Today Canadian consumers are being buffeted by a perfect storm — a worldwide meltdown in the stock market, a looming recession, and skyrocketing consumer debt. Who are Canadians with debt problems going to call for help? It is probably not going to be a lawyer despite the fact that it is often in a consumer’s best interests to do so.
My name may be familiar to you. At some point in the past, one of your clients may have shown you a demand letter from Mark Silverthorn’s law office. For 12 years, I represented some of Canada’s largest collection agencies. Not anymore — my law practice has made a 180-degree change in direction and now I focus on assisting individuals receiving collection calls or those experiencing problems paying their bills.
Today, there is an entire industry providing advice and services to consumers with financial problems. For lack of a better term I will refer to this collection of service providers as the consumer debt service industry, a group that includes lawyers, credit counselling agencies, debt consolidation lenders, debt settlement companies, debt consulting firms, and bankruptcy trustees.
Each player in the consumer debt service industry is limited in terms of the type of advice or services it can provide to consumers. Unfortunately, Canadians are often poorly informed in terms of (1) which player can provide them with the appropriate option for dealing with their particular financial problems, (2) a specific player’s conflicts of interest, and (3) the extent to which a player may be an advocate for the consumer.
Fortunately, with the exception of debt consulting firms, the various players in the industry are licensed and regulated. However, today the consumer debt service industry, in many respects, is failing Canadians due to conflicts of interest and some players’ reluctance to refer consumers to another person who can offer a better solution. With few exceptions, in Canada lawyers are the only player with a professional obligation to act as the client’s advocate and to avoid conflicts of interest.
Credit counselling agencies
A credit counselling agency will arrange for its client to repay 100 per cent of selected unsecured consumer debts over a period not to exceed five years under a debt management plan. There are two types of credit counselling agencies in Canada, non-profits and for-profits — also known as independent credit counselling agencies.
Non-profit credit counselling agencies receive most of their revenues in the form of what is euphemistically referred to as “voluntary donations” from creditors. A “voluntary donation” is typically equal to 18 per cent of what a consumer actually pays to a creditor under a debt management plan. In contrast, if a lawyer negotiating repayment of a debt on behalf of a consumer were to receive financial compensation from his client’s creditor the lawyer would face disciplinary sanctions.
For-profit credit counselling agencies typically charge clients fees equal to 15 per cent of the total amount of debt included in a consumer’s debt management plan. Some for-profit credit counselling agencies charge this fee each time a client remits monies to the agency under a debt management plan.
However, some for-profits front-end load their fees. Some might question the practice of front-end loading fees by some for-profit credit counselling agencies because a significant number of consumers enrolling in a debt management plan will subsequently drop out of the plan, and arguably the agency has not earned its fees.
Credit counselling agencies, both non-profit and for-profits, face a conflict of interest when it comes to determining which unsecured consumer accounts, if any, should be included in a debt management plan.
By advising a consumer not to include a particular account in a debt management plan a credit counselling agency is foregoing potential revenues; actual fees in the case of for-profits and potential “voluntary donations” in the case of non-profits.
Given the manner in which credit counselling agencies obtain their revenues, one can only wonder how often agencies advise consumers they are not legally required to pay a consumer debt due to the expiry of a limitation period.
Debt settlement companies
Debt settlement is an alternative to credit counselling and debt consolidation loans.
Consumers who hire a debt settlement company typically do not make any payments to selected unsecured creditors over a period of time. During this period the debt settlement client saves money for his “settlement fund.” Over a six- to 36-month period a debt settlement company will attempt to negotiate lump sum settlements with a client’s creditors, often for amounts that are only 30 to 50 per cent of the original amount owing.
Consumers hiring a debt settlement company should know what they are signing up for. First, in most provinces hiring a debt settlement company will not prevent a creditor or its collection agent from making payment demands directly to the consumer.
Second, a consumer who has hired a debt settlement company is not paying certain consumer debts and therefore may be sued.
Finally, a percentage of consumers who enter into a contract for debt-settlement services will subsequently “drop out” and will end up paying some fees without obtaining any financial benefit from the relationship.
Debt consulting firms
There are debt consulting firms operating in Canada providing financial advice to consumers on a fee-for-service basis that are not regulated by the government.
I have no reason to believe that the vast majority of these firms are anything other than ethical businesses providing quality advice to consumers. However, I am aware of some instances where a debt consulting firm charges its clients’ sizeable fees and then steers the consumer to another player in the consumer debt service industry.
At some point consumers experiencing financial difficulties may speak to a bankruptcy trustee with respect to making a consumer proposal or filing for personal bankruptcy.
When a consumer meets with a bankruptcy trustee, the trustee will provide the consumer with information. However, a bankruptcy trustee does not act as a consumer’s advocate or representative in the person’s dealings with the consumer’s creditors.
The role of bankruptcy trustee does not include an in-depth analysis as to whether or not a consumer might ever have to pay a particular account. In fact, there are bankruptcy trustees in Canada who do not know what the limitation period is in their province for unsecured consumer debts.
Lawyers need to be better informed about consumer debt options
Being an effective advocate for a client experiencing problems with unsecured debts involves much more than identifying potential legal defences, such as limitation periods, and whether or not the client is judgment proof. It is extremely helpful if a lawyer is knowledgeable about the debt collection industry and the life cycle of a delinquent account.
Lawyers need to be better informed, not only about the various players in the consumer debt service industry, but also consumers’ seven options for handling their unsecured debts. During the 12 years that I was a collection lawyer representing some of Canada’s largest collection agencies I observed first-hand how some lawyers representing debtors missed opportunities because they failed to appreciate the strength of a client’s bargaining position in dealing with a collection agency or a creditor.
Mark Silverthorn, who practises law in Kitchener, Ont., has written a book titled A How-to Guide for Dealing with Collection Agencies in Canada that can be ordered online at his law firm’s website, www.helpwithcollectioncalls.ca.