A few things to keep in mind before committing to working with a non-licensed credit counsellor or debt consultant.
a) Unlike Licensed Insolvency Trustees (LIT), credit counsellors and debt consultants are unregulated. Anyone can call themselves a credit counsellor or a debt consultant. They are not subject to formal training or professional development standards.
b) As they are unregulated, one must assess their abilities, experience and reputation. They are not prohibited from being in, and benefitting from, a conflict of interest; they may not hold funds in a trust account; they may not carry insurance; and, they are not subject to an authority such as the government or the court to assist debtors and creditors if they do not properly perform their duties.
c) We have seen many instances where debt consultants and credit counsellors have charged significant upfront fees and then done NO work. The debtors’ credit ratings have immediately worsened and many have then been sued by creditors.
d) Unlike a LIT, credit counsellors have no statutory authority to stop garnishments or collection lawsuits.
e) They can only assist debtors with the creditors that consent to work with them. Creditors can drop out of the program at any time and begin to sue the debtor. Unlike a Consumer Proposal, creditors cannot be forced into a solution that is best for the debtor.
f) CRA and many lenders will not work with debt consultants or credit counsellors. A LIT can stop CRA account seizures and garnishments and then work with CRA to significantly reduce income tax and HST debts.
g) Working with a credit counsellor impacts credit ratings in the very same manner as when a Consumer Proposal is filed with a LIT.
h) An LIT must provide budgeting and money management services as part of a Consumer Proposal. There is no such duty for a credit counsellor or debt consultant.
i) For the creditors that agree to participate in a credit counselling payment plan, their principal debt must be paid in full, usually over 5 years. The only benefit to the debtor is a reduction of interest that would otherwise have to be paid.
In contrast, a Consumer Proposal payment is primarily determined by what the debtor can afford to pay each month. While each situation is unique, typically, total payments in a Consumer Proposal are only 30%, 40% or 50% of the principal owed. All interest is forgiven.
j) Many credit counsellors and debt consultants state their services are free as they are often registered as a not for profit. This is usually not true – the debtor must pay a fee each month to the credit counsellor and the creditors also compensate them.
A LIT must collect taxes for the federal government and is paid a standard statutory fee from the funds paid to it. Of note, once the principal of the debt is greatly reduced by the Consumer Proposal process, the total paid to the Trustee is usually much, much, less than what would have been paid to a debt consultant or credit counsellor to arrange for the full payment of all principal over 5 years.
Consumer Proposals are a creation of the Canadian federal government. It wrote the legislation and oversees the administration of Consumer Proposals by Licensed Insolvency Trustees (“LIT”). An LIT is a highly qualified, and federally licensed professional, whose responsibility is to help you understand your finances, prepare a Consumer Proposal that you understand and can afford, will be accepted by your creditors and, to coach you in personal money management and budgeting.
Baker Tilly Ottawa Ltd. is a Licensed Insolvency Trustee. If you have questions about your debt load, or Consumer Proposals in particular, we would be pleased to help you. We have been assisting individuals eliminate overwhelming debt for over 30 years.