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Take a Buyer Beware Approach to Ontario's New Debt Settlement Laws

06/05/2015 07:54 EDT | Updated 06/05/2016 05:59 EDT

On July 1, 2015 the long awaited legislation regulating debt settlement services in Ontario comes into force. There are three main features of this new legislation that will impact Ontario consumers (with a ripple effect across the country).

First, debt settlement companies and collection agencies will now be regulated under the newly named Collection and Debt Settlement Services Act.

Companies providing debt settlement services in Ontario must be licensed under the Act, with a few exceptions. Not-for-profit credit counselling agencies acting as charitable foundations (as defined by the Canada Income Tax Act), bankruptcy trustees (who are already licensed by the federal government), and lawyers are excluded from these licensing requirements.

Most importantly, fees will be capped under the new Act and up-front fees are prohibited. Debt settlement companies will only be able to charge a maximum amount of 15 per cent of payments (10 per cent for a lump sum) plus a $50 set-up charge and they will not be allowed to charge those fees until payments have been made to the creditor.

So what's good in all these changes? The biggest potential benefit to consumers will be the moratorium on up-front fees charged for no real service provided. Up until now, debt settlement companies kept the first several thousand dollars in payments by the debtor to cover their fees, before they even contacted the client's creditors. Not wanting to wait, creditors just sent accounts to collection or pursued legal options like a wage garnishment anyway. The individual hoping for debt relief found themselves out of pocket thousands of dollars and, in the end, was often left with even more debt than before when you consider all the interest and potential legal costs that had accumulated. According to the Canadian Bankers Association only 10 per cent of proposals received from debt settlement companies are accepted and it's estimated that only three per cent are successfully completed.

Those are pretty low odds. So the question is, will the success rate improve as a result of Ontario's legislated changes? The truth is probably not.

While debt settlement companies must be licensed under the Act, there is no provision legislating minimum requirements for education, training or codes of conduct. Bankruptcy trustees, licensed by the federal government under the Bankruptcy & Insolvency Act, must go through rigorous training and an extensive examination process before being licensed to provide debt relief services in Canada. Reputable credit counselling agencies are accredited through various provincial or Canadian associations and the better agencies ensure that their individual counsellors are appropriately trained.

Given the lack of standards and training, it is unlikely that any new form of debt settlement company will be able, or willing, to provide complete advice to consumers looking for options to eliminate their debt. In almost all circumstances where an individual has significant debts, a consumer proposal remains a better debt settlement option over more informal debt settlement programs.

Through a consumer proposal, filed under the Bankruptcy & Insolvency Act, debtors receive protection from creditors' legal actions during the process, even while negotiating the terms of their offer. All creditors must participate on an equal playing field (one vote for every dollar owed) and even large creditors are required to be reasonable given the alternative: the debtor potentially declaring bankruptcy with a resulting decrease in realizations for the creditor.

More importantly, fees for bankruptcy trustees administering consumer proposals have always been limited and legislated under the Bankruptcy & Insolvency Act. In case you are still skeptical, it might interest you to know that 99 per cent of consumer proposals filed by my firm, Hoyes, Michalos & Associates, are accepted by creditors. It is highly unlikely that informal debt settlement companies will come anywhere near that figure.

My last concern is the potential conflict of interest that may exist between the debt settlement provider and their "client." Under the new rules, collection agencies in Ontario can now become debt settlement service providers. Where a collection agency is working on behalf of a creditor to collect on a now outstanding debt, they can "help" the debtor make an informal proposal to that creditor, or any other creditor, to settle their obligation for a lesser amount and collect a fee. Do these collection agencies have two clients - both the creditor and the debtor? Will they collect fees from both and for whom will they negotiate the best deal?

All of these are questions which are left unaddressed by the soon to be enacted amendments to the debt settlement laws in Ontario. So while the excessive abuses may decline, consumers looking for debt settlement options should still take a "buyer beware" approach and ensure they research all of their options.

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