Who to see when you have too much debt

On July 15, 2023, the Toronto Star published a lengthy article, written by Richard Warnica, about the unregulated services of a debt consultant. While the story focuses on an individual and a particular debt consultancy firm, the context applies to a broad swath of the Canadian public.


Financial Insecurity is Becoming the Rule, not the Exception

According to a report from MNP Ltd., cited in the Star article, 52% of Canadians are within $200 of not being able to meet their financial obligations. Thirty-five percent of Canadians (therefore, about two-thirds of the 52%) already find that they cannot cover their bills and debt payments. In other words, they are effectively “insolvent,” and unless they turn things around quickly, are candidates for a consumer proposal or bankruptcy.


Why is Debt Becoming Such a Problem?

Why is debt becoming such a problem in Canada? A confluence of factors is responsible. First, during the height of the COVID-19 pandemic, financial institutions were not pressuring consumers to pay off their debts, nor were the courts operating to enforce debt payments. Second, government-based financial aid programs helped to keep afloat individuals and businesses that were negatively affected by the pandemic. Third, again as a consequence of measures taken to reduce the spread of the virus, people didn’t have the opportunity to spend much of their money. Those with income had higher savings rates than we have seen in years.


Over the last year, however, these elements have disappeared. Lenders are demanding payment. The courts are operating. Financial aid programs have ended. People are back to spending. The tendency to finance consumption with debt has returned “with a vengeance.” Compound that pent-up desire to spend with supply chain issues, consequent inflation, and increased interest rates, and Canada is back where it was pre-pandemic, with too many instances of spending more than one can afford.


Source: Office of the Superintendent of Bankruptcy, “Insolvency and CCAA Statistics in Canada”


The statistics from June 2022 to May 2023 represent the number of insolvencies in the form of either consumer proposals or bankruptcies in those 12 months. The trend line projects where Canada is likely to be in June, July, and August. As you can see from the columns, the monthly figures do not change precisely according to the trendline, but the tendency is toward increased filings.


Is a Debt Consultant the Solution?

Enter the business of debt consultancy. These are unregulated businesses, unlike licensed insolvency trustees (formerly known as trustees in bankruptcy), businesses that operate under federal regulation, or non-profit credit counselling services that are provincially regulated. The argument is that they are educators, providers of helpful options, for a fee. The reality is that they are a “middleman” who do little but provide referrals. No strategies are recommended. There is no shepherding of their clients toward a solution.


Who Should You Consult?

This is one of those cases where “cutting out the middleman” is the right thing to do. Doug Hoyes is cited by Warnica. Partner with Ted Michalos of the licensed insolvency trustee practice Hoyes Michalos, which has offices throughout many parts of Ontario, Hoyes notes that “by law, [their] consultations are free. There are no upfront fees.” For more information about Licensed Insolvency Trustees (LIT), you can look here.


Another option people may wish to consider are the provincially regulated non-profit credit counselling agencies. Links to these agencies can be found through the Financial Consumer Agency of Canada. You may find them helpful in coaching you toward managing your debt.


Credentials to Look For

While some unlicensed debt consultancies may provide useful information, the motivation of a for-profit organization that cannot offer Canadians in tough financial situations meaningful assistance beyond a referral is a red flag. If you are struggling with debt, then before you sign anything, ask for credentials. Indeed, ask about credentials even if you have already signed a contract with a debt consultancy firm. Credit counsellors should hold, or be on their way to holding, the Accredited Financial Counsellor Canada (AFCC) designation. If you are considering a bankruptcy or consumer proposal, licensed insolvency trustees (LITs) are your go-to professionals. The designation required to obtain the licence is the Chartered Insolvency and Restructuring Professional (CIRP). These professionals often come from an accounting background as well. If you cannot find a business where one of these credentials is available, then you may very well be working with the wrong people.


I will add that, as a CFP® professional, if I am approached by a potential client who needs help with debt management that is beyond the scope of normal financial management concerns, then an LIT would be the first person to whom I would turn. As was noted in the article, they don’t charge for the initial consultation, and if their services are not right for them, they will refer you elsewhere.


This is the 206th blog post for Russ Writes, first published on 2023-07-17


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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.


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