Tag Archive for credit counselling agencies

Licensed Insolvency Trustees and credit counselling agencies: the competitor-collaborator paradox

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:

  1. consumer proposal might not be available because an individual cannot satisfy the statutory insolvency requirement (many consumers are “house poor”)
  2. individual has significant student loan indebtedness in circumstances where the individual has ceased attending school as a full-time student less than seven years
  3. 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)
  4. 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:

  1. Taking advantage of a limitation period to avoid paying a debt
  2. Learning that a consumer might be judgment proof or near-judgment proof in which case a creditor might never recover any monies from them
  3. Circumstances where it might be in a consumer’s best interests to negotiate a favourable one-time lump sum payment with a creditor
  4. Advice that a consumer should dispose of certain assets such as a principal residence

 

Indebted consumers often receive poor financial advice from those holding themselves out as helping them

 

In 2010 my book The Wolf At The Door:  What To Do When Collection Agencies Come Calling (2010), published by McClelland & Stewart, was in bookstores across Canada. As part of the research for this book I mystery shopped about a dozen organizations in the Greater Toronto Area holding themselves as helping consumers with unsecured debt problems.  For lack of a better term I will refer to debt settlement firms, credit counselling agencies, debt consultants, and bankruptcy trustees as debt resolution service providers.

WATD(2)bookcover one column wide (1)

 

Response where limitation period was relevant

I provided my mystery shoppers with special pens that could surreptitioulsy record conversations.  I also provided my mystery shoppers with various scenarios to persent to debt resolution service providers.

One of the scenarios these mystery shoppers presented was that the date of last payment on all their unsecured consumer debts were more than three years ago.   I wanted to test these organizations’ response to a scenario where a consumer might be better off simply taking advantage of Ontario’s two-year limitation period for simple contract debt with respect to any unpaid unsecured consumer accounts.

An Ontario resident might have $60,000 in unsecured consumer debt in circumstances where the date of last payment on these debts was more than two years ago.  In this scenario, the consumer would have the option of not paying a nickel to their creditors.  The fact that an Ontario resident had an unpaid account, however, would show up on their credit report for seven years following the date of their last payment.

I was shocked when I listened to the recordings of these interviews.  As a general rule, the people who met with my mystery shoppers either had no idea about the significance of Ontario’s two-year statute of limitations, they denied its application to the mystery shopper’s particular situation, or they informed the mystery shopper that the fact that Ontario’s statute of limitations had expired was of no benefit whatsoever to their situation.

 

Free debt consultation or sales pitch? 

All of the organizations who were mystery shopped as part of my research for The Wolf At The Door offered a free consultation.  When I listened to the recordings provided by my mystery shoppers it was evident that the firm’s representative was highly motivated to encourage the mystery shopper to sign on the dotted line for a debt resolution option available from their organization.

 

A system that is broken

 

1.       A system that is rife with conflicts of interest

The debt resolution service provider industry has a huge problem. And that problem is conflicts of interest.  As a general rule, these organizations only offer one or two debt resolution options from the toolbox of the six to ten debt resolution options that might be available to a particular consumer.

When a consumer drowning in debt speaks with a representative from a debt settlement firm, a credit counselling agency, or a bankruptcy trustee that organization is very limited in terms of the range of solutions it can offer to the consumer.  It is only human nature for these organizations to put the debt resolution option offered by their firm in the best light possible.  These organizations only receive financial compensation if an individual decides to proceed using a service offered by that debt resolution service provider.

 

2.    A system where consumers often choose less-than-optimal solutions

Consumers who reach out to a debt resolution service provider are typically vulnerable individuals.  They may be facing major issues: missed bill payments, collection calls, lawsuits, and sometimes wage garnishments.  It is common for these individuals to sign up for a debt resolution option with the first organization they contact.  These consumers might not be aware that in some instances the person they are discussing a debt resolution option with is essentially a commissioned salesperson.

Two factors contribute to consumers choosing less than optimal debt resolution options.  Firstly, the average Canadian knows very little about debt resolution options.  Secondly, debt resolution service providers often sell their debt resolution option to the exclusion of other alternatives. This cocktail often results in a terrible hangover for the consumer:  a debt resolution option which is not optimal for the consumer in their particular circumstances.

 

More robust role for government and government regulators needed

Governments and government regulators should take a more active role in protecting vulnerable consumers from signing up for debt resolution options which might not be in the consumer’s best interests in a particular situation.  Firstly, government websites should offer detailed descriptions of various options available to a consumer.  These should not only be educational but also they should be balanced.  Secondly, before a consumer makes a financial commitment with respect ot a debt resolution option–a debt settlement agreement offered by a debt settlement firm, a debt management plan offered by a credit counselling agency or a consumer proposal or personal bankruptcy– they should be required to either read a government-approved document or watch a government- approved video describing the particular debt resolution option in detail as well as alternative debt resolution options.

 

At my firm Comprehensive Debt Solutions, we are not captive of a particular debt resolution option.  If you would like to learn more about your various options for dealing with your debt please feel fee to contact me.  You might find that paying a modest amount to speak to me for 15 to 30 minutes is the best money you ever spent in your life!  Feel free to contact our office to arrange a consultation.  You can call our office at 1 (866) 996-9941 or (519) 827-5513 or send me an e-mail at mark@comprehensivedebtsolutions.ca

You might want to contact our office and schedule a telephone consultation with Mark Silverthorn to learn more about your options for dealing with your current debt situation.

You might want to contact our office and schedule a telephone consultation with Mark Silverthorn to learn more about your options for dealing with your current debt situation.

 

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New online Ontario Debt Collection Industry Directory

 

My goal has always to provide the public with as much information as possible about the collection industry.

My goal has always to provide the public with as much information as possible about the collection industry.

 

I am pleased to announce that today Comprehensive Debt Solutions Inc. has published an online Ontario Debt Collection Industry Directory which is available to the public at no charge.  This directory will contain the contact information of every collection agency, debt settlement firm, and credit counselling agency with offices in the province–regardless of size.

This online directory currently lists more than 150 organizations.  This directory comes after months of hard work collecting information and every effort was made not to leave out any organization, including some so small they are one-person operations.

The rationale behind publishing this online directory is consistent with our firm’s philosophy that the better informed a consumer is, the better his or her chances of making the optimal decision in connection with addressing their debt situation.

The Ontario Debt Collection Industry Directory can be found under the “BILL COLLECTORS” tab on the horizontal navigation menu on  www.comprehensivedebtsolutions.ca.  Here is the link for this directory on this website:

http://www.comprehensivedebtsolutions.ca/ontario-debt-collection-directory.html

If you feel that we have omitted to add an organization to this directory or the directory contains inaccurate or outdated information, then I would invite you to contact me at mark@comprehensivedebtsolutions.ca, or call me at (866) 996-9941.

Please feel free to share this post with others.  I anticipate that some individuals in the collection industry will favourite this webpage.

 

Compiling the list of names of organizations for the Ontario Debt Collection Industry Directory involved tapping into our extensive network of anonymous sources.

Compiling the list of names of organizations for the Ontario Debt Collection Industry Directory involved tapping into our extensive network of anonymous sources.

 

Data entry for the Ontario Debt Collection Industry Director was the responsibllity of our intern/Office Manager, Rosie.

Data entry for the Ontario Debt Collection Industry Directory was the responsibllity of our intern/Office Manager, Rosie.

 

Radio Stations Big Winners in Consumer Debt Air Wars

 

It is hard to listen to the radio for more than 15 minutes wihout hearing an ad from a credit counselling agency or a bankruptcy trustee.  The amounts of money spent on radio ads by a handful of the largest Canadian credit counselling agencies and bankruptcy trustee firms across Canada must be staggering!

This air war highlights a number of developments in Canada.  Firstly, some bankruptcy trustee firms and some credit counselling agencies are aggressively competing for market share.  Secondly, some players–the largest credit counselling agencies and the largest firms of bankruptcy trustees– have the financial resources to play this high-stakes game, and others simply do not.  Finally, it would appear almost inevitable that we are going to witness a certain degree of consolidation in both the non-profit credit counselling space and the bankruptcy trustee space over the next five years. Some smaller credit counselling agencies and smaller bankruptcy trustee firms might face challenges competing with the large advertising budgets of the big players and they might feel compelled to join their larger competiors or simply exit the marketplace or reinvent themselves and offer a different mix of services to the public.

In the past we have waxed nostalgic about the disappearance of the family farm.  In the not-too-distant-future we might be doing the same for the community’s local credit counselling agency and the bankrupty trustee down the street.