In last week’s blog, I discussed how some Debt Consultants, for a fee, simply tell you what information to gather and then refer you to a trustee. These Debt Consultants are charging debtors up to $1,500 for information you could get for free, had you contacted a trustee on your own.
This week, I am going to discuss debt settlement. Let me explain, how a debt settlement generally works. First, you stop paying your creditors and then you start saving money, which will be used to make settlements with your creditors. Here is an example of someone who recently came to my office in Vaughan.
Chris (not his real name), owed $47,500 as follows:
Creditor Card A – $5,100
Credit Card B – $3,500
Credit Card C - $2,500
Line of Credit A – $25,000
Line of Credit B - $7,600
Income Tax – $3,800
Chris went to see a debt consultant after seeing their advertisement in the newspaper. After the meeting, the debt consultant advised that, he could not help him with the income tax debt, but could help him with the rest. He advised that paying the debt consultant $800 a month over the next 2 years (24 months), would likely be enough to settle all his debts.
What did the debt consultant not tell Chris?
- First, the Debt Consultant was not using the funds to make monthly payments to the creditors. Rather the money was being put into a bank account to be used to make a settlement with his creditors later.
- Second, Chris was unaware that the first five payments ($4,000) were to be used to cover the consultant’s fees.
- Third, the Debt Consultant did not tell him, he would have no legal protection from the creditors and they would still have to deal with collection calls and possible legal action.
What ended up happening to Chris was he paid the consultant the first couple of months. That is when he starting getting collection calls. When he called the debt consultant’s office to see what was going on, the reception, said this was normal and it would all be worked out soon. Shortly after making his fourth payment, Chris got a Statement of claim from one of his creditors. They were suing Chris because they had not received payment in 5 months (since he went and saw the debt consultant).
Chris was quite upset so he called the debt consultant. The consultant said this rarely ever happens (not true), however at this point it is probably best he goes see a trustee in bankruptcy about doing a consumer proposal. He offered a telephone number of a trustee he recommended. Chris was so upset with his debt consultant he called us instead.
Debt consultants don’t want you to know that the service they provide is something you can do on your own. You don’t need the advice of a debt consultant, to tell you to stop paying your creditors and save money and try to make a settlement. You can do that on your own, but if you choose to do this option, I want you to know the risks.
The first risk is like Chris, you may get sued. Second is that the creditor might not agree to the settlement, as there is no mechanism to force them to agree, so you might end up paying at least some of the creditors in full.
The following are reasons why you might consider filing a consumer proposal instead:
- Creditors cannot sue you when you are in a consumer proposal
- Government debts such as income tax can be included
- You can make affordable monthly payments and a lump sum payment is not required
- Consumer Proposal Administrators are regulated by the federal government
- As long as at least 50% in dollar value of your creditors agree, it is legally binding on all your creditors.
For the record, Chris was able to file a consumer proposal and stop the legal proceedings against him. He offered his creditors $300 a month over a five year period (60 months) and it was accepted. Had he come to see us first, he would not have spent $3,200 that went right into the debt consultant’s pocket.
If you are feeling overextended, I would recommend giving us a call at 905-856-2930 or 310-7526. You can also send us an email or fill out our online evaluation. We can set-up a free consultation to review all your options and we never charge any upfront fees.
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