July 1st of this year marked the first day of a new regulatory regime for firms offering debt settlement services to Ontario residents. The new regulatory regime regime contained in the Ontario Collection and Debt Settlement Services Act applies to both firms offering lump sum settlements as well as those offering settlements by way of monthly installment payments–commonly referred to as credit counselling. The focus of this blog post is those firms that negotiate one-time lump sum settlements on behalf of clients–and not those firms offering to settle outstanding accounts by way of monthly installment payments.
Draconian restrictions on fees for debt settlement service providers
Except where a debt settlement provider is exempt from the Act, the new regulatory regime places onerous restrictions as to a debt settlement provider’s compensation. With respect to any debt settlement agreement signed after June 30, 2015, a debt settlement provider is not entitled to receive a penny in fees until such time that a settlement is actually paid out. Furthermore, the amount of fees that a debt settlement firm can charge is capped. The maximum fee that can be charged for settling a debt is an amount equal to 10 percent of the amount of the debt on the date of enrollment in the debt settlement agreement.
An example will help illustrate the resrictions on fees.
On July 2, 2015, ABC Debt Settlement Inc. entered into a debt settlement contract with John Smith who has one ourstanding credit card with an outstanding balance of $10,000. Seventeen months after signing this contract ABC Debt Settlement Inc. settles this debt for $5,000. The maximum fee that ABC Debt Settlement Inc can charge John Smith is $1,000 or 10 percent of his $10,000 indebtedness on the date of his enrollment into his debt settlement agreement.. ABC Debt Settlement Inc. is not entitled to charge John Smith any fees whatsover until the date that the settlement is actually paid out.
Prior to July 1, 2015, the Ontario Government did not restrict the amount of fees that a debt settlement firm could charge. Debt settlement firms would often charge fees equal to 15 to 20 percent of the amount of the consumer’s debt, plus a $50 monthly fee for the life of the debt settlement agreement. Prior to July 1, 2015, a debt settlement firm that enrolled a client into a $10,000 debt settlment plan might generate somewhere between $2,000 and $4,000 in fees and the fees were not contingent upon whether or not a settlement was actually paid out. Debt settlement firms would typically start charging fees in the first month that a client enrolled in a debt settlement plan.
Lawyers exempt from the Act and substantial restrictions on fees
Except where a debt settlement provider is exempt from the Act, the new restrictions on fees apply to any debt settlement agreement signed after June 30, 2015. Except where a debt settlement provider is exempt from the Ontario Collection and Debt Settlement Services Act, the debt settlement service provider must not only charge fees in accordance with the Act but also it must be licensed as a collection agency in Ontario and comply with the Ontario regulatory regime for collection agenccies.
The most important exemption under the Ontario Collection and Debt Settlement Services Act is for lawyers. The “lawyer’s exemption” can be found in paragraph 2(1)(a) of the Act and it reads as follows:
2.(1) This Act does not apply,
(a) to a barrister or solicitor in the regular practice of his or her profession or to his or her employees;
In order for a law firm to be exempt from not only the punitive restrictions on fees contained in the Ontario Collection and Debt Settlement Services Act and the necessity of being licensed as a collection agency it must be able to fall within this exemption.
Debt settlement services offered by TDF Debt Advisory Law PC
Sometime in June of this year a law firm by the name of TDF Debt Advisory Law PC, based out of Whitby, Ontario, began offering debt settlement services. This law firm operates from the same premises as Total Debt Freedom Inc., a firm which has been one of the largest providers of debt settlement services to Ontario residents over the past 10 years.
If you go on the homepage for Total Debt Freedom Inc.’s website, www.totaldebtfreedom.ca, there is a link to the homepage for TDF Debt Advisory Law PC’s website, www.debtconsolidationlaw.ca.
If you visit the homepage for TDF Debt Advisory Law PC then a representative from TDF Debt Advisory Law PC will attempt to start an online chat with you. Over the past week I exchanged messages with representatives of this law firm using this online chat feature. I learned, for example, that TDF Debt Advisory Law PC offers debt settlement services to the residents of every province and territory in Canada.
Yesterday, I communicated with these online representatives of TDF Debt Advisory Law PC and it became evident that these individuals do not work on site at TDF Debt Advisory Law’s Whitby office. When I asked one representative if he was working from the firm’s Whitby office he replied “I am not allowed to share my location.”
The following exchange occured yesterday when I asked the online representative from TDF Debt Advisory Law PC the name of the receptionist at the law firm’s Whitby office and a ball park number with respect to the number of employees who worked at the law firm.
Entrance of TDF Debt Advisory Law PC into the Canadian debt settlement marketplace
TDF Debt Advisory Law PC began offering debt settlement services to the public on its website sometime in June of this year. The consensus among executives in the Ontario debt settlement industry is that TDF Debt Advisory Law PC was created in response to the new restrictions on fees that debt settlement providers can charge to Ontario residents. I would be very surprised if TDF Debt Advisory Law PC’s fee structure is consistent with that which other debt settlement providers in Ontario must comply with–those which must possess an Ontario collection agency license.
Law firms which comply with the Act should be entitled to “lawyer’s exemption”
When the Ontario Legislature enacted the Ontario Collection and Debt Settlement Services Act it made a policy decision that a “barrister or solicitor in the regular course of his profession and his or her employees” is entitled to an exemption from the Act. There are a number of law firms operating today in Ontario which would certainly seem to be entitled to fall within the “lawyer’s exemption” in the Ontario Collection and Debt Settlement Services Act. I believe that TDF Debt Advisory Law PC is not one of them. The business model used by TDF Debt Advisory Law PC, in conjunction with Total Debt Freedom Inc., would appear to be an amateurish attempt to circumvent the Act.
Caught by the Act’s anti-avoidance provision?
The Ontario Collection and Debt Settlement Services Act contains an anti-avoidance provision in section 2.1 of the Act that reads as follows:
2.1 In determining whether or not this Act applies to an entity or transaction, a court or other tribunal shall consider the real substance of the entity or transaction and in so doing may disregard the outward form.
At some future date an Ontario judge might rule, relying upon this anti-avoidance provision, that debt settlement agreements offered by TDF Debt Advisory Law PC are subject to the Act because TDF Debt Advisory Law PC is not exempt from the Act under the “lawyer’s exemption. Furthermore, I believe that a court could make a finding that TDF Debt Advisory Law PC and Total Debt Freedom Inc. constitute a single entity which is providing debt settlement services in contravention of the Act.
TDF Debt Advisory Law PC’s huge gamble
I believe that TDF Debt Advisory Law PC is throwing the dice and that it is taking a huge gamble There are four key areas where TDF Debt Advisory Law PC is potentially vulnerable.
- Ontario Registrar of Collection Agencies might take some action against the firm
- Potential action by provincial regulators outside of Ontario responsible for regulating the conduct of debt settlement providers in their province
- Law Society of Upper Canada might take some action
- Client(s) of TDF Debt Advisory Law PC might sue the law firm claiming a contravention of the Act, and if successfull, they would be entitled to 100 percent refund of fees and punitive and exemplary damages
Copies of debt settlement agreements entered into after June 30, 2015
If you have signed a debt settlement agreement after June 30, 2015, with either TDF Debt Advisory Law PC or Total Debt Freedom Inc. then I would invite you to contact me at either (866) 996-9941 or (519) 827-5513. Furthermore, I would extend this invitation to anyone who has signed a contract after June 30, 2015, in which you pay for services and one or more of the services provided to you is negotiating a one-time lump sum settlement on your behalf.