| |
Toronto Credit Counselling - Facts about Credit Counselling Agencies
You may have seen advertisements on the internet or television published by these agencies. The common themes in these ads are that:
- they’ll negotiate with your creditors and consolidate your debt into easy manageable payments
- they’ll help you avoid bankruptcy
The purpose of this page is to provide you with facts about these agencies so you can take the appropriate action in dealing with your debts.
Credit counselling agencies offer programs called Debt Management Programs (DMPs) in which the agency negotiates with the creditors to work out a repayment plan. Such repayment plans may reduce the interest and monthly payments paid by the client. Some agencies may advertise that they can reduce your monthly payment by as much as 50%. A reduction of 10% to 25% is more common.
The agency will contact these creditors on your behalf to obtain their acceptance of your DMP – which they may choose to accept or decline. Before entering into a DMP, most agencies will require you to sign a contract, which states you will make regular payments to their agency. The agency then distributes your payments to your creditors.
A DMP through a credit counselling agency is ideal where:
- You are unable to get a debt consolidation loan but still want to repay your debts
- You have a good income and can afford to make payments of at least 75% of your current minimum monthly payment
- You need assistance in negotiating with your creditors
A DMP may not be the right solution for you if you are unable to repay all of your debts in full within five years, even with interest relief. If you cannot afford to pay all of your debts in full, but still want to negotiate a payment arrangement with your creditors, a consumer proposal may be a solution than credit counselling. Under a consumer proposal it is possible to negotiate a settlement of less than 100 cents on the dollar.
For example, if you have $50,000 in debts, a typical DMP with interest relief would require you to pay $1,000 per month over 50 months. If you can only afford $500 per month, a consumer proposal may be a better option. If you can't even afford that, personal bankruptcy may be the only solution.
It’s been said that “there’s no such thing as a free lunch” and this is true of DMPs. Many consumers enroll in DMPs because they wish avoid bankruptcy, fearing the impact of a bankruptcy on their credit rating.
However, what many people don’t realize is that when you enroll in a DMP, creditors may indicate an “R7” status on your credit report. An “R7” rating indicates that you are making regular payments to creditors through a special arrangement.
In order for you to understand what this means, here is an excerpt from Equifax’s website. Equifax is one of the two major credit reporting agencies in North America (the other being TransUnion):
- R0 Too new to rate; approved but not used
- R1 Pays (or paid) within 30 days of payment due date or not over one payment past due
- R2 Pays (or paid) in more than 30 days from payment due date, but not more than 60 days, or not more than two payments past due
- R3 Pays (or paid) in more than 60 days from payment due date, but not more than 90 days, or not more than three payments past due
- R4 Pays (or paid) in more than 90 days from payment due date, but not more than 120 days, or four payments past due
- R5 Account is at least 120 days overdue, but is not yet rated "9"
- R7 Making regular payments through a special arrangement to settle your debts
- R8 Repossession (voluntary or involuntary return of merchandise)
- R9 Bankruptcy or bad debt (write-off)
As you can see, an “R7” is nominally better than an “R9” (i.e., filing bankruptcy), but not by much. Such a rating may prevent you from accessing more credit for a period of time. Moreover, for a period of two or three years after you complete your DMP, your credit report will indicate that you used the services of a credit counselling agency to help repay your debts.
The following charts show how long it takes before information is removed from Trans Union Canada and Equifax credit reports if your reside in Ontario:
| Event Type |
Trans Union |
Equifax |
| Credit transactions (from the first date of delinquency) |
6 years |
6 years |
| Judgments (from the reporting date) |
7 years |
6 years |
| Collections (from the first date of delinquency) |
6 years |
6 years |
| Secured loans (from the date opened) |
5 years |
6 years |
| Bankruptcy (from date of discharge) |
7 years |
6 years |
| Consumer Proposal (from date of completion) |
3 years |
3 years |
| Credit counselling (from date of completion) |
2 years |
3 years |
During this period, if you give your permission to any creditor, landlord or employer to access and view your credit report, they will also see this information:
"Non Profit" credit counselling agencies are usually funded by credit grantors. Consequently, an agency may not be completely independent and impartial and may have a conflict of interest in giving impartial advice. A recent Consumer Affairs Canada funded report on the Canadian Credit Counselling Industry warns that some non-profit credit counsellors may advise only those solutions that bring in funding via commissions or donations from creditors.
If you feel that a debt management plan through a credit counselling agency is the ideal solution for you. You should consider the following factors:
- Is the agency accredited? You may be surprised to learn that in Canada, there are no laws or regulations specifically designed to ensure consumer protection in the sphere of budget counselling. In other words, anyone can claim to be an “expert”, duly qualified to advise consumers—whatever the training and experience he or she may (or may not) possess. Thus, a vulnerable consumer could pay fees for services, which, at the end of the day, prove to be of no use to him or her.
If you reside in Ontario, you should consider using an agency that is a member of the Ontario Association of Credit Counselling Services (OACCS). The OACCS is a self-regulated body consisting of credit counselling agencies that meet minimum standards of practice and ethics. Their website is www.oaccs.com
- What are the fees? Get a clear presentation of the fees you will be charged. If there are fees (set-up fee, monthly service charges), the agency should explain what they are based upon. Legitimate non-profit agencies are funded by creditor grantors, so if you are dealing with a legitimate agency, you should not expect to pay more than $75 in set-up fees or make a monthly payment that exceeds $40.
- Have there been complaints filed against this agency? You may wish to contact your local Better Business Bureau (BBB) to inquire if any complaints have been filed against the agency you’re considering using:
You should avoid using agencies that engage in the following practices (excerpted from the Better Business Bureau website):
- Demands that you provide account numbers or other financial details before it will discuss its services or fees. Reputable credit counselling agencies are happy to provide free information upfront about their services.
- Boasts that it can "lower your monthly payments by 30 to 50%." This bold statement is rarely, if ever, true.
- Promises that it can "get you out of debt easily." This is an irresponsible advertising claim. Getting out of debt is rarely an "easy" task. Avoid counsellors who promise a quick and easy way to fix your credit problems.
- We won't need much time. Steer clear of any agency that claims it can evaluate your situation in just minutes, or that offers to do so quickly over the phone. If services are provided over the phone, make sure the counsellor is evaluating your personal situation, and not rushing to provide generic advice that could apply to any consumer. Experienced counsellors may want to spend close to an hour with you reviewing your financial situation before recommending how to address your financial condition, and may offer follow-up sessions.
- Claims that it can remove negative information, such as bankruptcy, from your credit report. It is illegal to make such a representation if the negative information reflects your true credit history. Accurate information cannot be removed from a person's credit report.
- Issues a blanket recommendation for a debt management plan. DMPs are not for everyone. Do not agree to establish one unless and until you have reviewed your personal situation with a certified credit counsellor who recommends such a plan and then customizes the plan to best manage your debt.
- Requires "voluntary" contributions. Required "voluntary" contributions are not voluntary!
- Is reluctant to provide the organization's business name and address. This is a clear sign of impending fraud. A toll-free telephone number or e-mail address is not sufficient. Scam artists typically avoid providing their physical location to thwart law enforcement detection.
- Insists that you make an immediate decision. Reputable credit counsellors will permit you time to evaluate their offer, shop around and make a determination that best suits your financial situation.
|
|
|
