Credit counselling the runt of the litter compared to other debt resolution options

 

Today you cannot turn on the radio without hearing an ad for Consolidated Credit or some other credit counselling agency.  Each year hundreds of thousands of Canadians choose to eliminate their debt via credit counselling–just one of a number of debt resolution options available to Canadian consumers struggling with unsecured consumer debt.

What these radio ads fail to mention is that credit counselling, except in very limited circumstances, does not compare well with other debt relief options.

Credit counselling is the runt of the litter compared to other debt resolution options.  A consumer choosing to eliminate their debt by way of credit counselling is choosing one of the most expensive methods of resolving their outstanding debt. The cost to the consumer using credit counselling to eliminate one dollar of their debt will be somewhere between 110 cents and 130 cents on the dollar–an exorbitant amount!

In the remainder of this blog post I will explain my rationale for this statement–one which the credit counselling industry doesn’t want Canadians to know about.

 

Except in two limited circumstances eliminating unsecured consumer debt by way of credit counselling is not attractive compared to other debt relief options.

Except in two limited circumstances eliminating unsecured consumer debt by way of credit counselling is not attractive compared to other debt relief options.

 

It is difficult to find a more expensive method of resolving your outstanding unsecred consumer debt than credit counselling

If you were to choose credit counselling to eliminate your unsecured consumer debt then the cost of eliminating one dollar of your debt will be somewhere between 110 cents and 130 cents on the dollar.  If you choose credit counselling then you will enroll in a Debt Management Plan (DMP)  which has three separate cost centres:

You will repay 100 percent of your outstanding balance:   Individuals who enroll in a Debt Management Plan with a credit counselling agency will pay 100 percent of their outstanding debt in connection with their unsecured consumer debts.

You will typically pay an additional 10 percent in fees to your DMP provider:

Virtually all organizations that offer Debt Management Plans (DMPs) charge a consumer enrolling in a DMP a fee.  This fee typically adds an additional ten percent to the consumer’s cost for eliminating their debt by enrolling in a Debt Management Plan.

You might have to pay some interest on your outstanding balance during the life of your DMP Credit counselling agencies inform consumers that they will “work with your creditors” to obtain interest relief.  However, a credit counselling agency cannot guarantee you interest relief on your outstanding balance during the life of your Debt Management Plan.  Firstly, some creditors–small creditors, finance companies, and payday loan firms– refuse to provide interest relief to consumers enrolling in a Debt Management Plan with a credit counselling agency.  Secondly, some creditors who would normally offer interest relief to consumers enrolling in a Debt Management Plan might refuse to do so in certain instances if they felt that a consumer had sufficient assets–typically some equity in their house–which could be used to resolve their oustanding account.  Finally, creditors are much stingier offering interest relief to for-profit credit counselling agencies than non-profit credit counselling agencies.

 

How does the cost of resolving your debt situation by way of credit counselling compare with other debt resolution options?

1.    Taking advantage of the expiry of a limitation period

Each province in Canada has a limitation period for unsecured consumer debt, two years in British Columbia, Alberta, Saskatchewan, Ontario, and New Brunswick, three years in Quebec, and six years in the remainder of Canada.  If you have an unsecured consumer debt, such as a credit card–and your creditor does not commence a lawsuit against you before the expiry of the limitation period in your province then you will be in a position to resolve your outstanding account without paying a single penny to your creditor!

If you communicate with a credit counselling agency do not expect them to provide you with any information as to how you might be able to avoid paying a penny to one or more of your creditors by taking advantage of a limitation period!

 

2.   Eliminating your debt by way of a consumer proposal

If you owe more than $10,000 in debt then you might be eligible to eliminate your outstanding debt by making a consumer proposal through a bankruptcty trustee.  Under a consumer proposal creditors typically repay an amount equal to approximately 35 percent of their indebtedness to creditors–including unsecured consumer debt and monies owing to the government–by making installment payments over a period not to exceed 60 months.  This means that those eliminating their debt by way of a consumer proposal are paying aboout 35 cents to eliminate one dollar of their debt–an amount three times less expensive than credit counselling.

 

3.   Settling your account by negotiationg a one-time lump sum settlement

If you have an unsecured consumer debt and you have not made a payment in more than six months then you might find youself in a position that your creditor will agree to accept a one-time lump sum payment–for an amount significantly less than the current outstanding balance–as settlement in full.  When I negotiated settlements on behalf of consumers four years ago one credit company would routinely accept settlements based on a lump sum payment equal to 18 percent to 25 percent of the outstanding balance.  As a general rule, creditors will not entertain settlement negotations unless an unsecured consumer debt has been unpaid for a minimum of six months.  There are three key factor in determining how generous a particular creditor might be (1) a creditor’s attitude towards settlements, (2) the degree of financial hardship the debtor is experiencing, and (3) the age of the debt–typically the older the debt, the more generous a creditor might be prepared to be.

 

4.   Eliminating your debt by providing your creditor with a series of post-dated cheques

Some, but not all, major banks and credit card companies effectively stop charging interest on an outstanding account once the account becomes six months overdue.  If you have an unsecured consumer debt and your creditor stops charging interest on your outstanding account then it would it would actually be cheaper to provide your creditor, or its authorized collection agent with, a series of post-dated cheques totalling one hundred percent of your outstanding balance, instead of enrolling in a Debt Management Plan.  Under a Debt Management Plan a consumer typically pays a feel to the credit counselling agency, an amount which typically adds an additional ten percent to the consumer’s cost for eliminating his debt.under a Debt Management Plan with a credit counselling agency. In this scenario, if you were to simply provide your creditor, or its authorized collection agent, with a series of post-dated cheques totalling hundred percent of your outstanding balance then you would shave ten percent off the cost of eliminating your debt, compared with credit counselling.

 

5.    Eliminating your debt if you have access to a low-interest loan

If you are able to borrow money at less than 10 percent interest–and the lower the rate of interest the better– then you might actually be better off obtaining a low-interest loan, paying off your creditors, and then paying off your loan, than doing credit counselling.  Some parents might be willing to lend money to their children at four percent interest–more interest than they would receive if on deposit in a chequing account, so that their children could pay off their existing unsecured creditors.

For more information about credit counselling I would invite you to visit the webpage on www.comprehensivedebtsolutions.ca titled “What Every Canadian Should Know About Credit Counselling”.

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