Bankrupt in BC
By Lisa Cordasco, March 1, 2016
New laws meant to protect BC consumers who are drowning in debt may not go far enough.
EASY-TO-GET LOANS and low interest rates are enticing Canadians to take on more and more personal debt. According to TransUnion, a credit monitoring firm, the average Canadian owed $27,485 in unsecured debt in 2015—an increase of nearly 7 percent from the previous year. That rise in unsecured debt has led to a rise in consumer insolvency rates every year since 2010.
J.D. is a 62-year-old bookkeeper from Victoria who was being crushed by a mountain of debt in 2014. “I was so depressed I couldn’t leave my house for two months,” she says. “The embarrassment, the humiliation. Who feels like going out? ” Two years later, J.D. is about to declare bankruptcy—and she’s not alone. The Office of the Superintendent of Bankruptcy reports close to 130,000 Canadians declared bankruptcy or entered into a consumer proposal last year, an increase of 9.7 percent from 2014. And, it predicts one in six adult Canadians will become insolvent every year for the next 20 years.
“Credit is so easy to get, and yet it’s so hard to get out of it,” says Scott Hannah, the CEO of the Credit Counselling Society, BC’s largest not-for-profit credit counselling service. He says the growing number of people facing financial crises has led to the growth of unregulated, for-profit companies that use Facebook, the internet and other advertising with promises to “reduce your debt by 80 percent,” or “eliminate student loans or Canada Revenue Agency debt” by offering “a government sponsored program.” Hannah says such claims “are blatantly false.”
When 69-year-old D.H. found himself over his head with a $26,000 tax bill from the Canada Revenue Agency and $16,000 in credit card debt, he sought help from a debt counselling firm. Its website contains glowing testimonials but some of its former clients say they felt they were taken advantage of by dubious claims and unfulfilled promises.
Two years ago, D.H. met with the company’s representative in Victoria, who looked at D.H.’s income versus his expenses and proposed a debt settlement plan that would allow D.H. to repay his creditors within five years at zero percent interest. “The debt consultant charged me $3300, and then sent me to a licensed trustee, who handled my consumer proposal. I found out later that had I gone directly to an insolvency trustee I would not have been charged thousands of dollars in up-front fees. The CRA clawed back my pension and I’m paying them again in my consumer proposal.” Despite his background in the banking industry and his designation as a Certified Management Accountant, D.H. says he was blind-sided. “My education and my work experience did not help because at that point in my life, I was so overwhelmed with where I got myself financially, I was not in a strong position. I was vulnerable and the [debt consultant] preyed on that.”
Only licensed insolvency trustees can negotiate a bankruptcy or consumer proposal. A consumer proposal protects debtors from being taken to court by creditors through a legally sanctioned repayment plan at zero percent interest.
The owner of the debt consulting firm defends his company’s practice of charging up-front fees to refer customers to a service it cannot legally provide. “It is not fair to characterize the services provided by [my company] as simply referring consumers to a bankruptcy trustee. We act as a financial advisor and an advocate for the consumer. Why does a consumer hire a personal trainer when they could go to the gym themselves, or why hire a lawyer to represent them through a divorce? These things can be done by themselves, but many are not comfortable doing so and need guidance and support,” he says. “A trustee is not obliged to act as a financial advisor to a consumer struggling with consumer debt, nor to help a consumer get the best possible result when making a consumer proposal or a bankruptcy.”
Victoria-based insolvency trustee Colleen Craig disputes those claims. “Licensed insolvency trustees act like a traffic cop to balance the interests of everyone. We ensure creditors can be repaid to the degree that’s possible and debtors are protected by paying what they can afford without worrying about creditors taking legal action against them. Debt consultants, debt poolers and debt settlement agencies cannot negotiate a better deal when it comes to consumer proposals because they have no authority to negotiate them. What trustees do is set by federal legislation and professional standards and practise. Whether the debtor is referred to a trustee by a credit counsellor, a debt pooler or a repayment agent, when it comes to a consumer proposal or a bankruptcy, the result will be the same.” Fees charged by insolvency trustees are set by federal guidelines, and they are taken off the principal that’s being repaid. There are no extra charges added on to the principal debt.
The provincial government has no jurisdiction over insolvency trustees, who are licensed and regulated by the federal Office of the Superintendent of Bankruptcy, but the Province has licensed and regulated one group of financial advisors, known as “debt poolers” since 1977. Debt pooling is an informal arrangement, negotiated by a debt pooler, on behalf of a debtor, to repay all or part of their debts to creditors. The debtor pays the debt pooler monthly installments, and the debt pooler distributes those funds to the creditors. In 2010 in BC, however, a new business model emerged which involved lump sum payments. In such cases, a third party, called a “debt settlement agent,” collects money from a debtor until enough cash is saved up to pay the settlement agent’s fee and the amount needed for a lump sum payment to satisfy creditors. The lump sum debt repayment model was not covered by provincial legislation, though that’s about to change.
Consumer Protection BC spokesperson Tatiana Chabeaux-Smith says, “The new business model that involves lump sum repayments came on the scene a few years ago and it’s caused problems for consumers.”
Hannah says those problems include over-the-top promises and bad advice. “Under the new business model, debtors would be told to stop talking to their creditors—and the debt resettlement companies would also not talk to the creditors until the debtor paid thousands of dollars of fees and saved up enough money for a one-time payment. In the meantime, the debts would be increasing and creditors would end up taking debtors to court and garnish their wages, which would come as a surprise to the debtor, who thought they had a deal brokered by their debt settlement agent. People paid up-front fees with no guarantee of a settlement. Others stopped making monthly payments and forfeited to the debt settlement agencies all they had paid to that point in time.”
He says the impact was devastating for many. “People had their credit ratings ruined and had legal action taken against them in some cases. These resettlement agents and private debt counsellors put debtors homes or their jobs —and in some cases their lives— in jeopardy because of the stress and the damage they had caused.”
Chabeaux-Smith says that’s why the provincial government is set to enact new regulations aimed at protecting people who are trying to get out from under a mountain of bills they cannot afford to pay.
BC’s new legislation
Starting April 1, 2016, both debt poolers and debt settlement agents operating in BC will have to abide by the same rules. Certain up-front fees will be banned. Fees can only be collected when a repayment plan is agreed to by the debtor and the creditors. The new rules will also limit how much debt settlement agents can charge for that service. If the debt is paid in a lump sum, they will be allowed to charge a small administration fee and up to 10 percent of the original debt. If it takes longer than 90 days to repay the debt, they will be allowed to charge a 15 percent fee.
The legislation, however, is silent on whether debt counselling companies can charge up-front fees to refer their clients to insolvency trustees.
BC’s Credit Counselling Society welcomes the new regulations, but its CEO had hoped they would demand more from those who are licensed. Hannah says, “The new regulations will make it mandatory that all debt settlement and repayment organizations be licensed, but they will not be required to have any special training or education to get a license—and that’s a deficiency. They will be required to hold trust accounts for debtors to make repayments but those accounts do not have to be audited. Debt settlement agents will have to explain the risk associated with that in a disclosure statement and exactly how, when and to whom the debts will be repaid, but the debt settlement companies that were not serving consumers well will have already left BC.”
Hannah says he’s more concerned that debt counselling companies will remain unregulated after the new consumer protection regulations come into effect.
When the provincial government announced its new regulations last December, then-solicitor general Suzanne Anton said, “British Columbia families and individuals need to be confident that when they are making tough money decisions, they’re getting the right advice and that they have certainty over what they’re being charged. These new regulations will help those people in debt understand their rights, and help ensure they do not get taken advantage of during a vulnerable time in their life.”
Critics note it’s ironic that those who advise or counsel debtors will not be governed by the new regulations. Hannah says, “We have asked the Province to include all debt counsellors… in the new regulations. They have not.” BC’s current Solicitor General Mike Morris was not available for an interview to explain why debt counsellors are not included in the new rules.
Chabeaux-Smith says Consumer Protection BC did not consider companies such as the previously mentioned debt counselling company a “debt pooler” under the old regulations. “Many credit counsellors do, in fact, offer services that are defined as a debt-pooling service. We are aware of the business model used by [that company] and, under their business model, they are not engaged in a ‘debt pooling system,’ per se, meaning that they are not distributing a debtor’s money to three or more creditors. As such, we were satisfied that a license as a debt pooler was not required.” She admits her watchdog group is unsure whether any debt or credit counselling agencies will be subject to the new rules. “When the new legislation comes into effect on April 1st, we will assess each business model on a case by case basis to determine whether they require a debt repayment agent license. We will have to assess that based on the new requirements.”
Craig predicts she will continue to see distraught debtors who come to her after dealing with for-profit debt counsellors, despite the new regulations. “If a debtor still wants to pay someone $4000 to refer them to a trustee, the new regulations won’t stop that,” she says. “There’s nothing stopping debtors from paying thousands of dollars for a referral that’s unnecessary.”
The debt counselling company owner says although his company is not required to hold a provincial debt settler’s license, “it is fully compliant with all relevant existing provincial laws in British Columbia and will be compliant with all regulations as of April the 1st.” He won’t say whether his company will apply for a debt settler’s license or end the practise of up-front fees on that date.
J.D., the bookkeeper, says she is frustrated that there is no watchdog to investigate complaints against debt counselling agencies, even after April. “My [debt] counsellor recommended a repayment plan that did not include all of my creditors. He said I could pick and choose which creditors to include in my consumer proposal, which I later discovered was untrue. The trustee I was referred to did not check things properly. He did not tell me I had to include all my debts and he did not advise me whether I would qualify for bankruptcy. I ended up paying more than $4400 dollars in fees to [the debt counselling company] plus 18 months of consumer proposal payments totalling $5700 dollars. But I was not protected from other creditors. I ended up being evicted from the space I rented for my bookkeeping business, and was taken to court by a bank over a $20,000 dollar personal loan that was not included in my consumer proposal. Because of this, I have been forced into bankruptcy. I’ve been told I could sue the trustee and [the debt counsellor], but I don’t have any money left to pay for a lawyer.”
The debt counselling company’s owner calls J.D.’s claim “alarming and not how my company operates. I am also very surprised a trustee would allow this practise.” He wonders whether J.D. understands and is interpreting her situation correctly. He says 97 percent of clients entering into a consumer proposal with the guidance of his company successfully complete the program.
How do BC’s debt rules compare?
In Ontario, consumers can cancel any debt settlement contract within 10 days of signing it with a full refund, and consumers have up to a year to cancel contracts and seek refunds from debt poolers and settlement agencies that have not lived up to the terms outlined in Ontario’s provincial regulations.
There is no such recourse in BC. Complaints about debt poolers or debt settlement agencies can be made to Consumer Protection BC, and although the watchdog group will investigate, it may or may not order a company to repay the fees it charged to a consumer. And it will not have the authority to investigate any complaints against debt counsellors.
The Province has no jurisdiction over the business practises of insolvency trustees, and trustee Colleen Craig believes there are trustees who accept referrals from debt counsellors and skirt the rules themselves. Craig suspects some fellow trustees allow debt counsellors to do the paperwork that should be done by the trustee, who is legally obligated to negotiate with the creditors based on what a debtor can repay. “These trustees simply show up to rubber-stamp those documents,” she says.
Craig has made formal complaints about such trustees to her industry group, the Canadian Association for Restructuring and Insolvency Professionals, but to no avail. “I feel that the professional body knows that this stuff is going on, but that it is technically outside the federal legislation governing insolvency trustees and technically outside of the association’s ethics guidelines. It really is a very grey area.”
Hannah says his group has made similar complaints to the Office of the Superintendent of Bankruptcy in Ottawa, but “they seem reluctant to investigate unless we come with solid evidence but I think it’s their duty to look into it.” No one from the OSB responded to requests for an interview.
The rebuilding credit carrot
Debt counsellors say their value also lies in their ability to help clients rebuild their credit and safeguard their financial future. The debt counselling company owner says his company offers insurance, car loans and other “financial instruments” to rebuild credit quickly. “These products protect the consumer,” he says.
But one former client of the debt counselling company says he felt pressured to take out high interest loans, referred by his debt counsellor. The 45-year-old construction contractor entered into a consumer proposal through the firm, based in Victoria. R.G. says his counsellor behaved like a used car salesman. “He used high pressure tactics. He rushed me into a plan and discouraged me from shopping around.” Two years into his five-year consumer proposal, R.G. says he got an unsolicited call from his debt counsellor, offering to connect him to a lending company. “They told me I could repair my credit rating quickly by taking this loan to pay off my consumer proposal. They said they would report the repayment to the credit rating agencies. I took the loan at a double digit interest rate, but my consumer proposal repayment was never reported [so my credit rating never improved] and I am paying thousands of dollars more in interest on my still unpaid loan.”
The debt counselling company owner stands by his company’s credit rebuilding program. “When a person pays out a consumer proposal, the credit score can jump by as much as 50 to 70 percent. The loans are voluntary and so he would have to apply for the loan to receive it.” He welcomes the opportunity to resolve R.G.’s problems. “It appears there may be some errors on his credit report that are holding back his score. We can work with this individual to have these arrears issues resolved.”
But Hannah disagrees with that strategy for rebuilding credit. “It’s a dog and pony show with some of these debt counsellors who recommend dubious loans. Our organization would never recommend that to a debtor who was in a consumer proposal. I doubt these new provincial regulations will end such practises.”
Consumer Protection BC admits the Province’s new regulations won’t protect everyone seeking debt relief. It recommends consumers take a “buyer beware” approach by doing their own research into the various types of debt repayment options, including confirming whether their advisor is licensed by the province or by federal regulations governing insolvency trustees. It cautions those seeking debt relief to try to put aside their emotions which lead many to sign contracts hastily that end up costing more money and increasing stress.
It appears BC’s new consumer protection regulations would not have prevented or resolved the problems experienced by the debtors who shared their stories with Focus. D.H. would still have paid thousands of dollars in up-front fees with no right to demand reimbursement. There is no formal process for J.D. to complain about allegedly bad debt counselling advice, although she could complain to Ottawa’s Superintendent of Bankruptcy about her trustee’s actions. R.G.’s advisor was under no obligation to explain how his credit score could be damaged by the advice he was given. These consumers turned to debt counsellors who were not governed by provincial legislation in the past, nor will they be under BC’s new regulations. Starting April 1, both debt poolers and settlement agents will be legally referred to as “debt repayment agents” under provincial law and their practises will be overseen by Consumer Protection BC, but debt counselling agencies will remain unregulated.
Hannah, however, remains optimistic about the future. “The good news,” he says, “is that the regulations governing the debt industry in BC can be amended through orders-in-council, which means new legislation is not required if changes are needed.” He promises his Credit Counselling Society, which already holds a debt settlement licence, will closely monitor the effects of the new regulations and will encourage the provincial government to close the loopholes that remain.
Lisa Cordasco is a former CBC Radio news reporter and morning show host who has made Victoria her home for the past 25 years.
This story was updated on March 18, 2016. The names of the debt counselling company and its owner were removed.