankruptcy or file a consumer proposal.  Unfortunately, the term has been high-jacked and used to describe the services offered by debt consultants and debt settlement companies.  You can probably tell from my tone that I am less than impressed by these businesses, but they are not the point of this article.

Why You Need Credit Counselling

The basic premise behind credit counselling for bankrupt individuals is that one of the contributing factors to your money problems may have been a lack of knowledge regarding financial matters.  The two sessions that are provided by your trustee will help you identify some of the underlying issues that may have caused you to get into trouble.  The sessions describe the warning signs of pending financial problems, as well as introduce strategies to avoid these problems in the future.

There is some question regarding the importance of mandatory credit counselling.  The Office of the Superintendent of Bankruptcy (OSB), the government agency that oversees the insolvency process in Canada is currently conducted an evaluation of counselling and this has somewhat changed the nature of credit counselling services in Canada.

I suspect there will be some people that suggest that credit counselling is not necessary – they will say the benefits of the two required sessions haven’t been proven.  I respectfully disagree.

I am of the opinion that there should be more sessions – at least one for each year that a person is involved in either bankruptcy or a consumer proposal and I will tell you why.  No one accumulates enough debt to require an assignment in bankruptcy or a consumer proposal overnight.  Most of the people I see have taken years to acquire their debt and it may take years to clear their names and re-establish themselves financially.

You can’t expect someone to change their habits just because you tell them to – in fact, by clearing a person’s debts without some attempt  to educate them in proper financial conduct we run the risk of making bankruptcy appear too easy.  People might be inclined to simply go out and do it all again…

I don’t believe that’s what happens, but I do believe that credit counselling is one of the reasons so few people end up filing for bankruptcy or a consumer proposal a second time.  It seems a small price to pay to reduce the risk of future problems.

In regards to increasing the number of sessions to one for each year of either bankruptcy or a consumer proposal, my reasoning is two-fold.  The first is the position I have already stated – it took time to create the debt, it will take time to change peoples’ financial habits to reduce the risk of repeating their money problems.  The second reason follows similar lines.  Each subsequent credit counselling session should build on the knowledge and skills imparted at the previous session.

The current two session requirement does not provide for enough time to lapse to adequately assess whether or not there has been a change in an individual’s attitude towards money.  Further, the current two session requirement has to be completed in the first 7 months of a person’s bankruptcy or consumer proposal.  If their proposal is going to run 5 years doesn’t it make more sense to check in on a regular basis to see that their financial behavior has changed?

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What is good credit counselling?

First and foremost, we are of the opinion that good credit counselling has the ability to provide a real benefit to the individuals that receive it. Most people in financial difficulty have had some “thing” happen in their life that triggers a crisis. Loss of employment, marital breakdown, business failure – any number of tragedies can bring on money problems. Counselling can’t correct what has gone wrong, but it may reduce the risk that people will repeat the same mistakes with their finances in the future.

There is a difference however between credit counselling and debt relief. Credit counselling should mean helping people look at their budget and helping them build stronger personal finance habits. It should not be just about filing a debt management plan and being a debt collector for the banks. 

So here’s how we think credit counselling sessions that are part of your bankruptcy or proposal should be improved.

Frequency

The current standard requires a person that files either bankruptcy or a consumer proposal to attend two counselling sessions. The first session occurs between day 10 and 90 after filing. The second session occurs at least 30 days after the first, but prior to the discharge, in the case of an individual bankrupt, or of the issuance of the certificate of full performance, in the case of a consumer debtor.

We believe these requirements should be modified as follows:

For bankruptcies

1)      In all cases, the first counselling session should occur within 60 days of filing;

2)      In 9 month bankruptcies, the second counselling session should occur at least 30 days after the first and before the expiration of the 7^th month after filing;

3)      In 21 month bankruptcies, the second counselling should occur at least 90 days after the first and before the expiration of the 12^th month after filing. In addition, a third counselling session should occur at least 180 days after the second session and before the expiration of the 19^th month;

4)      In 36 month bankruptcies, the second session should occur at least 90 days after the first and before the expiration of the 12^th month after filing. In addition, a third session should occur at least 180 days after the second session and before the expiration of the 24^th month, and a fourth session should occur at least 180 days  after the third and before the expiration of the 34^th month; and

5)      The Court should require an annual counselling session for every year of a Conditional or Suspended Order.

For consumer proposals

a)      In all cases the first counselling should occur within 60 days of filing; and

b)      There should be a requirement to attend at least one additional counselling session for every 12 month period in the term of the proposal. For example, a 60 month proposal will require a total of 6 counselling sessions, the initial plus 5 additional sessions based on the term of the proposal.

In addition, any Division I proposals filed by an individual (or individuals if joint) should require the same counselling standards as consumer proposals.

Content

The first counselling session should consist of a workbook individuals are required to complete prior to attending the session. This workbook could be completed on-line, or at the request of the debtor, by hardcopy. The workbook should be designed to address basic money management skills, including, but not limited to record keeping, budgeting, longer term financial planning, as well as financial literacy. The objective should be for the debtor to complete the workbook in advance and then for the counsellor to review the debtor’s results.  The session should end with a list of expectations or goals to be achieved before the next session(s).

All subsequent counselling sessions should include a review of the expectations and goals that were set at the prior session, as well as a general review of the debtor’s current financial situation and the establishment of a new set of financial expectations and goals going forward.

Compensation

We note that the fees for counselling have not changed in a very long time. The first counselling session should be in person and might take an hour to complete. The fee for this session should be $150.00. The subsequent sessions could be completed on-line, by phone, or in person and might take 30 minutes. In person sessions should be paid a fee of $75, while on-line and/or phone sessions should be paid a fee of $50.

If all of our suggestions were adopted, the cost for counselling in a five year consumer proposal would increase from the current $192.10 ($170 in fees plus $22.10 in HST) to $593.25 ($525 in fees plus $68.25 in HST) if all of the sessions were performed in person. However with the on-line option the costs would be lower. The benefits however to ensuring that those filing bankruptcy or a consumer proposal gain value from these sessions are well worth the suggested changes.

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Dealing with your debts through credit counselling can make sense if:

• you do not owe a lot of money to your creditors,
• you have only one or two debts that you need help with
• you have fallen behind on your payments, but feel you are able pay them in full now.

How Credit Counselling Works

A credit counsellor will contact your creditors and help arrange a debt management plan that allows you to repay your debts in full over a period of time. This arrangement is voluntary and is not legally binding on you or your creditors.

A credit counsellor is not able to settle your debts for less than the full amount owing, but is often able to negotiate a lower interest rate during your repayment period. A debt management plan will not work if you have a tax debt with Revenue Canada. A debt management plan will be reported to the credit bureau and will reflect negatively on your credit record.

For an updated look at how credit counselling works today, see our podcast Are Credit Counselling Agencies Just Debt Collectors?

Finding a Reputable Credit Counsellor

If you feel that you have the ability to repay your debts in full but need help dealing with your creditors then your next step should be to contact a credit counsellor. Finding a reputable credit counsellor is not always easy. If you do an internet search for credit counselors in your area, you will likely get hundreds of hits. Word of mouth or a referral is a good way to find someone. We have a list of local, reputable credit counsellors that we have dealt with personally, and can refer you to.

When looking for a credit counselor, there are a few things to keep in mind. First of all, how much will you pay in fees? Is there an up front consultation fee? Annual or monthly “membership” fee? Monthly service fee? When you call to make your first appointment be sure to ask if there is a consultation fee.

Also, it is not a good idea to start making debt management payments until your credit counsellor has confirmation from each of your creditors that they are willing to participate in the program and exactly how much they agree to accept each month. I often meet with people that have entered into a debt management plan and after making several monthly payments, their credit counsellor contacts them to tell them that their monthly payment will need to be increased. This happens because one or more of your creditors did not accept the amount that the counsellor offered them initially and will only agree to your debt management plan if you increase your monthly payment. Beware of debt consultant scams where the debt consultant takes your money, but doesn’t actually do anything.

Can You Afford The Payments?

Is credit counselling a solution? Say you owe $15,000 to your creditors. If you decided to pay down this debt on your own over three years, you could expect payments of approximately $680 a month. If a credit counsellor could get all of your creditors to agree to stop interest and allow you to repay this debt over three years, you could expect to pay approximately $420 a month. This is a good solution if you can afford the $420 a month for 3 years. Unfortunately a lot of people I meet with are unable to maintain their debt management payments because their living expenses are higher than they thought or because their income fell during the 3 year timeframe.

Consider a Consumer Proposal as an Option

A debt management plan is a good solution if you can afford to pay all of your debts in full, but just need a break on the interest. If you can’t repay the debt in full, an alternative and better option may be a consumer proposal.

A consumer proposal is a settlement of your debts and is legally binding on all your creditors, including Revenue Canada. A consumer proposal ensures that all of your creditors are treated fairly; one creditor does not have the ability to demand a higher payment than your other creditors. A consumer proposal can only be filed by a licensed insolvency trustee; a credit counsellor cannot file it for you. The payments in a proposal on that same $15,000 of debt would be significantly less than a debt management plan, possibly as low as $200 a month for 36 months.

Understanding your options will help you pick the solution that works best for you. Everybody’s situation is different. Contact us for a free, no-obligation consultation. Let us help you find debt relief.

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