Ontario clients trying to pay down debt are now protected from being charged exorbitant fees for debt-settlement help.
On July 1, 2015, new Ontario laws came into force regulating the operation of debt settlement companies.
As an advisor, you should understand the implications of the new rules so you can provide your clients with accurate information. If your own practice includes debt settlement services, you need to be aware of new restrictions on your fees.
Debt settlement companies had been advertising their ability to reduce someone’s debt by as much as 70% of the stated principal. These agencies did this by negotiating settlements with a person’s creditors. The catch – the debt settlement company charged fees upfront, before any deals had been made and any debts had been settled. This meant that in a high number of cases the creditors initiated legal action against the debtor before the debt settlement company commenced any work. Once legal action began, the company’s ability to settle was effectively eliminated. The Canadian Bankers Association says fewer than 10% of all settlement proposals sent to banks by debt settlement firms are accepted.
Ontario’s new law, called the Collection and Debt Settlement Services Act, severely restricts debt settlement companies’ ability to charge upfront fees, and it limits their overall fees to 15% of each payment to creditors, plus a set-up charge of $50 per account. In the event the debtor makes a lump-sum settlement offer, fees are capped at 10%. This protects debtors because, except for the small set-up charge, the settlement agency can’t charge fees until the debtor begins to make payments. That means the creditor has likely agreed to a settlement deal.
In addition, debt settlement companies are now included under the same regulatory umbrella as collection agencies. The Act, however, doesn’t apply to lawyers, trustees in bankruptcy or not-for-profit credit counselling agencies.
What does this mean for clients seeking debt relief? Settlements are still possible. The law simply stops the collection of fees before services are rendered. On the surface, this sounds like a good thing.
The law’s introduction immediately drove some large debt settlement companies out of Ontario. Unfortunately, we think it is only a matter of time before some companies transform themselves into debt consulting firms — not subject to the new rules — and return to the market. We have seen evidence of this already.
The easiest way for a debt settlement company to avoid the new rules is to partner with a law firm or lawyer. Under the lawyer’s auspices, the debt settlement company would be exempt from the new laws. Lawyers have strict rules of conduct, so if firms decide to continue under the old system, we don’t believe these relationships will survive for long. A lawyer wouldn’t likely tolerate the negative impact these debt settlement arrangements would have on his or her reputation and practice.
The second possible transformation for these companies has longer-term consequences. The companies could change into debt consulting or debt coaching firms. These entities already exist, and we expect them to become more prevalent. Debt consulting firms differ from debt settlement companies in that the consulting firm does not collect or retain a debtor’s payments on behalf of creditors or for relief of debt. These debt counsellors are charging a fee for advice only.
Since the consulting firm isn’t settling the debt, the new laws don’t apply. Based on my experience with these services, the paid advice these debt-consulting firms provide clients is typically to refer them to a licenced trustee in bankruptcy to file a consumer proposal. The problem is, most licenced trustees will meet with a potential client and review his or her debt-relief options for free. Anyone with access to the internet or a phone book can find a trustee and make an appointment without the help of a debt consultant.
If you have a client with debt issues, you need to guide your client past unscrupulous debt management companies and point them toward professionals that can perform the services that will actually solve their debt problems, such as drafting a consumer proposal or filing for bankruptcy.