Mark explains why credit counselling is the most expensive way for Canadians to eliminate debt, what it can cost per dollar owed, and the alternatives: direct payments, being judgment proof, limitation periods, settlements, consumer proposals and bankruptcy.
Transcript
Is credit counselling for suckers?
Is credit counselling for suckers? You are not a sucker if you do credit counselling and you want to repay 100% of your debt, with money going to your creditors, plus pay exorbitant fees to your credit counselling agency, and potentially pay additional interest to your creditors, and pay additional monies to creditors not participating in your plan, and pay additional monies to creditors garnishing your wages.
You might, however, be like most Canadians and want to get out of your current debt situation as inexpensively as possible. If you are one of these individuals, then I am going to suggest to you that you are a sucker if you do credit counselling. The most charitable description of credit counselling is that a consumer can repay 100% of their debt by making monthly installments to their creditors over five years. You may not be aware that credit counselling is the most expensive way for a Canadian to eliminate their debt.
How much credit counselling can cost
How much will you pay to eliminate your debt using credit counselling? If you choose credit counselling, then you may have to pay monies from as many as five different buckets. You will have to pay 100% of your outstanding principal and interest owing to your creditors on the date of your enrollment into credit counselling. You will be required to pay fees to the credit counselling agency. Under Ontario law, a credit counselling agency can charge you an additional 15% of what you owe as administrative fees. If your plan includes $10,000 in debt, your agency can charge you $1,500 in fees. If your plan includes $35,000 in debt, your agency can charge you more than $5,000 in fees.
You might have to pay some interest accruing on some of your debt during the life of your plan. Credit counselling agencies negotiate with your creditors seeking interest forgiveness, but they cannot guarantee it. You might not be able to include all your debts in your plan, because your creditors are under no obligation to include your debt. Finance companies, for example, routinely refuse. Your bank might refuse because it says you can simply borrow the money and pay off the account, particularly if you have equity in your home.
Credit counselling is simply not available for certain categories of debt: secured debt such as mortgages and car loans, and money owing to the government for things like income tax and student loans. It is of no benefit to you if you've been sued by a creditor or if a creditor is garnishing your wages. If you add up all the money that you will pay to do credit counselling, you could be paying somewhere between $1.15 and $1.30 to eliminate one dollar of your debt. It is no surprise, then, that a significant percentage of those enrolling in credit counselling drop out because they cannot afford it.
Alternatives to credit counselling
How does credit counselling compare with other debt relief options available to Canadians? We are going to look at three alternatives. One, making monthly payments to your creditor. Number two, scenarios where you might be able to avoid paying a penny to your creditor. Number three, scenarios where you may be able to pay substantially less than 100 cents on the dollar to eliminate your debt.
Some but not all creditors stop charging interest when they place your unpaid account with a collection agency. In these circumstances you may want to make monthly payments directly to your creditor's collection agency, and you will avoid paying the exorbitant 15% administrative fee to a credit counselling agency.
Paying nothing, or much less
You might be in a position where you can avoid paying a penny to your creditors. If you do not own real property and you support yourself on social assistance or on pension income, then you may very well be judgment proof, and you may be able to avoid paying a penny to your creditor. You might also be able to avoid paying a debt due to the passage of time and the expiry of a limitation period. If your creditor does not sue you before the expiry of a limitation period, then you can avoid paying a penny.
There are several scenarios where a Canadian can pay significantly less than 100 cents on the dollar to eliminate their debt. Once your debt is six months old, your creditor may be willing to accept a one-time lump sum payment for significantly less than what you owe as settlement in full. Some Canadians may find it prudent to make a consumer proposal through a Licensed Insolvency Trustee. Unless you have significant equity in your home, then under a consumer proposal you should be able to eliminate your debt by paying somewhere between 30% and 50% of what you owe to your creditors, by making equal monthly payments over a period of five years. Canadians seeking to eliminate their debt will often pay three times as much using credit counselling compared with a consumer proposal. Consumers who do not have high incomes nor significant assets may find it advantageous to file for personal bankruptcy.
In summary
In summary, credit counselling is the most expensive way for a Canadian to eliminate their debt. There are much better options for a Canadian seeking to eliminate their debt. Once you have all the facts, you will see that credit counselling is for suckers.