Over the next few weeks you might see a number of stories in the media about major reforms in the Ontario debt settlement industry. A new regulatory regime, which goes into effect on July 1, 2015, will have a dramatic impact on the debt settlement marketplace in Ontario.
This new regulatory regime will not, however, prevent an Ontario resident from negotiating a favourable settlement with his creditor, or the creditor’s authorized collection agent. Nor will the new regulatory regime prevent an Ontario resident from hiring someone to serve as a “debt coach” who will coach or mentor a consumer as to how to negotiate a settlement on their own.
After July 1, 2015, we can anticipate some major changes in the Ontario debt settlement marketplace. I anticipate six key changes to the Ontario debt settlement industry over the next few months:
- a number of traditional debt settlement firms will, or have already, exited the marketplace
- a number of traditional debt settlement firms will see their business shrink
- a number of firms that provided debt settlement services prior to July 1, 2015, who were not licensed to do so will cease providing debt settlement services
- there will be a dramatic increase in the amount of debt settlement services provided by small Ontario-based law firms
- some small Ontario-based collection agencies might provide debt settlement services as a sideline to their primary business of collecting overdue accounts
- there will be substantial growth in the debt coaching industry—people who coach or mentor consumers who wish to settle their own debt
An attractive strategy for resolving your debts
If you are struggling to pay unsecured consumer debt then settling your debt might be an attractive strategy for resolving your debt. A creditor might be prepared to accept a one-time lump sum payment for substantially less than the current outstanding balance. Over a four-year period I negotiated hundreds of favourable settlements on behalf of consumers. In many cases my clients made a lump sum payment of between 18 and 30 percent of the outstanding balance to settle an outstanding account.
Here are 12 things to consider if you are contemplating settlling one or more of your debts:
- This strategy is not available for many types of debt including secured debt, monies owing to the government and non-dischargable debt
- If the relevant limitation period in your province has expired you should consider whether it is in your best interests to settle an account for any amount
- There is nothing to be gained from settling an outstanding account where the date of your last payment is more than six years ago (will not show up on your credit report)
- Creditors will virtually never settle an account unless no payments have been made on the account for a minimum of six months
- If you are going to default making payments on a credit card, personal loan, or line of credit with a particular financial institutution then you should not have any money on deposit in a savings or chequing account with that financial institution
- If your account is overdue then you should expect collection calls
- If your account is overdue then there is a risk that you might be sued
- It might be possible to negotiate a settlement for less than the full outstanding balance if you have been sued
- You should never make a payment to settle your account unless you first receive a satisfactory written settlement letter from your creditor or its authorized collection agent
- You should retain any and all documents related to your settlement including your settlement letter, your payment, and any receipts serving as proof of payment
- Settlements tend to be more generous the longer an account remains unpaid
- Some, but not all, creditors will require some proof of a consumer’s financial hardship before agreeing to a settlement
Consumer proposal is not for everyone
Settling your debt might be an attactive option in a number of circumstances where a consumer proposal might not be an ideal solution for a consumer in a particular situation:
- Consumers who do not have a regular income and who cannot make 60 monthly installment payments which are typical under a consumer proposal
- Consumers who have substantial student loans in circumstances where the consumer ceased attending school less than seven years ago
- Consumers whose employment or profession would be adversely affected if they were to make a consumer proposal
Settling your debt is very attractive compared with credit counselling
Those considering credit counselling might want to explore the merits of settling their debts in their particular circumstances. The issue is cost. How much will it cost you to eliminate one dollar of your debt by either settling your debt or by way of credit counselling?
If you were to choose credit counselling then the cost of eliminating one dollar of your debt will be somewhere between 110 cents and 130 cents. If you were to choose settling your debt then you will invariably be able to eliminate your debt–and potentially resolve your debt situation by taking advantage of the expiry of a limitation period–for substantially less.
Three ways a consumer can settle a debt
A consumer who wants to settle an unsecured consumer debt has three options. Firstly, a consumer can do it on his own. Secondly, he can hire someone to serve as a “debt coach” who coaches him as to how to settle his debt. Finally, he can hire a firm that will negotiate directly with his creditors on his behalf. If a consumer decides to settle their debts then the costs associated with doing so will vary dramatically depending upon the level of assistance they seek from others.
1. Do it yourself
A consumer who attempts to settle a debt on their own pays virtually nothing in out-of-pocket expenses.
2. Debt coaching services
It remains to be seen how much debt coaches will charge for their services.
3. Hire a firm to negotiate directly with your creditors on your behalf
Any firm operating under an Ontario collection agency license:
After July 1, 2015, any firm offering to negotiate settlements on behalf of an Ontario resident must either be licensed as an Ontario collection agency or be exempt from this licensing requirement.
After July 1, 2015, some debt settlement firms will be providing debt settlement services on the basis of having an Ontario collection agency license. Some of these firms might be described as traditional debt settlement firms. In addition, under the new regulatory regime collection agencies are permitted to provide debt settlement services to Ontario consumers.
The maximum fee that these firms can charge is ten percent of the dollar value of a debt on the date the debt was enrolled into a debt settlement plan. Therefore, if you hired a debt settlement firm to settle one $10,000 credit card debt–regardless of the amount of any settlement–the maximum fee that a consumer could lawfully be charged is $1,000, or 10 percent of the original $10,000 debt. It is important to appreciate that a debt settlement firm which holds an Ontario collection agency license is not entitled to charge a nickel in fees until a settlement is actually paid out.
Law Firm: Law firms–as well as bankruptcy trustees– are exempt from the draconian restrictions on fees that traditional debt settlement firms must comply with after July 1, 2015. I anticipate that after July 1, 2015, law firms that provide debt settlement services in large volume will likely charge their clients an amount equal to about 15 percent of the amount of debt included in their debt settlement contract. The law firm might also charge an additional fee of $50 per month during the life of the debt settlement contract.
Unlike debt settlement providers licensed as an Ontario collection agency, law firms can charge their clients for services on a monthly basis, beginning in the first month of a debt settlement contract, and their fees are not contingent upon a settlement actually being successfully negotiated and paid out.
Learn more about how you might benefit from “settling your debt”
If you would like to learn more about what would be involved if your were to resolve your debt situation by “settling your debt” then I would invite you to contact our office and schedule a telephone consultation with me. You can reach me toll free at (866) 996-9941 or at (519) 827-5513. Alternatively, you can contact me via e-mail at firstname.lastname@example.org.