Drowning in a sea of debt?
Debt-settlement companies' lifeline could sink you, watchdogs warn
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Hey there, time traveller!
This article was published 21/01/2012 (3970 days ago), so information in it may no longer be current.
IF it sounds too good to be true, it probably is. These are words to live by when minding your money, and the credo most certainly applies for those searching for debt-repayment solutions these days.
If you’ve gone to the web looking for answers, there’s a good chance you have come across debt-settlement agencies, many of which claim they can cut their clients’ credit-card debt as much as 60 per cent.
Some — once they’ve got you on the phone — even contend they can completely eliminate your credit-card debt.
But Canada’s consumer watchdog, the Financial Consumer Agency of Canada (FCAC), issued a warning earlier this month cautioning consumers to think twice before paying one of these agencies for their services.
“We’ve started to get more calls about it, and debt management is something that is on people’s mind in the new year, so we thought this was a good time to put the information out there,” FCAC spokeswoman Julie Hauser says.
The federal agency warns these debt-relief companies often use high-pressure sales tactics and charge significant fees. And the FCAC is not the only government agency concerned about these companies’ practices.
In early November, Manitoba’s Consumer Protection Office also issued an alert about debt-settlement companies.
“This is kind of a brand-new phenomenon that first appeared in the United States as a result of the real estate problems there,” says Jan Forster, director of the Consumer Protection Office.
Since 2009, they’ve started up in Canada.
Both the feds and the province are circumspect in their warnings. They want consumers to be sure to understand what they’re getting into before signing a contract with a company to negotiate their debts on their behalf.
But the executive director of Community Financial Counselling Services (CFCS) in Winnipeg says consumers should steer clear of these companies altogether because they often charge substantial fees in exchange for services that dubiously purport to significantly reduce a consumer’s unsecured credit-card debts.
“There’s often an up-front fee to do the initial counselling to determine what the person’s debt is,” says John Silver, with the United Way-funded non-profit. “Then consumers are asked to sign a contract, where they pay a monthly fee to the agency so it will negotiate on the consumer’s behalf.”
The problem is consumers end up spending money on significant fees to the debt-settlement agency that could have been used to actually pay off their debts.
Debt-settlement companies often recommend clients stop making minimum payments and instead set aside money to pay the settlement once it’s been negotiated. But while they claim to negotiate on consumers’ behalf, they do not guarantee they will successfully negotiate a reduction in their clients’ debts.
“In the agreements that we’ve seen, it says quite clearly that there are no guarantees, and what we know is the creditors do not have to negotiate with these companies,” Forster says.
“They could refuse to negotiate or even talk to them, so consumers are paying up front without any guarantee that there will be any positive outcome for them at all.”
Often compounding problems is these companies tell consumers to stop all contact with creditors because they will do the communicating with the creditors on the consumer’s behalf once the consumer signs a contract.
Maura Drew-Lytle, spokeswoman for the Canadian Bankers Association (CBA), says consumers facing debt problems should always maintain contact with their financial institution.
“Banks are willing to be flexible and help customers make alternative arrangements to repay the loan,” she says.
She adds Canadians are well advised to heed the FCAC warning about debt-settlement companies’ “unrealistic claims about slashing their debt” and “false claims about government involvement or approval.”
In fact, Silver says many reputable creditors won’t negotiate with agencies they do not consider legitimate. In a recent meeting, Silver says a CBA official informed him the organization is developing a list of agencies, including debt-settlement firms, with whom banks won’t negotiate.
That has proven difficult, however, because many debt-settlement companies open, close and re-emerge with new names.
In the last year, Silver says he has seen a handful of contracts signed by unhappy consumers who paid hundreds of dollars in fees.
“In one contract that I saw, the person would have been charged $3,500 in fees — all going to a company, and that was about the amount they claimed they could reduce the debt through negotiation,” he says. “There was absolutely no benefit to this person.”
Consumers often pay monthly fees for extended periods because the company has told them negotiating a settlement will take several months.
In the meantime, they stop making minimum payments, which negatively affects their credit rating. Because there’s no guarantee of success, consumers pay ongoing fees, assuming their debt is being taken care of by the agency while their credit rating plummets and their debt grows. And they end up in a worse situation than when they started.
Connie, a Winnipeg resident whose name has been changed to protect her identity, says she ended up paying an upfront fee to a U.S.-based firm called Vortex Debt Group after it cold-called her in late 2010. Vortex persuaded her that in exchange for the upfront fee and ongoing monthly payments, it would negotiate with her creditors to clear up her credit-card debt of more than $15,000. The company advised her to stop making minimum payments and cease all contact with her creditors. Once she signed on, Vortex withdrew $408 from her bank account a few days later. Soon after she stopped making minimum payments, the calls from her creditors began.
“They were upset because no one had contacted them,” she says. “But they (Vortex) had taken my money.”
She then got in touch with a local, non-profit credit-counselling agency, which advised her to stop further payments to Vortex and even change her bank account.
“I was so embarrassed by the whole thing because I had been managing to keep up with my payments.”
She has since started working with CFCS, but the ordeal left her credit rating in tatters.
“I have no use of credit cards anymore, so I don’t have any backup in an emergency.”
The 1-866 contact number Vortex provided to Connie is now out of service. But Canada’s Credit Counselling Society’s website, www.nomoredebts.org, states Vortex has since re-emerged as two other companies. Calls by the Free Press to both companies earlier this week were not returned.
“Many of these companies are Internet firms with offices in the U.S,” Silver says. “Florida seems to be a popular location.”
Most firms only started operating in Canada after U.S. lawmakers began cracking down on debt-settlement companies’ predatory practices, he says.
Given recent statistics on Canadians’ consumer debt levels, we’re fertile ground.
Credit-monitoring agency Equifax recently released figures indicating Canadians collectively owe $480 billion in consumer debt, and about $6.7 billion of it is in arrears.
Needless to say, many of us are facing desperate debt circumstances and might be tempted to use a debt-settlement agency’s services, which offer a seemingly easy way out, Forster says.
“There could be times when debt-settlement agencies have been able to help people reduce their debt — I don’t know for certain — but what I do know is they have very significant upfront fees and there’s no guarantee of service,” she says. “It just doesn’t make sense to use that type of service.”
Provincial regulation upcoming
The provincial government is expected to announce in the coming weeks changes to the Consumer Protection Act introducing stricter regulation of debt-settlement agencies operating in the province. “We’ve been actively working with stakeholders and looking at other jurisdictions with legislation like Alberta, and we’re very close to developing a strategy that would deal with the issues that are most important, including the upfront fees,” says Jan Forster, director of the Consumer Protection Office. In the meantime, Forster says people facing debt problems can contact the Consumer Protection Office. “We can provide them with a list of organizations that can actually help them.” For more information, contact the office at (204) 945-3800, toll-free at 1-800-782-0067 or by email at email@example.com
Community Financial Counselling Services can help.
You might have noticed this agency’s counsellors have offered their expertise in recent Free Press Money Makeovers. Community Financial Counselling Services (CFCS) is a free-of-charge, Winnipeg-based service offered to individuals and families who are having difficulty paying their bills, including credit-card debt payments. The organization will help clients develop budgets to manage their costs and provides them with the full spectrum of workable debt options, including bankruptcy and consumer proposals. When possible, they will also help individuals negotiate their debt with creditors to reduce their payments and, in some cases, have their debts reduced, says executive director John Silver. Still, Silver says debt-reduction settlements are rare. “In order to do a settlement, you need assets or funds to be able to actually do it, and then you have to have a situation that the creditors will agree it is the best alternative.”
Debt counsellors… in the pocket of the banks?
Debt-settlement companies frequently tell potential clients that non-profit agencies like CFCS are funded by lenders.
“Because credit-counselling agencies get some remuneration from the banks or the creditors, they (debt-settlement companies) claim that we’re in league with the creditors,” Silver says. But he says non-profit agencies work for their clients and are partly supported by creditors because they help indebted consumers get back on solid financial footing. Debt-settlement companies also frequently tell consumers that going for credit counselling will lower their credit score, whereas hiring a debt-settlement company to negotiate a reduction in debt won’t. Silver says debt counselling has no effect on consumers’ credit ratings. Many CFCS clients, however, do enrol in its debt-management program that does affect their credit rating. But the program also reduces clients’ interest costs on their debts — sometimes to zero interest — and provides them with an affordable monthly payment until all debts are paid in full. But the credit ratings of clients of debt-settlement agencies are also negatively affected because they stop making payments.