You’ve seen the debt settlement ads. The ones that say “we can reduce your debt by up to 70% – avoid bankruptcy”.
There are two ways that companies can do this.
- The first is to refer you to a licensed trustee in bankruptcy to file a consumer proposal. They tell you that they ‘work for you’ and charge you a fee to prepare your paperwork. In truth, you should never have to pay any upfront or referral fee to talk to a bankruptcy trustee.
- The second way that companies can reduce your debt by this much is through something called a debt settlement program. In theory anyone can help you negotiate a deal with your creditors, but in practice many of these companies fall short of providing good service. I have written quite a few articles about the questionable services provided by many debt settlement companies. I am clearly on record as one of their harshest critics when they do not provide the service they charge for.
Here are some of the top reasons you should avoid debt settlement companies and what they don’t tell you:
- They cannot assist with government debts or student loans.
- They cannot stop wage garnishments.
- They don’t normally deal with payday loan outfits.
- There is no guarantee that they will succeed in negotiating a settlement and most do not.
- Your creditors may not be willing to wait and you may find your debt in collections.
- They are collecting a fee, typically 20-25% of your debt, before they do anything for you.
- You may face legal action including court judgements against you.
- You may end up in worse financial condition than when you started, forcing a bankruptcy you could have avoided.
We have been told by a large payment processing company that the actual success rate for the largest debt settlement company operating in Ontario is only 3%. 97% of the people that sign up and start paying fees never have their debts settled. 97% of the people that sign up end up worse off than before they started the program.
Debt settlement deals that follow this method have been banned in many Canadian provinces and American states. Ontario announced in the spring of 2013 that it will also be banning this type of program and since that time many companies have simply closed up shop.
To get on-side with the new laws all the debt settlement companies need to do is wait to collect their 20-25% until after they have settled your debts and the creditors get paid. In this way, the debtor would only be paying a fee based on performance, not expectations. I find it very interesting that the vast majority of the debt settlement companies, in particular the largest ones, have decided it makes more sense to close up shop than it does to switch their fee collection to meet the new requirements.
The few debt settlement companies that are left are presumably complying with the new fee requirements. If they do then I have no problem with debt settlement as a solution to a person’s financial problems.
My final warning, if you decide to respond to one of these ads then be very careful before you commit to any kind of program, before you agree to pay any fees. If it turns out you are talking to someone that is just going to refer you elsewhere, then leave. You can contact a bankruptcy trustee directly yourself to file a consumer proposal and save yourself the referral fee. It you determine they are a debt settlement company then make certain they are complying with the new fee rules – they only get paid when your creditors get paid. In that way you won’t be paying any fees on the hope that a deal might be made later.