What is a Licensed Insolvency Trustee?

What is a Licensed Insolvency Trustee? Licensed Insolvency Trustees (LITs) are financial professionals licensed and regulated by the Government of Canada. They provide financial advice and services to individuals and businesses undergoing financial difficulty. LITs help people make informed choices to deal with their financial problems.

Why You Should Consider Consulting with a Licensed Insolvency Trustee

Free consultation

Most LITs will provide a free initial consultation. At the consultation, the LIT will assess an individual’s debts, assets and household budget and explain the legal options available to deal with overwhelming debt. These options might include filing a consumer proposal or filing for personal bankruptcy.

LITs are professionals

It is very important to ensure that you get financial advice and services from a qualified professional. When you choose an LIT, you can be confident that you are dealing with someone who has demonstrated they have the knowledge, experience and skills to be granted a licence from the Office of the Superintendent of Bankruptcy (OSB).

Protection from creditors

Once you’ve decided to retain an LIT, the LIT deals with your creditors directly.  In addition, In addition, unsecured creditors are legally prohibited from commencing or continuing legal proceedings against you to recover their debts.

LITs are regulated

LITs are regulated by the Government of Canada and are subject to ongoing oversight by the Office of the Superintendent of Bankruptcy and must adhere to federal standards of practice, including the Code of Ethics for Trustees.

Choosing a Licensed Insolvency Trustee – practise due diligence

You should be wary of working with a Trustee that has professional conduct issues or engages in questionable business practices. Below are some research tools that you can use when scouting for a prospective Trustee to work with.

Professional Conduct Issues

You should first determine if the Trustee has been subject to any disciplinary action for professional misconduct.

Licensed Insolvency Trustees are licensed by the Office of the Superintendent of Bankruptcy and are also supervised by them. The OSB publishes the results of investigations into the professional conduct of Trustees on their website. Professional Conduct Decisions of the OSB can be found here.

Moreover, many Licensed Insolvency Trustees are also licensed accountants. Therefore, it would be prudent for you to investigate whether the Trustee in question has been subject to any disciplinary action by the accounting body in which he/she is a member. For an example of disciplinary cases, here is a link to CPA Ontario Decisions, Orders, Settlement Agreements and Reasons in Cases Involving Disciplinary Proceedings.

Questionable Business Practices

The most common business practice that is bringing disrepute to the profession are Trustees who work in conjunction with fee-charging third parties who usually refer to themselves as “Debt Consultants”.

In April 2016, the Office of the Superintendent of Bankruptcy initiated a review of the business practices of certain Trustees throughout Canada and completed its review in April 2017.

The purpose of the OSB’s review was to identify potential problems associated with the integrity of the consumer insolvency process, particularly in cases where Trustees have entered into business relationships with Debt Consultants.

In conducting this review, the OSB conducted across Canada interviews with clients of certain Trustees who had filed consumer proposals. The OSB also reviewed the business practises of various Trustees throughout Canada who demonstrated frequent and sustained relationships with Debt Consultants.

The OSB’s observations after completing its review are as follows:

• Debtors served by Trustees who received referrals from Debt Consultants ended up paying thousands of dollars more for the administration of their consumer proposals than debtors who found a Trustee directly.

• Typically, Debt Consultants required a debtor to sign a fee agreement for consulting services before being introduced to a “selected Licensed Insolvency Trustee.” Debtors typically understood the role of the Trustee as being limited to meeting with the debtor to “file” the proposal developed by the Debt Consultant.

• The amount of the consulting fee portion of the agreement between the debtor and the Debt Consultant averaged approximately $2,400 and reached as high as $4,200.

• Furthermore, the OSB’s review found that debtors were often also sold supplemental services through the Debt Consultant and charged additional ongoing fees during the life of their proposal, which further increased their costs. For example, Debt Consultants marketed loans to pay out proposals at high interest rates, new credit instruments at high interest rates, proposal insurance, “credit rebuilding” loans and financial literacy services. Such expenses amounted to thousands of dollars in additional costs during the life of the proposals reviewed.

• Thirteen Trustee firms, including one national-level firm, were found to have operated in a frequent and sustained relationship with the two large-volume Debt Consultant firms. More than 40 % of their proposal filings were sourced from these Debt Consultants.

• A debtor would typically meet with the Trustee only once, at a time arranged by the Debt Consultant, to sign proposal documents. Before that meeting, the Trustee relied on the Debt Consultant to carry out the legal obligations of the Trustee with respect to actually conducting the assessment and collecting the debtor’s financial information. In cases where the Trustee had a frequent relationship with the Debt consultant, all aspects of the insolvency process prior to filing the proposal were usually performed at the Debt Consultant’s office.

• Information by the Trustee to prepare the proposal documents was normally transmitted directly from the Debt Consultant to the Trustee shortly before the meeting at which the proposal documents were to be signed.  Signing of proposal documents also took place in various informal locations in towns and cities where the Trustee did not have a registered office.

• Subsequent communications with the Debtor after the proposal was filed were almost exclusively performed by the Debt Consultant and not by the Trustee

Conclusion

As you can see, choosing the wrong Trustee can cost you both money and peace of mind. We hope that this article gave you the necessary tools to choose your Trustee wisely.

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