Not long ago I wrote a blog about something called debt settlement services in Ontario, which due to questionable practices have been coming under fire within the credit and debt services industry, with growing complaints from consumers about how the services are not delivering on the promises they make. Since then, the fires of controversy are building, big time, with a growing contingent of credit counselling services and associations – as well as trustees and financial advisory firms – calling for government scrutiny of debt settlement companies and the way they operate.
Leading the charge is the Canadian Association of Credit Counselling Services, the association’s Ontario counterpart, OACCS, as well as my agency Credit Canada Debt Solutions Inc. (CCDS). In addition, vocal critics in the industry include Bankruptcy Canada, supported by professional trustees, BDO Canada, one of the country’s leading accounting and advisory firms, and Doug Hoyes, co-founder of Hoyes, Michalos & Associates Inc., Ontario’s largest independent personal insolvency firm.
We have all agreed, it’s time for the Ontario government to take a good, close look at debt settlement services, whose promises and practices have already been censured by the Financial Consumer Agency of Canada (FCAC). Not to mention, debt settlement practices have been outlawed in the United States, and through new legislation they have been highly regulated in Canada – with certain practices banned outright in Manitoba through regulations modeled on an existing Alberta law. Meanwhile, Nova Scotia lawmakers are on their way to enacting similar legislation.
In just the past week or so, CACCS – and we here at CCDS in cooperation with Michalos & Associates Inc. – have approached the news media with a flurry of feature news and opinion pieces calling for serious investigation and analysis of debt settlement companies. The whole story can be found in a news package we distributed, which I am including with this blog.
The following items include a “News Feature – Special Report” covering the controversy in detail, as well as a “Feature News – Sidebar” pertaining to consumers who feel they have been betrayed by debt settlement companies. The news articles were prepared with the assistance of independent writer/journalist Robert McDougall.
Read them, and weep; that is, if hot steam doesn’t otherwise start exiting your angry ears first.
Feature News – Special Report
In the Thicke of things. Controversy mounts around debt settlement services with calls to action for government scrutiny in Ontario.
TORONTO – Behind the bold, red company logo stands the quaffed, smiling Canadian actor Alan Thicke, who is delivering an energetic sales pitch in a TV commercial. He encourages those facing debt problems to take advantage of a “consumer relief program” that offers to reduce overall credit card debt by as much as 70 per cent. The commercial’s tone is reassuring, betraying no sign that behind the TV supers and Mr. Thicke’s confident voice a controversy is mounting – one that cuts to the very heart of Canada’s debt services industry.
At issue is the “nature” of the services Mr. Thicke is helping to sell. But the matter needs explaining, and none in Canada are better equipped to do so than the country’s leading expert on consumer credit and debt issues, Laurie Campbell. She is CEO of the country’s largest and oldest credit counselling agency, Credit Canada Debt Solutions, headquartered in Toronto. As well, she is a former member of the federal Task Force on Financial Literacy and featured author of the blog, For the Love of Money (fortheloveofmoney.ca).
Said Campbell: “The controversy does not specifically or necessarily revolve around Mr. Thicke and the company he represents. The issues are bigger than that, having to do with the nature of practices now being carried out by a whole set of similarly inclined companies operating in Canada – and particularly in Ontario. These companies, which I understand largely stem from the United States, offer what is generally described as debt settlement services. The services also frequently fall under the banners of debt reduction, debt relief, and debt negotiation in advertising sales pitches.
“The perspective is, not too long ago, debt settlement services were outlawed in the United States, and through new legislation they have been highly regulated – with certain practices banned outright in Manitoba through regulations modeled on an existing Alberta law. Meanwhile, Nova Scotia lawmakers are on their way to enacting similar legislation. Given these developments – and in light of an increasing volume of consumer complaints relating to the services – serious questions are being raised in Ontario about why lawmakers in the province have not yet taken the matter in hand,” Campbell explained.
So what is the nature of debt settlement services? First of all, it has to do with the credibility of the claims debt settlement companies are making to consumers. The promises these companies make are being characterized by critics as grandiose. The companies promote savings of up to 90 per cent on unsecured (principally credit card) debt of $10,000 or more, which translates to paying creditors as little as 10 cents per dollar owed. According to many experts in the field, this is a preposterous expectation in most consumer debt cases.
Secondly, there is the matter of how the debt settlement process unfolds. Companies ask that consumers withhold payments from creditors and instead grow personal savings for a lump-sum offer of settlement somewhere down the road. Meanwhile, all or a majority of service fees are paid by consumers to debt settlement companies before the companies reach deals with creditors, or even before they contact creditors. Critics maintain that through this process, unsuspecting consumers can be left with more debt, less money, and a bad credit rating as debt settlement companies blur issues and fail to negotiate settlements while pocketing up-front fees.
Though debt settlement companies currently are free to pursue their practices in regions of Canada that include Ontario, they are not immune to official censure, or at least, not as far as the federal government is concerned. While it is not within Ottawa’s purview to regulate debt settlement services (that is a provincial matter), the federal government nonetheless is free to voice its opinion about them, and it has done so in no uncertain terms.
Earlier this year, the Financial Consumer Agency of Canada (FCAC) issued a consumer alert about debt settlement companies that are moving into new markets with suspect claims of easy, big-money-savings for people experiencing debt problems. The FCAC flagged the companies for “pie-in-the-sky” promises. High pressure sales tactics, unrealistic claims about slashing debts, misleading information about protecting credit ratings, and false claims about government involvement or approval were among the FCAC’s criticism of the sales pitches and practices.
At the same time, a number of long-established credit counselling agencies, trustees, and financial advisory firms say they are receiving a growing number of consumer complaints about debt settlement services, particularly in Ontario.
The Canadian Association of Credit Counselling Services (CACCS) – along with its Ontario counterpart OACCS – announced that issues surrounding debt settlement services require urgent attention. Alerts in Ontario also have been raised by Campbell’s agency, as well as by Bankruptcy Canada, supported by professional trustees, and by BDO Canada, one of the country’s leading accounting and advisory firms. As yet, the Ontario Government has remained quiet about the matter even as lawsuits and threats of lawsuits between debt settlement companies themselves and at least one leading bankruptcy trustee proceed apace.
Campbell said that if nothing else, provincial lawmakers should scrutinize the debt settlement business model, which before being outlawed in the United States gained speed across the country just about time the housing bubble collapsed.
Interestingly, U.S. attorney and American Fair Credit Council (AFCC) President Robby Birnbaum had this to say about the history of debt settlement services: “When the mortgage meltdown happened in the U.S., a lot of people who were in the mortgage industry tried to figure out what their next business would be … They saw debt settlement as an option, and they saw it as being an easy conversion for their existing sales staff who knew consumers needed help because of the large amounts of credit card debt.
“At the time, there wasn’t a lot of regulation to protect consumers specifically in debt settlement. There were a lot of companies that very quickly jumped into the debt settlement space, marketing very aggressively, and it became a numbers game – how many consumers you could get to sign up with your business as quickly as possible. Thus came the pie-in-the sky promises, and other deceitful claims,” Birnbaum said.
Debt settlement companies proliferated in America at that time, but federal and state regulators soon took steps to outlaw practices in the interest of protecting consumers from offensive behaviour. The Federal Trade Commission (FTC) characterized the core element of the debt settlement service process as “an abusive practice,” according to a recent article in Maclean’s Magazine.
In Canada, a highly vocal critic of debt settlement services is Doug Hoyes, co-founder of Hoyes, Michalos & Associates Inc., Ontario’s largest independent personal insolvency firm. Hoyes took an interest in the matter after receiving negative reports about “debt negotiation” services from a number of people who came to his firm feeling they had been lead astray.
“One company featured prominently in the complaints that came to us,” Hoyes said. “People told me stories about how the company lead them to believe it would handle negotiations with creditors. But as time went on, creditors kept urgently contacting the people owing them money, who were left stressed and confused about the status of their debts. Only months later – with fees paid in large part or in full to the debt services company – did people realize that no debt negotiations had taken place,” Hoyes said.
This compelled Hoyes to conduct an unofficial, independent investigation of the debt services company. The findings brought into question the company’s office plant and employee commitment in Ontario, with suspicions that the offices merely constituted a shell for operations based out of the United States. For publishing his findings in a blog, Hoyes was threatened with a libel suit. But he continues to stand his ground, claiming full documentation of his original findings.
“Circumstances surrounding the offices have changed since I first reported on the issue, and I have addressed that fact publically. But I’m not backing off from what I first discovered. It pains me to think that debt settlement services with roots in the United States have entrenched themselves in Ontario, and are freely partaking of business practices the companies cannot legally pursue in the very country where they are, or were once, headquartered. The situation needs to be officially addressed, and soon.” Hoyes said.
While statistics concerning the efficacy of debt settlement services are not available in Canada, studies relied upon by the FTC and state regulators in America found that less than 10 per cent of consumers typically completed debt settlement programs, according to Maclean’s Magazine. Unofficial reports in Canada have put the figure as low as three per cent.
“The stories I’m hearing about these services are heartbreaking and maddening,” said Campbell. “Debt settlement companies frequently tell clients with debt problems to simply stop making payments on unsecured debts relating to credit cards, personal loans, lines of credit, and the like. Clients are advised to put their money aside in monthly savings and allow it to build to a point where a ‘lump sum’ settlement can later be arrived at with creditors at just a fraction of what is owed – in other words, a ‘pennies on the dollar’ settlement.
“But often as time goes on and the lump sum builds, creditors are left in the lurch, receiving no money in the framework of unreliable – or entirely absent – negotiations on the part of the debt settlement company, which is supposed to manage matters. The creditors continue to contact clients, and the clients grow confused because they think the debt settlement company is on top of the situation. But what really may be happening is the company is trying to buy enough time to get its up-front fees, which are taken off the top from the lump sum as it builds. After that, there is little incentive to help the troubled consumer. This is what happened in America, and now it is happening in Canada.”
Campbell continued: “We’re looking at situations where consumers are paying debt settlement companies thousands of dollars in up-front fees for the privilege of being hounded by creditors and in the end facing possible court action. At the same time, consumers see their credit ratings go up in smoke while still facing the original debt problem they thought would be resolved. There’s news of one case where a person owing $42,000 was charged $7,000 in up-front fees by a debt settlement company, only to be left with the full debt still owing and the $7,000 in fees long gone.” Campbell said.
Campbell emphasized that practices of debt settlement companies are distinctly different from those of not-for-profit credit counselling agencies – such as Credit Canada Debt Solutions. Though debt settlement companies can apply for and receive not-for-profit status in Ontario, the companies are not recognized for exemptions under provincial legislation.
“Unlike debt settlement services, credit counselling agencies in Ontario and across Canada offer something called Debt Management Programs, which take a thoughtful, realistic, longer-term approach to debt resolution. Our counsellors work face-to-face with people, helping them in steps all along the way – often for years – with full transparency of services and progress. I do not see this happening among debt settlement companies,” she explained.
“Moreover, credit counselling agencies are actively engaged in full-scale credit education programs, and devote major resources to the cause of financial literacy through myriad financial coaching and public awareness programs. To these ends, we work with many private and public sector partners, including major financial institutions, provincial and federal governments, educational institutions, and local communities. To my knowledge, debt settlement companies can make none of these claims,” she added.
Campbell said it’s becoming increasingly clear that the debt settlement services business model will not stand in Ontario, or anywhere else in Canada.
“As the Bank of Canada has pointed out, consumer debt in the country has reached unprecedented – even alarming – levels. Under the circumstances, we must all of us in the financial sector and government take extra special care to foster an environment that promotes fair and trustworthy business practices in relation to consumer debt.
“I believe it’s time for the Ontario government – and all governments across our land – to take up the task of protecting consumers from the questionable practices of debt settlement services. I have faith our governments will do so. Canada’s track record for protecting consumers is commendable, and often exemplary. I have no reason to believe that situation is going to change,” Campbell said.
In summarizing the controversy, she pointed out a quote from a recent opinion piece published by CACCS, of which Credit Canada Debt Solutions is a member organization.
“In matters of personal finance where the entire security of families and individuals often is at stake, integrity and respect for the well being of others is essential among those who would call themselves professionals in the debt services field.”
Feature News – Sidebar
Debt settlement services in Ontario leave people feeling cheated and angry.
TORONTO – There is the case of the retired Ontario automotive employee, married, his kids grown and having fled the nest. Over time he had managed to incur debts of more than $75,000. Not hard to do over a lifetime when you’re paying out a mortgage, buying new automobiles every few years, and raising kids and putting them through college. His debt represented a tough nut by most standards. Come retirement, keeping up with the payments and interest simply presented too much difficulty.
Then he saw a commercial on TV with an offer that seemed too good to be true. A debt settlement company proposed to help him reduce his debt to the point where he would pay just pennies on each dollar owed. So he called the company and arranged to let them handle the settlement, which he was told the company would negotiate with creditors some time later in the form of a lump sum payment – creditors would receive the lump sum based on savings he would place in his bank account. Meanwhile, per the debt settlement company’s advice, the man stopped all payments to creditors as he started to build his savings.
What he didn’t realize was that the debt settlement company – through a Power of Attorney agreement – would take fees from his savings up front, and at the same time do nothing to contact his creditors, who naturally grew concerned when the man stopped paying down his debts. It turned out the offer was, indeed, too good to be true.
Months of confusion, with the debt settlement company blurring issues whenever he called, resulted in the man paying out hundreds in debt settlement service fees before at last being presented with a court order from his bank concerning unpaid debts. At the same time, his credit rating took a nose dive. Now the man is left bitter and feeling cheated. Recently, he sought advice from an accredited, not-for-profit debt counselling agency and is considering the only option that may be left open to him – that of taking out a home equity loan on the modest house he has paid for in full, and that he had hoped would provide some security for his children when he and his wife pass on.
His is but one of many complaints that are surfacing about debt settlement services in Ontario, which also fall under the banners of debt reduction, debt relief, and debt negotiation in advertisements. In sales and telemarketing pitches, the companies promise debt savings of up to 90 per cent, a claim that most experts in the debt services field characterize as unrealistic, if not outrageous. Indeed, the Financial Consumer Agency of Canada (FCAC) not long ago issued a consumer alert about such promises, describing them as “pie-in-the-sky.” Meanwhile, the way the debt settlement process unfolds also is coming under fire.
More typical cases in Ontario have presented themselves.
One Ontario woman tells of circumstances that match the above retiree’s story almost word for word in terms of how the debt settlement process unfolded. Recently separated from her husband, the woman is a single mom and part-time employee facing a critical debt problem. After paying a debt settlement company almost $1,000 in up front fees to handle her case, she was surprised and crestfallen when her bank started calling with collection notices. She now believes her only option is to file for bankruptcy.
Another similar story is told by a Peterborough, Ontario, woman. After being guaranteed debt savings of 45 per cent by phone – with additional promises of possible savings as high as 70 per cent – the woman signed up for a debt settlement program to which she is scheduled to contribute almost $1,300 per month for 36 months. Given that debt settlement companies typically charge about 15 per cent in up-front fee against the total debt settlement, the woman can expect to pay out about $7,000 in up-front service fees over the first few months before building on the lump sum that would be offered to creditors down the road.
Well into the debt settlement program, the woman’s bank started contacting her about lapsed debt payments, and now she feels betrayed by the debt settlement company.
“Stories of this nature grieve and anger me,” said Laurie Campbell, one of Canada’s leading experts in the field of consumer credit and debt. She is CEO of the country’s largest and oldest not-for-profit credit counselling agency, Credit Canada Debt Solutions, headquartered in Toronto. As well, she is a former member of the federal Task Force on Financial Literacy and featured author of the blog, For the Love of Money (fortheloveofmoney.ca).
“Here you have debt settlement companies going after cash-strapped retirees and struggling single mothers in Ontario with big promises, only to deliver grief and chaos through suspect business practices. Is this the kind of business environment we want for our debt services industry in Canada, especially when consumer debt generally is at an all time high? I don’t think so,” Campbell said.
“It’s time regulators took a good, close look at debt settlement practices in Ontario. After all, for almost two years unfair and unacceptable debt settlement services have been outlawed in the United States, with certain practices in Canada now banned outright in Manitoba through regulations modeled on an existing Alberta law. Meanwhile, Nova Scotia lawmakers are on their way to enacting similar legislation. Enough is enough.” Campbell said.