| What Credit
Counselors are and how they operate
More and more credit counseling firms have opened up for business
in Canada in the last ten years, fueled by the debtors' desires
to do almost anything to avoid going bankrupt. Credit grantors,
in an attempt to dissuade people from filing bankruptcy, have also
joined in with financial support of "non-profit" credit counseling
companies.
Credit counselors have you make regular payments under a debt repayment
plan, to them and they in turn make payments to your creditors.
Credit counselors get paid by holding back a certain percent of
your payments for their fees.
There are two types of credit counselor; independent credit counselors
and ones who advertise as "non-profit". The two types of credit
counselors have similar services. The main difference is that the
"non-profit" Credit Counseling firms get funding from various credit
grantors such as banks, credit card companies, and department stores.
Many people do not fully understand all the ramifications involved
such as:
- Effect on your credit rating.
The credit bureau will record that a debt
repayment plan is in place. Three years after the debt repayment
plan is satisfied the record will be removed from the credit bureau.
- Are your payments too high?
Your payments should be high enough to
significantly reduce your debt but not so high that you have "no
life". If you do not have money left over at the end of the month
to pay for the small pleasures in life you may find that you end
up defaulting on your payments to the credit counselor.
- What should your monthly payments
be?
We find that Industry Canada Standards
on required payments in a bankruptcy are quite accurate in establishing
the maximum payments that should be made in a monthly payment
schedule set up by a credit counselor. The standards for 2006/07
are:
One Person - 50% of monthly take home pay in
excess of $1,797/mo;
Two People - 50% of monthly take home pay in
excess of $2,237/mo;
Family of Three - 50% of monthly take home pay
in excess of $2,750/mo;
Family of Four - 50% of monthly take home pay
in excess of $3,339/mo.
Family of five - 50% of monthly take home pay
in excess of $3,787/mo;
|
Credit
counselors versus trustees in bankruptcy |
Are there advantages for a person using the services of a credit
counselor rather than a trustee in bankruptcy?
Let’s consider the facts and then you decide.
Keep in mind that bankruptcy trustees such as David Reynolds and
Associates Inc. are licensed by the Federal Government and subject
to a code of ethics. Also be aware that bankruptcy trustees are
the only debt professionals who can provide a full
range of financial solutions.
Furthermore, bankruptcy trustees are the only debt
professionals who can guarantee that you will get protection from
your creditors.
Remember, that your objective is to get out of debt and re-establish
a good credit rating in an honorable and cost-effective way, as
quickly as possible.
| Key Considerations |
Credit Counsellors |
Trustee in Bankruptcy or a Proposal |
|
When will my debt be erased from the credit
bureau? |
3 years after the entire debt is repaid. |
Bankruptcy: 6 years after the discharge**.
Proposal: 3 years after the Proposal is satisfied (which is
usually a portion of the total you owe).
|
|
What about costs? |
Credit counsellors hold back a portion of
the payments you make for their fees. |
Fees in almost all bankruptcies and in consumer
proposals are set and regulated by the government. |
|
Which is cheaper? |
|
A bankruptcy or a proposal is usually cheaper.
|
|
Can income tax debt and other CRA debt be
included and eventually written off? |
No |
Yes. Almost all debts can be written off. |
|
Once I agree to a debt repayment plan with
a credit counsellor or file for bankruptcy or a proposal,
will my creditors, including CRA, be forced to stop all actions
against me including trying to collect money; phoning me;
garnisheeing my wages or repossessing my assets? |
No. They will not be forced to stop but the
creditors, that agree to a plan, will voluntarily stop collection
calls and other actions. In other words, if a creditor does
not agree and sues, you are not protected. |
Yes. By law, all actions must cease and garnishees are
stopped or prevented once a proposal or bankruptcy is filed.
Collection calls will stop once the collector knows you
have filed a bankruptcy or a proposal.
|
|
Which will give me a better credit rating?
|
|
In most circumstances a bankruptcy or proposal
will give you a better credit rating because it will deal
with your debt more quickly thus allowing you to start to
rebuild your credit sooner. |
|
Can I pay back less than I owe and have
the rest of the debt erased? |
Only in rare circumstances. |
Yes. |
|
What training and education do credit counsellors
and trustees in bankruptcy have? |
There are no set standards.
Please refer to this report on credit counsellors by Canadian
Consumer Affairs. The report raises concerns about poorly
trained credit counsellors and the conflict of interest
“non profit” credit counsellors have because
they are funded by credit grantors.
|
Almost all trustees have both an accounting designation
and a university degree. In addition, all must complete
and pass a rigorous three-year bankruptcy and law course
and be investigated by the RCMP before being granted a trustee
licence.
Ongoing professional development is mandatory.
|
|
Are they regulated? |
No |
Yes, by the Federal Government. The government
performs regular audits on each trustee office.
Also stringent codes of ethics are in place by the Bankruptcy
and Insolvency Act, the CAIRP and the accounting bodies.
|
|
What kinds of debt repayment plans are offered?
|
Payment plans, where monthly payments are
made which are distributed to the creditors. |
Bankruptcy and two kinds of Proposal. |
|
Is Government approved Credit Counselling
offered? |
In some cases. |
Yes. Government tested and approved counsellors
provide credit counselling in all bankruptcies and consumer
proposals. |
|
What if I have a dispute? |
There is no dispute mechanism in place. |
You have the right to have your dispute mediated. |
** First time bankrupts are entitled to a discharge
after nine months.
CAUTION!
Some credit counsellors are ethical but
It's an unregulated industry that has some unethical companies
that only want your money.
If you have some concerns about the advice
your credit counsellor has given, you have the option of getting
a second opinion:
1. Trustees will give you a free consultation
and there's no obligation to use their services.
2. Insolvency lawyers will charge you for
1 – 1 ½ hours of their time but it will be money
well spent for your peace of mind and potential savings of
thousand of dollars.
Here are some things to be aware of when
dealing with credit counsellors:
Credit counsellors that advertise as "non-profit"
are funded by banks, credit card companies and other credit
grantors and therefore have a conflict of interest. Their
mandate is to steer people away from going bankrupt or filing
a proposal. Be skeptical and you decide if they are giving
the best advice for you and your family or the best advice
for their sponsors the banks, credit card companies and other
credit grantors.
Setting your monthly payments
too high is common. We find that the Industry Canada
Standards on required payments in a bankruptcy or a proposal
are very accurate in establishing the maximum payments that
should be made.
Setting a payment plan for an extended
period of time such as five or more years is common.
This is almost always a very bad idea for you. Most trustees
in bankruptcy feel that the term should be a maximum of three
to four years. It is a stipulation in the Bankruptcy and Insolvency
Act that the term for a "Consumer Proposal" be no
more than five years. Terms longer than this have a very high
failure rate, because people cannot see a "light at the
end of the tunnel".
Some credit counsellors may
try to mislead you by saying that their services will give
you a better credit rating than a bankruptcy and
that a bankruptcy or a proposal will ruin your credit rating.
Don't be fooled! Any kind of a payment plan or bankruptcy
or a proposal will be flagged by the credit bureau and will
be a negative on your credit bureau report.
Some credit counsellors may
try to frighten people into using their services by saying
how terrible bankruptcy is. Don't be misled by these
bankruptcy myths. |
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