Credit counseling is a term with multiple meanings. In this interview, Gareth explains the difference and comments upon how it fits in with debt help advice in general.
Question: It’s common that people struggling with debt consider credit counseling as an option. Does your company offer credit counseling?
Gareth: The term has multiple uses and we have to differentiate between them. Yes, my company offers credit counseling. We work with people on budgeting and getting their finances in order through counseling sessions during bankruptcy or consumer proposal. These are required sessions.
Then there are credit counselors who look to help people by making a deal with their creditors. These deals are really informal arrangements that are non-binding with their creditors, so the debtor has no legal protection.
Question: What’s the downside of a non-binding arrangement with creditors?
Gareth: The problem there is you need everyone to play ball and if some creditors don’t want to partake in the plan, they’re not bound by it. In many cases, you can end up ‘herding cats’ in terms of getting your creditors to agree to one particular plan.
On the other hand, filing a consumer proposal through a trustee means all your creditors are bound by the proposal. They’re legally bound to accept it if 51% of your creditors vote in favor of it. So, there may be one creditor that votes ‘no’ (even if it’s Revenue Canada) – but if there are less than 51% that are voting no, then the arrangement is binding on all creditors.
The other major advantage of a consumer proposal versus a credit counseling plan is that you can compromise your debt and that can mean substantial reductions in what you owe. It can take as much as 80% off your total debt and there’s no interest during your proposal period.
With credit counseling, you need to get an agreement from all those creditors that are involved. You pay them, basically in full for some period of time, with perhaps a little reduced interest. But it doesn’t fit for a lot of people.
Question: It effectively doesn’t reduce the debt – just supports you as you repay the amount in full?
Gareth: That is correct. And to be honest, there are some situations that work for some people in that instance. Perhaps it’s because they just are very poor at budgeting and they do have the means to pay their creditors. But for a lot of people, it just doesn’t add up.
Question: There are companies on the internet that frequently turn up in search results when you search for ‘debt help’. They claim that they’re non-profit and effectively pose as the white knight that is going to save you. Some people think the words ‘non-profit’ means they are safer and that they aren’t a business that’s going to take advantage of you to boost their revenues. Have you a comment about that?
Gareth: Yes. That gives them a little bit of a positive look when they say they’re non-profit, but the fact of the matter is the employees there and the people that run these agencies get paid. They’re not doing it for free – they take salaries. There may be nothing left to the bottom line after the salaries are paid.
Question: So, how do they get paid?
Gareth: They do charge fees and they do take salaries.
Question: So what you are saying is that in a credit counseling scenario, you are paying a fee for the support that you’re receiving, which may only be about better budgeting skills. But you’re more or less going to be paying the entire sum and things could change even as you’re in a credit counseling relationship, a creditor could decide to get really nasty or aggressive and take action against you.
Gareth: That’s correct. They can change their minds and take action. It’s really just an informal arrangement that has, perhaps, a little more credibility than you just asking your creditors to pay over time without interest or lower interest. They don’t usually agree, but sometimes a credit counselor may be able to make some sort of deal. But still it is not binding. There’s no legal process to it and you’re at the whim of the individual creditors to whether it works or not.
Question: So even though they may have an AA plus rating and a lot of positive reviews at services like the Better Business Bureau – that these are the conditions that you’re walking into. There’s nothing binding to any arrangement and you’re going to be paying most of the owed amount?
Question: There is one more question: Credit counseling organizations are not licensed with the government, so there’s no oversight from the government?
Gareth: No, there is not. There’s no licensing.
Question: No one regulating?
Gareth: That’s correct. It’s amazing how many misconstrued ideas there are about what a consumer proposal is, what a bankruptcy involves, and the pros and cons of each option.
I think it’s important to contact a licensed trustee to find out what your options are. We are the only body licensed and regulated by the Canadian government that has access to all the debt relief options. The more information you have the better decision you can make.