July 1, 2015, Canada Day, marks the first day of a new era in the debt settlement industry in Ontario. Debt settlement firms will be subject to a significant number of obligations and restrictions. Furthermore, starting July 1st firms providing debt settlement services to Ontario residents face draconian restrictions regarding the fees that they can charge A consumer cannot be charged a penny in fees until such time that a settlement is actually paid out. This means that a debt settlement firm will likely not generate a nickel in revenues on a significant percentage of its files–files on which it has provided services and incurred expenses.
On any debt settlement services agreement signed after June 30, 2015, the maximum fee that a debt settlement firm can charge a client is equal to 10 percent of the amount of the consumer’s outstanding debt on the date he signed the agreement. For example, if a consumer with one debt–a $10,000 credit card debt–signed a debt settlement agreement and at some later date a settlement was paid out then the maximum fee that the consumer could be charged is $1,000 or ten percent of the original $10,000 debt.
These punitive restrictions on fees will make it difficult for any debt settlement firm which is not exempt from being licensed as a collection agency under the Ontario Collection and Debt Settlement Services Act to be financially viable. Last week I received a phone call from a gentleman who operates a small one-man debt settlement firm in Ontario and he advised me that he intended to surrender his collection agency license in the next two weeks. I anticipate that in the next few weeks and months that more debt settlement firms operating in Ontario will seriously consider doing the same.
Exemption for lawyers must be incredibly attractive
Certain organizations providing debt settlement services to Ontario residents are exempt from the new regulatory regime for debt settlement services in Ontario–including the punitive restrictions concerning fees. The most important exemption is for lawyers.
I foresee two developments in the near future. Firstly, I see law firms providing debt settlement firms taking market share away from firms providing debt settlement services which possess an Ontario collection agency license. Secondly, I anticipate that some existing debt settlements firms, particularly the larger ones, will be tempted to find a lawyer who will agree to permit their debt settlement services to be offered in the name of the law firm. I can also foresee that these debt settlement providers transforming their operations in-house at a law firm will discover the transition much rockier than they anticipated.
Three debt settlement firms to watch
Today there are fewer than a dozen debt settlement firms which possess a collection agency license in Ontario. Of these firms I anticipate that more than 70 percent of all existing debt settlement clients in Ontario are clients of three firms–listed below in no particular order of size:
- Consumer Debtor Protection of Canada Ltd.
- Ontario Consumer Credit Assistance (OCCA)
- Total Debt Freedom Inc.
The $64,000 question is which business model will these three major players in the Ontario debt settlement industry be using by the end of July? I see four options for these firms:
status quo: These firms could simply retain their existing business model in which case their revenues will drop substantially because of the new restrictions on fees for any new client signing a debt settlement agreement after June 30, 2015.
status quo plus addition of new revenue streams: These firms could retain their existing business model but try to offset the drop in revenues caused by the new fee restrictions by adding new revenue streams from additional goods or services, or business partnerships.
new clients will be clients of a law firm: The principals at these debt settlement firms might join a law firm and new clients will become clients of the law firm in which case they can avoid the draconian fee restrictions imposed on those debt settlement providers holding an Ontario collection agency license.
exit the debt settlement marketplace: It is possible, but very unlikely, that any of these three firms will exit the debt settlement marketplace in the immediate future.
If you have any insights as to what the debt settlement industry will look like in the near future I would invite you to contact me at (866) 996-9941 or (519) 827-5513. Alternatively, you can e-mail me at firstname.lastname@example.org