Credit counselling agencies and Licensed Insolvency Trustees (LITs), formerly known as bankruptcy trustees, offer debt relief options for debt-challenged consumers. Credit counselling agencies offer Debt Management Plans under which a consumer will pay 100 percent to 120 percent of their current indebtedness to their creditors by way of installments. Under federal insolvency law Trustees can offer two debt relief options; consumer proposals and bankruptcy.
In many instances, Licensed Insolvency Trustees and credit counselling agencies compete for clients. Paradoxically, however, credit counselling agencies and Licensed Insolvency Trustees often collaborate serving as a significant source of referrals for one another.
For whatever reason, if a consumer communicating with a trustee’s office or a credit counselling agency chooses not to proceed with the “available” debt relief option then it is very common for that consumer to be given a referral. This practice–where Licensed Insolvency Trustees and credit counselling agencies–routinely refer individuals to one another might not be in the best interests of a consumer. An individual given this referral might not be given independent advice as to the full range of their debt relief options.
This practice of mutual referrals is based upon self-interest and not necessarily the best interests of a consumer. If a Licensed Insolvency Trustee refers consumers owing less than $10,000 to one credit counselling agency–or a group of credit counselling agencies–then there is expectation that it will receive referrals from these credit counselling agencies involving consumers owing more than $50,000 in debt.
Most trustees decline a file where a consumer’s debts less than $10K
As a general rule, consumer proposals or bankruptcy do not take place where a consumer’s debts are less than $10,000.Licensed Insolvency Trustees will decline to make a consumer proposal or file personal bankruptcy where a consumer’s debts are less than $10,000. A trustee cannot generate any net income on a consumer proposal where a consumer owes less than $10,000. Furthermore, it doesn’t make a lot of sense for a consumer who owes less than $10,000 to his creditors to go bankrupt. In Canada it is very common for a debt-challenged consumer who owes less than $10,000 to creditors to be referred by a Trustee to a credit counselling agency.
Consumer proposal a less costly debt relief option where consumer owes more than $10K
Under a consumer proposal a consumer will repay an amount–usually somewhere between 25 percent and 50 percent fo their indebtedness–to their creditors, by way of monthly installments over a period not to exceed five years. In contrast, a consumer who enrolls in a Debt Management Plan with a non-profit credit counselling agency will pay somewhere between $1.00 and $1.20 to eliminated one dollar of their debt. This means that for a consumer who owes more than $10,000 in unsecured consumer debt a consumer proposal is three times less expensive method for eliminating debt compared with credit counselling.
A consumer’s cost when eliminating debt might not be the sole factor, however, when choosing between a consumer proposal or credit counselling. There are a number of scenarios where an individual might want to choose credit counselling over a consumer proposal:
- consumer proposal might not be available because an individual cannot satisfy the statutory insolvency requirement (many consumers are “house poor”)
- individual has significant student loan indebtedness in circumstances where the individual has ceased attending school as a full-time student less than seven years
- reputational issue: (any member of the public can pay $8.00 to conduct a search with the Office of the Superintendent of Bankruptcy to confirm if a specific individual has made a consumer proposal)
- employment-related concerns: Some individuals might not choose a consumer proposal because they might be required to report the consumer proposal to an employer or a professional association
Affordability obstacle for credit counselling where debts exceed $50K
Under credit counselling a consumer is going to repay 100 percent of their current outstanding principal and interest owing on all of their unsecured consumer debt. Credit counselling is attractive to some consumers because they are able to lower their payments to creditors because they are repaying their indebtedness by way of installment payments.
The fact, however, that it will cost a consumer between $1.00 and $1.20 to eliminate one dollar of their current unsecured consumer debt means that credit counselling becomes more unaffordable as the total amount of their indebtedness increases. Few consumer proposals are for more than $50,000. Scott Hannah, President and CEO of the Credit Counselling Society, Canada’s largest non-profit credit counselling agency, recently informed me that his organization’s average client enrolled debt in the $25,000 to $40,000 range.
Credit counselling agencies and LITs compete for clients where consumer owes $10k to $50k
As noted earlier, Licensed Insolvency Trustees seldom do consumer proposals where a consumer owes less than $10,00 to his or her creditors. Furthermore, Debt Management Plans offered by credit counselling agencies are not common where an individual owes more than $50,000 in unsecured consumer debt. This means that Licensed Insolvency Trustees and credit counselling agencies directly compete where the amount of unsecured consumer debt is between $10,000 and $50,000. All things being equal, credit counselling might be a more attractive option where total indebtedness is closer to $10,000. Similarly, all things being equal, for higher dollar amounts a consumer proposal might be more attractive than credit counselling.
Practice of mutual referrals often not in a consumer’s best interests
One of the consequences of these mutual referrals is that some consumers will be choosing a debt relief option in a bubble–limited to debt relief options offered by credit counselling agencies or Licensed Insolvency Trustees.
A consumer who is exposed to debt relief options available from credit counselling agencies and Licensed Insolvency Trustees may never be given information about the full range of debt relief options available to them including the following:
- Taking advantage of a limitation period to avoid paying a debt
- Learning that a consumer might be judgment proof or near-judgment proof in which case a creditor might never recover any monies from them
- Circumstances where it might be in a consumer’s best interests to negotiate a favourable one-time lump sum payment with a creditor
- Advice that a consumer should dispose of certain assets such as a principal residence