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Pre-paid? What happens when the business goes bust?

Take part in this poll and tell us what gets you going when it comes to working out and staying fit. Continue reading →

Certain Toronto gym-goers recently found themselves hanging when the fitness facility they’d joined closed abruptly — meaning not only were they left without a place to pump iron, they also weren’t sure if they’d ever see the money they’d paid in advance again.

It’s a scenario that could happen anywhere across the country, whether it’s a gym, tanning salon, martial-arts studio or other business: when you pre-pay for services and a company tanks, what happens to that hard-earned cash you’d already forked over? And how can you protect yourself from being left out of pocket in the future?

Consumer protection laws vary from province to province, so start by checking out details specific to where you live via the federal government’s Consumer Information website.

Despite legislation being in place, actually getting your money back when you’ve paid in advance only to find a business boarded up can be tricky.

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“Generally, if the company is out of business, consumers are out of pocket for monies pre-paid in advance,” says Simone Lis, vice president of the Better Business Bureau Serving Mainland British Columbia. “However, if a consumer has paid by credit card, this may offer some sort of limited recourse such as a credit card chargeback if the timing is close to when monies were paid and services not rendered according to contract.

“If a consumer has recently purchased such services through a daily-deals type website, some of these websites offer money back offerings as well,” she adds.

Tatiana Chabeaux-Smith, manager of corporate communications at Consumer Protection BC, suggests consumers contact their bank or credit card to stop any future payments.

“If the fees have been paid all upfront and the business closes, a consumer may want to find out if the business has filed for bankruptcy,” Chabeaux-Smith says. “If this is the case, they may be able to contact the bankruptcy trustee and have themselves added to a list of creditors.”

To find out if a company has filed for bankruptcy, you can visit the last known address of the business in person. If it’s in receivership or the owners have filed for bankruptcy, there should be a notice posted with information providing the details, according to the BC BBB.

If the business is a limited company, you can send a registered letter that may be forwarded to the owner. Request a return receipt that indicates the name and address of the person to whom the letter is delivered.

“If you paid by cheque, examine the back of the cancelled cheque to see where it was deposited,” the BC BBB suggests. “Contact that bank to find out if the business maintains an active account, and ask them for the location of the business and its principals. If they refuse to tell you, take the cheque to your own bank and ask for assistance. If paid by credit card, try contacting the credit card company for this information.”

Once the owner has been located, call or write to explain the problem and seek resolution.

Another option would be to legal action, but you have to be sure that threatening or pursuing legal action is worth your time and money.

To avoid ending up in a situation where you’re hooped, consumer groups urge people to do their research.

“Unfortunately, there is no guarantee that a company will be in business, so we would suggest not to pay in advance for services not rendered,” Lis says. “We would also suggest using a well-established company that maintains a strong reputation of working with their customers in the marketplace.”

Choose to pay monthly. If a business goes bankrupt, you won't lose more than a month's payment.

In Ontario, in fact, a gym must give people the option of paying for a membership and any initiation fees in monthly installments. It can charge up to 25 per cent more than a lump-sum payment, “but there’s no danger of a big loss if the club goes bankrupt”, notes Consumer Protection Ontario.

Contracts for continuing services, such as dance classes, fitness and sports programs, and martial-arts training, must be in writing, according to Consumer Protection BC.

Read the fine print, and know your cancellation rights.