Getting help from a credit counsellor

The Financial Consumer Agency of Canada is warning consumers to be cautious when looking for a company to help them pay off their debt or repair their credit.

If you can no longer keep up with your debt payments and are thinking about getting help to pay them off, remember:

Companies or agencies can’t guarantee they will solve your debt problems

Some companies or agencies may claim they can solve your debt problems quickly. They say they can negotiate a deal with the companies you owe money to so that you will only have to pay back a fraction of your debt. You may still need to pay fees even if your creditors refuse to negotiate or make a deal to settle your debt. You could end up in even more debt than you were in before.

Companies or agencies can’t quickly and easily fix your credit score

Some companies or agencies may claim that they can quickly and easily fix your credit score. It’s impossible to change or erase information that’s part of your credit history, unless information is inaccurate. Improving your credit score will take time. You have to show your creditors that your habits have improved and that you are paying back your debt on time.

Some companies may also offer you a loan suggesting it will help repair your credit score. The company may claim that making timely payments on this loan will repair your credit. When you sign up for this type of loan, you may never actually receive any money because the company will tell you the loan amount will cover its services or programs. Instead, you make regular payments to the company to repay the loan.

Be aware this type of loan usually has a high interest rate. This service does not help eliminate any of your other debts. You are required to keep making your payments on any other debts you owe. You may only be left with more debt and no change to your credit score.

Companies should not encourage you to take out a high-interest loan to pay off your debts

Some companies or agencies may encourage you to take out a high-interest loan to pay off your debts until they can negotiate a better deal with your creditors or settle your debts using another debt repayment option such as a consumer proposal. Be aware that some companies make money from fees, set-up costs and interest. You may still be carrying debt after the process is over.

If the company claims that they will file a consumer proposal on your behalf, be aware that only a qualified licensed insolvency trustee can help you with a consumer proposal or bankruptcy. Their advice on these two options is typically free. Licensed insolvency trustees are licensed by the federal government’s Office of the Superintendent of Bankruptcy.

It’s illegal for the company to claim that they can manage your consumer proposal or bankruptcy if they do not employ a licensed insolvency trustee.

Companies or agencies may misrepresent services they offer as being part of a government program

If you’re not sure a company is part of a government program, contact the government department or agency that is responsible for the program. Ask them to confirm that the company’s representation is genuine.

Before you sign up for any debt repayment program, we recommend that you do the following:

• Get advice from different reputable sources such as a financial advisor, an accredited credit counsellor or a licensed insolvency trustee.
• Ask questions, compare your options and make sure you understand what you are getting into.
• When seeking information on insolvency options, ask the question “Are you a licensed insolvency trustee?” Only a licensed insolvency trustee can provide access to options such as consumer proposals and bankruptcies.

Finding a credit counselling agency

Both not-for-profit organizations and for-profit companies offer credit counselling services.

Do your research to find a trustworthy organization and a qualified counsellor. Make sure you know what services they offer and how much it will cost.

Research the agency’s reputation

Make sure that the agency is in good standing with a provincial or national association. These associations require members to maintain specific standards of practice.

Find agencies through these associations:

• Credit Counselling Canada
• Canadian Association of Credit Counselling Services
• Canadian Association of Independent Credit Counselling Agencies
• Ontario Association of Credit Counselling Services

In Quebec, budget and credit counselling services are often offered by Associations coopératives d’économie familiale (ACEFs).

For more information, visit:

• Coalition des associations de consommateurs du Quebec (CACQ) (in French only)
• Union des consommateurs (in French only)

Find out if there have been any serious or unresolved complaints about the agency. This includes late payments to creditors or false advertising.

Check for complaints about the agency with:

• the Better Business Bureau
• l’Office de la protection du consommateur (Quebec)

Look carefully at the agency’s advertising

Be cautious. If it sounds too good to be true, it probably is.

Some agencies or companies may claim or misrepresent that they:

• can solve your debt problems quickly for only a fraction of your debt
• can quickly and easily fix your credit score
• offer services as being part of a government program

Keep in mind:

• you may still need to pay fees even if your creditors refuse to negotiate or make a deal to settle your debt
• it’s impossible to change or erase information that’s part of your credit history, unless information is inaccurate
• improving your credit score will take time
• you have to show your creditors that your habits have improved and that you’re paying back your debt on time
• agencies or companies should never try to coerce you into using their services (be wary of any credit counsellors doing this)
• if you’re not sure a company is part of a government program, contact the government department or agency that is responsible for the program
• ask them to confirm that the company’s representation is genuine
• Find a government department or agency:
• Contact a federal department or agency.
• Contact your provincial or territorial consumer affairs office

Find out about the agency’s services and costs

The services offered and the fees charged by credit counselling agencies can vary greatly.

Ask the following questions about services to help find an agency that is right for you:

• Is the first consultation free
• What services does the agency provide
• Will the agency provide you with a written proposal describing how they will help
• What type of support will the agency give to help you to improve your money management skills
• Will the agency provide you with monthly statements of payments

Ask about the counsellor’s qualifications

Credit counsellors aren’t legally required to have any specialized training. However, many credit counsellors have some training.

Ask about the counsellor’s qualifications, including:

• education
• specialized training
• years of experience

Common specialized training may include:

• Accredited Financial Counsellor Canada designation, offered by the Ontario Association of Credit Counselling Services
• Insolvency Counsellor’s Qualification Course, offered by the Canadian Association of Insolvency and Restructuring Professionals

The purpose of the training is to provide counsellors with the unique skills required to support consumers in the areas of personal finance, consumer credit, money management and counselling.

Are you comfortable with the credit counsellor

If the credit counselling agency seems to fit with your needs, ask to meet with a credit counsellor. This way you can see if it’s a good match. No reputable credit counselling agency will charge for the first meeting.

Make sure that you trust the counsellor’s opinion and judgment. If you’re not comfortable, ask to switch to another counsellor.

Debt Management Plans

You can sign up for a debt management plan through a credit counsellor.

A debt management plan is an informal proposal your credit counsellor makes to your creditors on your behalf. It allows you to consolidate your debts into one affordable monthly payment. In some cases, you may not have to continue to pay interest on your debt. You’ll usually have to repay 100% of your debts.

Before you enroll in a debt management plan, you’ll meet with a credit counsellor. The credit counsellor will assess your situation, help you make a budget and give you some tips about dealing with your debt.

If you decide to sign up for a debt management plan, a credit counsellor will contact your creditors on your behalf to ask if:

• they will reduce or eliminate the interest rate or fees on your debts
• they will extend the period of time which you have to repay your debt

A debt management plan is a voluntary agreement between you and your creditors. Creditors who choose not to work with you on a debt management plan may continue to contact you or garnish your wages or take money from your bank account if you have a bank account with them and you owe them money.

If some creditors don’t accept your debt payment plan, your credit counselling agency will usually suggest you make payment arrangements directly with those creditors.

If your creditor accepts the payment terms of your plan, you’ll then make regular payments to the credit counselling agency and the agency will use your payments to pay off your creditors according to the plan.

Keep in mind that creditors can still use collection agencies to recover the money you owe. Your credit counsellor can ask creditors to stop, but they have no legal power to make them stop.

There are also other options if you have serious financial problems. You may consider working with a licensed insolvency trustee. A trustee is licensed by the federal government’s Office of the Superintendent of Bankruptcy to handle debt problems under consumer proposals and bankruptcies. Both are legal processes you follow to pay off your debt.

When you meet with trustees, they will first assess your financial situation. They will typically provide this financial assessment for free. If it suits your financial situation, you may then consider working with them for a consumer proposal or bankruptcy.

What to consider before you sign up for a debt management plan

Think about the following before you enroll in a debt management plan.

Will it save you money

A lower interest rate will save you money. But the credit counselling agency may charge you a fee for its services.

Compare the credit counselling agency’s fees with what you’d save in interest on the debt management plan. If the agency’s fees are more than what you’d save, you may be better off seeking help from other sources.

Be aware that some credit counselling agencies may promote a debt management plan over other options, because they make money from creditors by getting a percentage of the debt that they recover.

You may consider other options, such as a consumer proposal or even bankruptcy. A licensed insolvency trustee can typically offer you free advice on these two options. Credit counsellors are unable to offer consumer proposals or manage bankruptcies.

Find a licensed insolvency trustee.

How much it costs

Make sure you know what fees they charge. These can include:

• initial set-up fee
• monthly maintenance fee
• application fee
• membership fee
• upfront fee or fee for each creditor

Ask if they will reduce or eliminate fees if you can’t afford to pay them.

The type of debts covered

Debt management plans may not cover all types of debt. You’ll need to continue to make payments on any debt not included on your debt management plan.

They usually cover debts, such as:

• credit cards
• lines of credit
• unsecured loans

They usually don’t cover debts such as:

• Canada Revenue Agency debt
• Quebec Revenue Agency debt
• student loans
• car loans
• mortgages

Debt management plans usually don’t cover secured debts because the company you owe money to could take your asset if you don’t make payments.

Make sure that the credit counsellor explains exactly which of your debts the program will cover.

What will happen to your credit report

Entering a debt management plan will have a negative impact on your credit report. Your credit score will decrease. There will be a note on your credit report that you’re making regular payments on your debts through a special arrangement with a credit counsellor.

This information will stay on your report for two years after you pay your debts. During this period, anyone you allow to access your credit report will see this information. This includes creditors, landlords and employers.

While a debt management plan may have a negative impact on your credit report in the short-term, in the long-term it may help you improve your credit report faster because you’re making regular payments and reducing your debt.

Find out how long information stays on your credit report.

Are you able to use credit

You’re often able to use credit during a debt management plan, however, credit counsellors will usually recommend you don’t take on any new debt. The counsellor may ask you to sign a disclosure statement to confirm you’ll not get or use credit.

After you’ve completed your debt management plan, a good way to rebuild your credit is to apply for a secured credit card.

Find out how to apply for and use a secured credit card.

Understand your responsibilities

When you’re following a debt management plan, you must make sure to:

• disclose all your debts
• make your payments on time
• not take on any additional credit

If you don’t make payments on time, your debt management plan may be cancelled. Make sure you know what costs are involved and what services you’ll receive. Before making a decision, talk to different credit counsellors and licensed insolvency trustees to compare your options.

Review your agreement carefully

If you decide to sign up for a debt management plan, carefully read the agreement before you sign it. Make sure you know what costs are involved and what services you’ll receive. Ask questions if you don’t understand any of the terms and conditions. Make sure you keep a copy of the agreement.

An agreement for a debt management plan should clearly state:

• how much you’ll pay in fees
• when the agency will process your payments
• your responsibilities
• what you can expect from the agency
• what will happen if you can no longer make payments because of a change in your financial situation

What you need to know before you sign a contract.

What to do during your debt management plan

Ask the agency for regular written status reports on your plan. Ask also for receipts of all transactions involved with the debt management plan. This will provide you with proof that the agency made your payments. While you’re in a debt management plan, companies you owe money to may stop sending you monthly statements.

Carefully review your status reports or monthly statements. Make sure the agency is paying your creditors on time. This will avoid any late fees or negative entries on your credit report.

You can also monitor your progress, by reviewing your credit report. It includes information on whether you’re making regular payments.

Order a copy of your credit report.

Compare your options

Everyone’s situation is different. Before making a decision, talk with different sources to see how they can help with your situation. This could include:

• financial advisors
• accredited credit counsellors to discuss debt management plans
• licensed insolvency trustees to discuss consumer proposals and bankruptcy

To help you decide on the best option for your situation, you may want to ask the following questions:

• how much of your debt will be repaid
• what type of debts will be repaid
• how long you’ll be making payments
• how much your monthly payment will be
• what happens if you can’t make a monthly payment
• what will happen if your financial situation changes and you need to reduce your payments or can no longer make payments
• can creditors or a debt collection agency continue to contact you
• what will happen to your assets
• what will happen to your credit report
• how much you’ll pay in fees
• can a creditor change their mind and withdraw from the agreement

Compare the advice you get from each reputable source before you decide which option is best for you.