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Are debt solution companies a scam?

Gail Johnson
Pay Day

With Canadians holding record levels of debt, more and more companies are seeking to cash in on those tabs. Call them debt-solution, -management, -settlement, -consolidation, -help, or -relief companies; they might go by different names, but they need to be approached with caution.

“When Canadians started getting in way over their heads, all of a sudden a bunch of debt-relief or debt-solution companies have popped up in the last few years,” says Jeffrey Schwartz, executive director of Consolidated Credit Counseling Services of Canada, Inc.

“They’re mostly good and legitimate and they do have valuable service to offer consumers. But there are ones that are less than savoury and ones we should keep our eyes out for. We don’t want people to get into situation where they signed up for something and paid money for something and either didn’t get the services they were promised or it was not a very good experience for them.”

Numbers on how many people successfully complete debt-settlement programs in Canada are lacking. In the U.S., however, the Federal Trade Commission has repeatedly found debt-settlement companies with completion rates of 10 per cent or less. (That’s in contrast to the industry’s own stats, which peg completion rates at between 30 and 60 per cent).

Ontario recently announced its intention to regulate debt settlement companies, which would see such consumer protections as a ban on up-front fees, a fee limit for services and more transparent contacts.

Manitoba, Alberta and Nova Scotia have launched similar moves. Debt settlement companies have even prompted a 'consumer alert' from the Financial Consumer Agency of Canada.

To help consumers distinguish legitimate debt relief services from illegitimate ones, Schwartz shares these tips:

There is no blanket solution
“Often what those companies offer is a one-size-fits-all solution, regardless of your situation," he says. Determining how one got into debt trouble is just as important as getting one out. "From there we should be realistically setting people up for success as opposed to offering a single solution.”

Look for unrealistic claims
Be wary of companies that claim they'll cut your debt by a substantial amount or claim there will be no consequences for your credit score. "Any creditor that settles for less than what’s owed to them — it’s going to have an impact on your credit profile, and the next time you apply for new credit, it’s going to show up," Schwartz says.

Watch out for minimum debt requirements
“Essentially companies are saying, ‘Unless you have X amount in debt, it’s not worth our while to talk to you’ Is that person offering a solution that has you in mind or does it have them in mind?”

Be wary of high fees
“For people struggling with debt, they may be presented with promises and claims, but going to cost them an arm and a leg. That should be a concern for any consumer," Schwartz says. An up-front fee should sound a warning bell for consumers, along with fees if you exit a program early.

Avoid companies that charge for educational materials
“Educational tools should be available to you not only to improve your situation now but to develop good behaviours for the future so don’t get into debt again," Schwartz says.

Avoid companies that urge you to cut off communications with your creditors
“That’s not really a good way to go with your creditors. If no one is communicating with them and you're not making payments, they don’t know what happened to your debt. They have full opportunity to use whatever remedies at their disposal [to reclaim money owed], which could include suing you. If anybody is telling you ‘Don’t talk to your creditors; we’ll handle the communications,’ ask why they do not want you to communicate," he warns.

Ask about staff members’ knowledge and background
What are the credentials of those providing the service? Ask about their experience and what qualifies them as a debt expert. What sets them apart from the competition and if they have an documentation to back it up.

“You have to be comfortable with the level of expertise of the person on other end of the line," Schwartz says.

Do background checks on the company
Do they have a good rating on the BBB? Are they non-profit? Are they unbiased around the solutions they’re providing?