Debt settlement is a term that’s been heard more and more the past few years by consumers. With debt settlement agents advertising heavily it’s no surprise. As Licensed Insolvency Trustees we’re often asked “what is the difference between debt settlement and a Consumer Proposal?” Although the two may sound very similar, they’re in fact two very different processes – read on as we explore three key distinctions:
Who’s handling the debt?
Advertisements can be misleading. Many debt settlement agents appear to indicate a claim of government endorsement, but the fact is there is only a single government-endorsed debt advisor in Canada – a Licensed Insolvency Trustee. Licensed Insolvency Trustees are specifically licensed, regulated and empowered by the government to assist Canadians with all of their debts, including amounts owing for taxes and student loans.
Licensed Insolvency Trustees must adhere to a strict code of conduct and rules of professional practice and are empowered to apply government legislation to help individuals get out of debt. Conversely, unregulated debt agents are often located out of country and have little to no accreditation process required in order to operate.
How much debt is settled?
It is common for the amount of debt that will be repaid under a Consumer Proposal to be reduced drastically, in full settlement of the debts owed. Reductions of up to 70-80% are typical and all interest is automatically frozen by law. In order to successfully settle debts using a debt settlement agent, typically a person needs to pay a lump sum settlement amount to each individual creditor. There is no set rule on how much the debt may be reduced, and because debts are often settled one at a time, this can mean the continued accrual of interest and escalation of collection on the other accounts in the meantime.
It’s important to note that there are several types of common creditors that will not work with a debt settlement agent. Government bodies collecting on debts such as income tax, student loans or ICBC will not accept debt settlement agency offers – these types of debts can only be reduced using a Consumer Proposal filed by a Licensed Insolvency Trustee.
What fees are involved?
Provincial legislation aiming to create rules to safeguard consumers working with debt settlement is relatively new in the Province of BC. It remains to be seen whether out-of-province and/or out-of-country debt settlement providers continue to operate with up front fees and no guarantee of success. By contrast, Licensed Insolvency Trustees offer free consultations, with no referral required; and fees and administrative costs involved in filing a Consumer Proposal are dictated by federal law. There is no additional cost to the person making the Consumer Proposal above and beyond what is being offered to their creditors under the terms of the Consumer Proposal.
The world of debt professionals is often overwhelming for people who are facing major financial decisions and challenges. We believe it is imperative for individuals seeking assistance to receive all the information that is relevant to their situation so they can make informed decisions about their options – without having to pay for debt advice!