6 Debt Settlement Scams and Credit Counselling Tricks To Avoid

The number of debt settlement companies entering the Canadian marketplace has ballooned in recent years. Advertising a wide range of services including credit counselling, debt settlement, debt relief, debt consolidation, and debt management, it is hard for the average person to distinguish between what is fact, what is hype, and what is a scam.

To help you find the right debt advisor, and avoid being tricked by misleading or even false advertising claims, here is a list of common debt settlement scams, tricks and questionable claims to avoid.

Scam #1: Claiming to be not-for-profit

One trick practiced by many credit counselling agencies is to claim non-profit status. While they may be registered as a not-for-profit charity, their business practices are much more in line with for-profit companies. This may include funneling money to a related for-profit company (sometimes in the US) in the form of management and consulting fees, advertising costs and business expenses or paying excessive salaries to top management who are the principals of the not-for-profit enterprise acting more like owners of a for-profit company.

There is nothing wrong with being a for-profit credit counsellor. Many provide an excellent service to their clients. The concern is that the deception of appearing to be a not-for-profit encourages people to put their trust in the organization without questioning first what service they are getting. After all, if it’s a non-profit they must care more about their clients right? Not so. These ‘not-for-profits’ can charge high up-front fees, fees for debt settlements that never get negotiated and more. Many debtors end up owing more at the end of the process and now have a damaged credit history.

Scam #2: Deceptive accreditation

Many credit counselling and debt settlement companies place large images or links showing that they are ‘safe’ and accredited. This can include large icons showing they are members of the Better Business Bureau (BBB), have an A+ rating, or are accredited members of a Credit Counselling Organization of some kind. Some debt settlement sites even place large icons showing they are ‘safe web browsing’ sites. Great, but not relevant to the service they are offering.

The problem is that this does not guarantee that these credit counselling and debt settlement agencies will provide a good service to their clients.  Many clients may not report bad practices to the BBB out of embarrassment. It is also easy to start up a self-regulated membership organization that offers accreditation to members but may or may not enforce those regulations.

Scam #3: Not employing accredited credit counsellors

Another concern is the number of debt settlement and credit counselling agencies who use ‘credit counsellors’ who are not properly trained and accredited yet are providing debt advice to people seeking financial help. It is important that not only the credit counselling agency you are dealing with be reputable, but that the individual providing you with credit counseling advice be trained, properly educated, accredited and have adequate experience to be able to offer you appropriate advice.

Scam #4: The “government program”

One of the most misleading debt settlement scams is labeling their debt relief program as ‘government approved’ or a ‘government program’. The truth is there is no government fund or special program around debt settlement. In Canada, the Bankruptcy and Insolvency Act regulates both personal bankruptcy and a consumer proposal. Ask if that is what they are referring to.  And if they are, read about the next debt settlement scam first.

Scam #5: Charging for services they do not provide themselves

Another advertising trick used by many credit counselling and debt settlement companies is to advertise services they do not provide in-house. They may offer bankruptcy and consumer proposals, yet they do not have a Trustee in Bankruptcy on staff or in their organization. In Canada, only a Trustee in Bankruptcy can administer a bankruptcy or a consumer proposal debt settlement.

What these agencies are doing is earning money by charging a fee to fill out forms and refer you to a trustee. Their claim is that they represent your interests where the trustee does not. The truth is if you need to go bankrupt or file a consumer proposal any trustee will offer you a free, no-obligation consultation to discuss your options. To help decide whether you should see a credit counsellor or a trustee in bankruptcy ready about the difference between credit counsellors and bankruptcy trustees.

Scam #6: It’s not a debt consolidation loan

Our final debt settlement scam talks about debt consolidation scams. A true debt consolidation is when you get a new debt consolidation loan and use the proceeds from that loan to pay off multiple higher interest debt. This type of debt relief works well for someone with reasonably good credit or who may have assets to secure the new loan.  It is not a form of debt settlement. Many companies are advertising themselves as debt consolidation companies but what they really offer is a debt settlement program, for a large up-front fee. And there may be no guarantee that their program will be successful for you. If you are talking to a debt consolidation company know exactly what you are being offered — a new loan or a debt relief ‘program’. Another tip: if what you are being offered is a new loan, shop around for the best rate. Make sure that the debt consolidation loan is something you can afford in the long run and will get you out of debt.

What Should You Do To Avoid Debt Settlement Scams?

Now that you know what to look for to avoid debt settlement scams, here are some steps you can follow when choosing a debt advisor:

  1. Beware of credit counsellors or companies promoting just one solution, pressuring you to sign up for a plan or making recommendations without asking you sufficient questions about your specific situation.
  2. Research the company you choose to deal with before signing. The best approach is to ask friends and family for a referral from someone they have used ‘successfully’ themselves. Check out the agency’s website and look for some of the telltale signs above that they may be engaging in deceptive advertising.  Does their website offer information or just promotion?
  3. Ask about the education, experience and credentials of the person you are meeting with. What accreditation have the completed? How long have they been working with the company and in the industry?
  4. Get advice from a Trustee in Bankruptcy in your area. Even if you do not need to go bankrupt, a bankruptcy trustee will take the time to talk to you about your situation and explain all of your options. If you need the help of a credit counsellor rather than a trustee, they can recommend a reputable agency in your community.

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