The total debt per consumer in Canada increased 5.6% in the last year -Source. After the recent FTC ruling in the United States (which prohibits debt settlement servicers to charge a fee unless a debt is altered, restructured, or settled), it’s no surprise that many companies are looking elsewhere for less a regulated turf. In the U.S., the debt settlement industry was regulated primarily because of deceptive marketing practices. Many companies were misleading the consumers and making implied promises to reduce their debt. To make matters worse, an upfront fee anywhere from 4-6% was nothing out of the norm.
As we take a look at the debt settlement market in Canada, we can already see some patterns. After doing a simple Google search for “Debt Settlement In Canada”, I stumbled across this website:
There are a few things on this website that raises some red flags. First, they claim that they can get you debt free in 3 years. Implied promise? They also claim that they can reduce your credit cards by 40-60%. What if some creditors won’t work with debt settlement companies? I’ve seen some cases where creditors will only offer a 20% reduction (Discover). In 2009, the Texas Attorney General filed a lawsuit against CSA (Credit Solutions of America) for their deceptive marketing practices. According to the state, “…CSA purported to offer a debt settlement service that would eliminate its customers’ unsecured debt in as little as three years.” -Source
Due to the recent influx of debt settlement companies in Canada, the BBB recently issued a warning about debt settlement companies -Source. I’m not saying debt settlement is a terrible approach to pay off your creditors. As a matter of fact, debt settlement can be a very effective way to pay off your creditors a fraction of what you owe and finally become debt free. So how do you know which debt settlement company isn’t here to just take your money?
1. Transparency- Make sure they are fully disclosing all their fees. What are their monthly fees (if any). Are there any escrow account fee?
2. Oversell- Many debt settlement companies will “sugar-coat” the program. They will tell you everything you want to hear and make the process sound painless. If they are only telling you the benefits of the program, they most likely aren’t the most reputable company around.
3. Licensed & Regulated – In British Columbia, companies must be licensed by the Consumer Protection BC. Also check with the BBB to see their track history.
4. Give me Proof- If a company is stating an average settlement rate of 30%, ask them to validate their claims by showing proof of successful settlements in the past
5. Cancellation Policy- If the company is taking advance fees; always check to see what their cancellation policy is. Be wary of companies who have a strict cancellation policy if no service is provided.
Lastly but not least, always check to see what your other debt relief options are. As mentioned, debt settlement is only effective for those who are best suited for it. There’s a more detailed article here that will teach you how to choose the best debt settlement company. Before enrolling with any companies, be sure to check that they are always giving you the right guidance.
Author Bio: Kevin is a writer for www.debteye.org. Debteye is a place where you can get unbiased opinions on anything related to personal finance. Kevin previously owned a debt settlement company prior to joining the DebtEye team. He is a a certified debt specialist and also works with credit counselors across the nation
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Item 5 should not arise if you avoid paying upfront fees.
I always thought we Americans have more debt problems than anywhere in the world.
Yes, you are correct. Obviously if a debt settlement company doesn’t charge an upfront fee, you should be able to withdraw your escrow account at any time. Most companies in Canada are still charging upfront fees before any work is done.
Upfront fee with no Guarantee doesn’t make sense. Why not use that fee to reduce the debt instead.
Calgary Realtor- You’re absolutely right, and I agree with you. Most debt settlement companies have not found a way to sustain operations without charging an upfront fee. It can take about 4-6 months before any fees can be collected.
Thanks for the mention. Just to be clear, Consumer Protection BC licenses debt poolers only, which is not the same as the types of companies you mention above. There are many terms being used these days which can be confusing for consumers.
We have posted some information on our website about debt solution options. Know more about Debt Pooling: http://bit.ly/fYEe1L and a consumer case study that has tips: http://bit.ly/hFHH0Q.
Before anyone settles their debt or files for bankruptcy there is an entire process that everyone should go through because either one of these options are long processes with lasting effects. I always encourage people to do the following:
* Before you make a decision always use simple math to add up your monthly income and expenses, to know where you stand. This is the beginning of budgeting.
* Afterward, find opportunities to increase your income and/or reduce your expenses. It’s best to avoid filing for bankruptcy as much as possible.
* If you are worried about your situation, take a bankruptcy evaluation test. There are many of these online
* Lastly, contact a debt settlement company or a bankruptcy trustee near you for a free consultation.
Good luck everyone!
@Syndic – Most people who are considering debt settlement or bankruptcy are already 2+ months behind on their bills. I always encourage all my readers to make a simple budget and try to find an additional source of income. Unfortunately, once you’re knee deep in debt, it’s extremely difficult to climb back out
In the u.s. i have noticed alot less advertising for debt settlement. It was getting pretty bad for a while, with companies using advertorials with obama’s picture in television ads. It was really only a matter of time before the regulation hit them hard.
Debt settlement isn’t always bad, but their are alot of companies that don’t provide good results for their customers
@Ross – I’ve noticed a lot less advertising in the US as well. This is due to the new Telemarketing Sales Rule. Lead Gen Companies are not allowed to state any percentage of savings or imply that it’s part of a government program. But I agree, Debt Settlement isn’t always bad, it just needs to be fit for the appropriate people.
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It’s all about looking for the best or a good debt settlement company. It’s always good for consumers to do their home work and find out from other consumers. I know of many consumers who have benefited from debt settlement.