Be Wary of Debt Settlement Companies; Stick With Registered Credit Counselors or Bankruptcy Trustees Who Are Professionally Certified and Bound By Code of Ethics
Last week, a young professional named Zak came to see me. A year or two ago he was struggling to keep up with his two credit card balances. Back then Zak owed $9,000 to one bank, and $7,800 to another.
Minimum monthly payments of around $500 from his net pay were not paying down the actual balances, just servicing the 20% interest charge, and he despaired he would never be out of debt.
Zak came across a company called Debt Free Solutions. They had a very slick website and an easy online application form. Placing his trust in the company, he signed a contract which agreed he would pay Debt Free Solutions $315 per month for thirty five months. After that, the plan was he would have no more debts.
In his desire to clean up his mess, Zak failed to read the contract properly and understand what would and could happen next.
From each of the first twelve payments, $261 would go direct to Debt Free Solutions (DFS) . The remaining $54 would be set aside in a special savings account for Zak. No payments would actually go to his creditors for another year.
After that, $50 from each monthly payment would still go to DFS, and the remaining $265 to be deposited into Zak’s special savings account at DFS. At the end of thirty five months, Zak would have paid $1,650 in monthly service fees to DFS, plus an additional $2,553 in the first twelve months. Over $4,200 in fees!
Debt Free Solutions’ advises their clients not to speak with their creditors in the meantime. Their “plan” is to wear down the creditors and negotiate a settlement when the creditors see there has been no payment for some time, and therefore some money may be better that none. In Zak’s agreement with Debt Free Solutions, DFS predicted they could settle his debts for around $6,755.
However, creditors do not just disappear. They may hire a collection agency to pursue you, or they may even initiate legal proceedings. In my experience, if a debtor has no contact or payments with a creditor for twelve months, it’s highly likely things will have escalated to court procedures. What then?
How this Debt Settlement Compant got Zak in hot water – with no help to be had
Here is what happened to Zak. First one bank aggressively pursued him, and he decided to enter directly into a separate repayment plan with them, one year after signing with DFS. Later the other bank did the same. They have issued statements of claim and the case will be heard in court at the end of this month. According to Zak, DFS are nowhere to be seen in this mess. It’s all on Zak.
The fine print in Zak’s contract with DFS does say (among many other things) that “enrolling in a debt negotiation program and/or stopping payment to Creditor(s) may result in legal action against Client by Client’s Creditor(s). The Court may award Creditor(s) a judgment against Client, which can result in a writ or lien against Client’s property.”
Ironically, when Zak came to my office he was in worse shape than he was before he began with DFS. The good news is he signed a consumer proposal with a Trustee last week, and we hope ALL his debts will be reduced to a single repayment of $150 per month for five years. And all legal actions and collection activities will cease now.
The Ontario government’s Ministry of Consumer Services is in the process of drafting regulations which would significantly toughen up the governance of debt-settlement companies. Companies such as Cambridge Life Solutions, Total Debt Freedom, Debt.ca, Canada Debt Settlements, and Debt Free Solutions will be on a much shorter leash than they are now.
My take is that it is very confusing for someone to figure out “who is who in the zoo” when it comes to dealing with their debts. The debt-settlement companies’ message often sounds similar, only more compelling, to that of trustees in bankruptcy and administrators of consumer proposals.
The debt-settlement companies’ marketing and advertising budgets dwarf those of the kind of people the debtor really should be talking to. Bus display ads, radio ads, print ads in many different publications, and of course, the bigger companies are invariably at the top of the first page of a Google Search.
Trustees are highly trained and educated professionals, officers of the court, who are bound by their code of conduct and code of ethics to explain the ways you can address your debt problems – and they usually do not charge for this initial consultation. Registered credit counselors can do the same for you – that’s what I am.
Rather than give you a long lesson on who to go to and who not, my advice is stay away from anything that seems too good to be true until you have sought a second opinion – preferably from a registered credit counselor or a trustee in bankruptcy.