If It Sounds “Too Good to Be True” — It Often Is!
By Rick Cullen, CMA, CIRP, Licensed Insolvency Trustee
You may have seen the ads before – Facebook has many similar little ads, all with slightly different promises, such as:
“We used a little-known Canadian law to erase $65,000 of debt in 36 months!”
“Credit card debt over $7,000? Qualify to reduce your debt by up to 60%”
“Canadian banks forced to forgive up to 75% of consumer credit card debt”
“New Canadian Debt Program Allows Canada Residents with over $10k in Debt to Eliminate 60% OF THEIR DEBT!”
You may have even seen one of several TV ads with a certain Canadian actor whose TV children suffered through some “growing pains”. He lays it on a little “thick” as spokesperson for a company which also offers to cut credit card debt “up to 70%”.
Debt settlement or debt negotiation is something that may work for some people. It is not as new or innovative as some of the ads suggest, but only recently did Debt Settlement companies become more common. With or without the assistance of a “middleman” like these Debt Settlement companies, it can usually lead to trouble.
Here is a typical scenario:
“I had been struggling with my debts for some time and it was causing grief and marital stress.
I saw one of those Debt Settlement ads on Facebook and it seemed like it was worth a try. The Debt Settlement people said they could save me up to 70% of my debt and they appeared to be very thorough and professional in my initial dealings with them. They promised to work for me and my husband and not for the creditors.
My husband suggested that it seemed ‘too good to be true’, but he reluctantly agreed that we should give it a shot. We desperately wanted to avoid bankruptcy and this seemed like a logical option to avoid that.
We signed some legal-looking documents including a Pre-Authorized Debit Agreement that would allow the Debt Settlement company to withdraw $500 per month from our bank account and put it into a special account under their control. As soon as there was ‘enough’ money in this special account, the Debt Settlement company would negotiate a settlement with each of our creditors. The Debt Settlement people said they would deal with our creditors and I wouldn’t have to worry about any more harassing phone calls. They even told us that, if a creditor calls, we should ‘update’ our phone number so that the creditor would only be phoning the Debt Settlement company.
Well, after a while things started to turn sour. The ‘thorough and professional’ assistance I witnessed at the beginning of the program was not maintained. I had made six payments of $500 to the Debt Settlement people, but my creditors were calling more than ever. My phone calls and e-mails to the Debt Settlement company representative I initially dealt with have gone unanswered for weeks. I called the phone number that the Debt Settlement people suggested I provide to the creditors, but the voice mail box was full! Yesterday, we received a notice from one of our creditors – it looks like they are planning to take us to Court.”
As a Licensed Insolvency Trustee I am effectively saddled with a title that strikes fear in the hearts of most people. Nobody wants to file for bankruptcy, but for some people it is the only practical option. My role is to make sure that people understand their options so that they can choose one that works best for their specific circumstances. To be frank, by the time most people come to see a Licensed Insolvency Trustee, their options have dwindled. Many times this is because they have tried so many other things to avoid bankruptcy that they no longer have any goodwill with their creditors… and they are forced into bankruptcy in order to avoid a wage attachment or other legal action.
The ads for the Debt Settlement companies play on people’s fear of bankruptcy and give them (often false) hope that they can avoid bankruptcy but still have the benefits of bankruptcy – such as being “allowed” to write-off a large portion of debt.
Many of the Debt Settlement websites are extremely mis-leading. Some sites with links from Facebook give the impression that the site is actually some form of “News” site that just happens to have a space to enter some personal information. Some of these websites may even be trying to trick people into providing personal information for the benefit of the website’s owners.
If you are curious/skeptical you can actually go to the Canadian Internet Registration Authority to find out what company actually owns any website ending with “.ca”. I’ve checked out several of the sites advertised on Facebook. I was surprised to find that many are owned by American companies.
Some of the internet websites for the Debt Settlement companies are very professional-looking. But that does not mean you should take everything they trumpet at face value.
How Debt Settlement Works (“kind of”)
These Debt Settlement companies are many and varied. Some even represent themselves to be law firms. Whether they even have physical offices in Canada is subject to debate. But they have one thing in common – the business model they use has been banned by the Federal Trade Commission in the United States. According to a March 2012 article in MacLean’s Magazine two Canadian Provinces (Alberta and Manitoba) have also passed legislation to protect consumers from these practices.
The basic idea is that you can offer that a creditor accept a lump sum settlement rather than paying the bill in full over a period of time. Some creditors will even suggest the lump sum settlement as a way of closing the file sooner. This is usually offered through collection agents who get paid only if they collect some money; or who may have even purchased the debt at a huge discount.
The Debt Settlement companies have latched on to this logic as a way to make money for themselves. They will offer to “negotiate” the settlement with your creditor(s) on your behalf. But since most people don’t have the required money set aside for the lump sum settlement, the Debt Settlement company will “help” you by offering a “special” bank account in which you can deposit money until you have saved enough for the Debt Settlement company to negotiate with your creditors.
It may be clear in the Agreement you are asked to sign – or it may be hidden in the “fine print” – but generally speaking, the Debt Settlement company will pay themselves a hefty service fee before they even make the Debt Settlement offer to your creditors. I have actually seen a few cases in which the Debt Settlement company has refunded money to the individual who had deposited it with them – only after the Debt Settlement company took their service fees for Debt Settlement plans that did not work.
In the meantime, as in the Typical Scenario referenced above, most creditors will not have the patience to wait for you to save up for a lump sum settlement. Practically speaking, the only way the Debt Settlement companies can have success stories is if the creditors involved are too lazy or “stunned” to take collection action before the lump sum settlement is proposed by the Debt Settlement company.
Check Out Your Options – Before It’s Too Late
I am not saying that making a lump sum settlement is a bad idea. But I have yet to see a Debt Settlement company without “horror stories” associated with it. I can’t comment as to whether the testimonials and good news stories available on their websites are true – but a little skepticism is a good thing. A federal government agency (Financial Consumer Agency of Canada) that provides guidance to Canadian consumers has a concise commentary on the dangers of Debt Settlement.
Keep in mind that anything a Debt Settlement company can do for you, you can do for yourself. The hardest part of debt settlement is saving up the lump sum settlement. There is no magic to the “negotiation” that the Debt Settlement company offers to do; it is the proverbial “bird in the hand” of offering less money, but offering the money up front. The fact that the business model of the Debt Settlement companies has been banned in the United States -and in at least two Canadian provinces- speaks volumes. The Debt Settlement companies are doing things that you can do yourself – and charging you a hefty service fee for their assistance. They also hold on to your payments until you have enough saved for the lump sum settlement. Doing it yourself would not be easy, but at least you would not be trusting your money with a third party and being left without protection from your creditors while you are waiting to see if the “scheme” will work.
We at Janes & Noseworthy do urge people to thoroughly investigate their options before any decision is made. Unfortunately, I have seen several cases in which a Consumer Proposal should have been the logical option as an alternative to bankruptcy. But because time (and money) was effectively wasted on a Debt Settlement company’s failed “scheme”, any goodwill that the creditors may have had has been lost… and bankruptcy becomes the only practical option.
We at Janes & Noseworthy pride ourselves on providing consumers with independent advice to allow the consumer to make an informed decision. There are times when the best option is something that we cannot assist with. I don’t like to be melodramatic, but I can look my kids in the eyes and tell them that I help people find a fair solution to their financial problems. With all honesty, I’m not so sure the people that work for Debt Settlement companies can say the same thing.
Rick has been helping individuals solve their financial problems for over 20 years.
He is a Certified Management Accountant (CMA), and a Chartered Insolvency and Restructuring Professional (CIRP). He is licensed by the federal government to administer bankruptcies and consumer proposals (and he abides by Ethical Standards of Professional Practice that require him to make sure potential clients understand all of the options available to them).