Credit Counselling

Credit Counselling FAQs – Avoiding Scam Agencies

You may have seen credit counselling advertisements on the internet or television or heard their ads on the radio:

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Although the above video is from an American news program, the information is relevant to Canadians, since many of these same companies are now operating in Canada (after changing their names). They have been literally been chased out of the United States by the U.S. Federal Trade Commission and state Attorney Generals for engaging in fraudulent business practices. And they think that Canada is an easy target so they have set up shop here.

The purpose of this page is to provide you with information on when using a credit counselling agency would be appropriate and how avoid the pitfalls of choosing the wrong agency.

How They Work

Legitimate credit counselling agencies are non-profit organizations financed by financial institutions such as chartered banks. In Ontario, they are members of OACCS (Ontario Association of Credit Counselling Services) and they 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. You will be required to pay 100 percent of the debt back over a maximum period of 60 months.

As you may now realize, there are also organizations calling themselves “credit counselling” or “debt settlement” agencies that may not be so legitimate. There are many questionable organizations now operating in the Greater Toronto Area which prey on the trust and desperation of people in debt.

The common themes in these ads are that:

  • they’ll negotiate with your creditors and help you settle for less than what you owe
  • they’ll help you avoid bankruptcy

When To Use A Credit Counselling Agency

A DMP through an OACCS accredited 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.

Impact on Your Credit Report

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 the Financial Consumer Agency of Canada’s website:

Ratings And What They Mean

  • 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 TypeTrans UnionEquifax
Credit transactions (from the first date of delinquency)6 years6 years
Judgments (from the reporting date) 7 years6 years
Collections (from the first date of delinquency) 6 years6 years
Secured loans (from the date opened) 5 years6 years
Bankruptcy (from date of discharge) 7 years6 years
Consumer Proposal (from date of completion)3 years3 years
Credit counselling (from date of completion)2 years3 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:

How Credit Counselling Agencies Are Funded

“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.