Debt Consultants and Consumer Proposals

Introduction – Debt Consultants

You’re in financial trouble and have performed some search queries on the internet for debt consultants. Chances are you came across a number of websites for:

• • “debt and credit specialists”
  • “debt management experts”
  • “debt relief experts”
  • “debt consultants”

after performed a search query on “consumer proposals“. Here’s a typical example of the claims they make:

We help reduce your debt by up to 80%

Our credit repair services can help you improve your credit score

Paying Unnecessary Fees To File A Consumer Proposal

The truth of the matter is this – such a company has no ability to reduce your debt at all. Rather, it will charge you steep fees (from $2,000 and up) to simply act as an intermediary between yourself and a Licensed Insolvency Trustee. Only an LIT has the legal authority to file a consumer proposal.

In fact, things have gotten so out of hand that in April 2017 the Office of the Superintendent of Bankruptcy (the “OSB”) issued a report revealing that in 2016 almost 10,000 consumer proposals were filed where the debtor reported having paid for advice before filing with an LIT. According to the OSB, the average fee charged by a debt consultant was $2,400, so that means that, in 2016, insolvent consumers paid over $23 million in unnecessary fees, simply to be referred to an LIT.

Lawsuits Against Debt Consultants

It has gotten to the point that such misleading practices have resulted in legal action against these debt consulting companies.

Two debtors who filed with LITs after paying third-party fees to debt consultants have initiated class action lawsuits in British Columbia against two prominent debt consulting companies.

The plaintiff debtors allege that the business models of the defendant debt consulting companies provided debt restructuring services in breach of both the Business Practices and Consumer Protection Act and the Bankruptcy and Insolvency Act.

The Canadian Association of Insolvency and Restructuring Professionals (CAIRP, which is the professional organization representing members who work in the Canadian insolvency system) has noted that:

…the existence of these legal proceedings raises the spectre that it may ultimately be determined that LITs who have worked with [debt consultants] were party to a scheme that unlawfully breached s.66.13(2) of the BIA…

What is s.66.13(2) of the BIA? It’s a provision in the Bankruptcy and Insolvency Act that requires an LIT to:

1. 1. personally perform a assessment of a debtor’s financial circumstances and the causes of her insolvency; and
   2. personally perform credit counselling during the consumer proposal process.

Many LITs which have chosen to work with debt consulting companies have effectively outsourced these two duties to debt consultants rather than performing these obligations themselves. This is a violation of s. 66.13 of the BIA because a debt consultant may not be acting in a debtor’s best interest; it may be recommending a consumer proposal when it might not be appropriate to do so in order to get paid a referral fee.

The CAIRP goes on to state that:

…This could mean they [i.e., LITs which chose to work with debt consultants] face exposure to claims for damages for conspiracy or, to the extent they received any financial compensation from [debt consultants], for restitution….

What this means is that LITs which chose to work with debt consultants in order to received debtor referrals from these companies may have opened themselves up to legal damages.

If the class action lawsuits are ultimately successful, these LITs could face significant financial penalties; so significant that some of these LITs may not be able to continue operating as viable businesses. The consequences to the clients of these LITs could be enormous if said LITs become insolvent themselves and can no longer continue operating.

Conclusion

Here are some takeaways from our preceding discussion and analysis.

1. 1. If you wish to file a consumer proposal, go directly to an LIT. Most LITs (including Fong and Partners) will provide you with a free, no obligation consultation to determine if a consumer proposal is the right option for you.
   2. If you filed a proposal with an LIT through a referral from a debt consulting company named in the class action lawsuit mentioned above, contact the law firm acting for the plaintiff debtors to be put on a mailing list.

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