Credit counselling and debt settlement services
Credit counselling agencies and debt settlement companies can help you get out of debt. But they are different from each other.
Credit counselling
Credit counselling agencies help you repay all your debt and learn how to stay out of debt. The agencies have creditor counsellors who give this help.
There are 2 types of credit counselling agencies:
- not-for-profit
- for-profit
Not-for-profit agencies work with you at a low-cost or sometimes for free. For-profit agencies always charge you for their services and they make a profit from helping you.
Debt settlement
Debt settlement companies can give you similar services as a credit counsellor. But they are for-profit businesses. This means they make a profit from helping you. There are other differences that are important.
When you use debt settlement companies, there are some extra risks. For example, they may:
- not tell all your creditors about your repayment, so creditors may keep calling you
- pay one bill at a time, so creditors may sue you to try to collect their money
- represent both you and your creditor, which is a conflict of interest
And they might not help you learn how to stay out of debt.
Debt settlement companies go by different names including debt consolidation, debt relief, and debt reduction.
Debt settlement companies must be registered with the Government of Ontario.
How do credit counsellors help?
A credit counsellor will review your bills and your budget. They
help you choose which of your past due bills are most urgent. And they help you figure out how much you can put toward repaying what you owe each month and still have enough to live on.
The credit counsellor contacts your creditors to let them know you’re working with them to come up with a debt repayment plan. Sometimes credit counsellors can get creditors to agree to accept less money as full payment of their bills or to lower their interest rate.
If you choose to pay your creditors with an instalment plan, you pay a set amount of money every month to your credit counselling service. The credit counsellor uses that money to pay your creditors what they have agreed to accept until the bill is paid. Once your plan is in place, your credit counsellor will talk to your creditors to let them know you have an instalment plan. This might stop your creditors from contacting you.
How do debt settlement companies help?
A debt settlement company will ask you for all your bills. Then they set up a debt repayment account that you pay a certain amount of money into every month.
They negotiate with your creditors to reduce the amount you owe them. But some creditors may not agree. And some may refuse to work with the company.
The company will usually focus on paying one bill at a time at the amount a creditor agrees upon.
They pay the bill only when there’s enough money in your debt repayment account. Then they wait again until there’s enough in the account to pay the next bill. They do not always ask you which bill you think should be repaid first.
They might not contact all your creditors to let them know you’re trying to pay your debts. These creditors might keep contacting you or hire collection agencies to collect what you owe them.
How much can these services charge me?
In Ontario, credit counsellors and debt settlement companies can only help you repay your debts in 2 ways. They can offer each of your creditors:
- an instalment plan to pay off the whole amount, or
- a single payment plan to settle the bill at a reduced amount.
Instalment plans
The credit counsellor or debt settlement company can charge you a one-time fee of $50 for setting up a repayment plan for each creditor. They can also charge up to 15% of each payment they make to your creditors.
Single payment plans
The credit counsellor or debt settlement company can charge up to 10% of the original amount of each debt they settle this way.
They get their fee after the payment has been made to the creditor. Your debt settlement agreement must tell you how much the counsellor or company is charging for each payment.
What are credit counsellors and debt settlement companies not allowed to do?
They’re not allowed to:
- say they are a charitable or not-for-profit organization if they are not
- claim that their programs are approved by the government if they are not
- promise results that are better than what they actually got for other clients within the last year
- promise results that are not in their control, for example, promising they can stop a creditor from trying to collect a debt
They’re also not allowed to charge you:
- an up-front fee for a making repayment plan, except for a $50 set-up charge
- more than 10% of your debt in a single payment plan
- more than 15% of your debt for each debt payment in an instalment plan
- any fee before they have made an agreement with your creditors and made payments to those creditors
What are credit counsellors or debt settlement companies required to do?
If you make an agreement with a credit counsellor or debt settlement company, they must:
- give you a copy of any debt settlement agreement when you sign it
- tell you in the agreement how their organization is funded, for example, by charging fees to clients or through charitable donations
- contact your creditors within 15 days after you give them permission to negotiate your debt
- tell you within 15 days if a creditor refuses to negotiate a payment schedule or a one-time payment
What must a debt settlement agreement include?
A debt settlement agreement must include your name, address, and phone number. It must also include:
- the credit counsellor or debt settlement company’s name, address, phone number, fax numbers, email address, and website
- their Ontario registration number if they are a debt settlement company
- whether they expect to get a fee from your creditors in exchange for getting you to enter into the agreement
- a detailed list of all services they will provide
The agreement must show the date the agreement was made, and its end date. The end date must not be more than 18 months after the latest of:
- the date you make the agreement
- the last day you make a payment under the agreement
- the last day the credit counsellor or debt settlement company settles a debt under the agreement
The agreement must have information about all the debts covered in the agreement. For example, it must include each creditor’s name, the total amount you owe each creditor, and the interest rate each creditor is charging you.
The agreement must say whether they will offer your creditors an instalment plan or a single payment plan. And when they will make payments to your creditors, or a one-time payment.
Finally, the agreement must say they will give you a written report on the performance of the agreement within 15 days after you ask for one.
Make sure you understand your agreement before you sign it. It’s a good idea to talk to your creditors to make sure they accept your repayment plan.
What if I change my mind after entering a debt settlement agreement?
When you sign a debt settlement agreement, you can cancel it in the first 10 days after you get a written copy. You can cancel it for any reason, even if you simply change your mind.
If the agreement does not follow the law or if you did not get a written copy of it, you have the right to cancel the agreement any time within one year after you sign it.
What happens if I cancel the agreement?
If you have the right to cancel the agreement, you can demand a refund of all fees you paid. You must send the credit counsellor or debt settlement company written notice that you want a refund.
If they do not refund your fees, you can sue them in Small Claims Court to get your money back. You can also sue them to get back any money they have not yet paid to your creditors.
If you have already made a repayment plan with a creditor, you still have to make the payments to that creditor.
What can I do if I have a problem with a debt settlement company or credit counsellor?
You can file a complaint with the Ministry of Public and Business Service Delivery and Procurement. There is a complaint form on the Ministry’s website at ontario.ca/page/filing-consumer-complaint or call 1-800-889-9768 (TTY: 1-877-666-6545). If the Ministry agrees with your complaint, it can order the agency to follow the rules, refund your money, or pay you compensation.
For more information and help
Consumer Protection Ontario can give you more information about your rights or help you make a complaint. Visit ontario.ca/page/consumer-protection-ontario or call 1-800-889-9768 (TTY: 1-877-666-6545).
Pro Bono Ontario’s legal advice helpline can give you up to 30 minutes of free legal advice. Call 1-855-255-7256.
Some community legal clinics also help with consumer law issues like problems with debt settlement services. To find your local clinic, visit legalaid.on.ca/legal-clinics or call 1-800-668-8258 (TTY: 711).