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Ontario to Introduce New Legislation for Debt Consolidation Companies

18 April 2013

There are good ways to pay off your debt, and there are some not so good ways to pay off your debt. One great way is to borrow against your home with a debt consolidation loan, pay off your debts, and then start repaying the home equity loan, albeit with much lower interest rates that you were paying before. Another, less-stellar way to pay off your debt, is to go through a debt consolidation company. These companies are often scammers looking for a way to make a quick buck; and the Ontario government is planning on stepping in to stop them from taking advantage of consumers.

First, a primer on what debt consolidation companies actually do.

If you find yourself with a mountain of debt (as most Canadians do today,) you can hire a debt consolidation company to pay off that debt for you. What they’ll do is speak to your creditors, get your interest rates lowered, and pay off your debts for you. They will then set up a payment plan with you, hopefully at a lower interest rate than what you were paying before on your debt, and you’ll start making repayments to them.

However, now you are debt-free and can truly start living again with only one creditor to worry about. Or at least, that’s the idea. Unfortunately too many people in Ontario lately have been finding out that this isn’t always the way it goes.

“The Ministry of Consumer Services became aware of an upward trend in consumer inquiries and complaints about debt settlement companies in 2011, with the trend continuing into 2012,” says Bryan Leblanc, a spokesperson with the Minister’s office.

Those complaints have shed light on a growing problem – debt settlement companies that claim to have paid off those debts so that they can continue to collect money from the indebted consumer, but who have in fact done nothing at all.

It’s not until the creditors start calling again, and telling the consumer that they owe just as much as they did before, that individuals realize there’s a problem. And often by that time, it’s too late.

It’s something that’s been happening more and more in Ontario lately, and Jeffrey Schwarz, executive direction at the non-profit Consolidated Credit Counseling Services Canada, Inc. says that he’s not surprised. He says that these companies used to operate largely in the United States. But when tougher legislation was introduced there preventing them from preying on unsuspecting consumers who really just wanted to clear up their debt, those same operators came to Canada.

And Ontario is one of the easiest places for them to set up shop – Alberta, Manitoba, and Nova Scotia are all provinces that already have tough legislation meant to keep these shady operators away from consumers’ pockets.

“When it became evident that Canadians were going to go a little bit more heavy into debt, all of a sudden, and to no surprise, these companies would pop up,” says Schwarz.

Pop up they did. And they’re causing a great deal of grief among Ontarians. The province currently has 22 of these businesses in place, and they receive over 100 complaints each month regarding them, says the Ontario Association of Credit Counselling Services.

But now Ontario has had enough, and they plan to do something about it. Legislation will be introduced today that makes it much harder for these companies to sap whatever they can from consumers and then pack up and go home. Some of the plans include banning up-front fees, mandating more transparent contracts, and a 10-day cooling off period in which the consumer can come back and back out of the deal. This latter piece of legislation in  particular will be very helpful, as it will prevent debt consolidation companies from advertising false interest rates or fees, only to go back on their word and charge the customer later.

And legislation for this kind of thing appears to work. Looking at the case study in Alberta is all that’s needed to see that. Before this Western province introduced their new laws governing these companies, they faced just as many complaints about them as Ontario is now. But since the new legislation came in during the year 2006, they’ve received only 33 complaints in total. Five of those came with sanctions being ordered, and one company even had their license to practice revoked.

“The number of complaints is low and that is partly reflective of the regulation’s impact,” says Mike Berezowsky, spokesperson with Service Alberta. “Though, we do know that people who find themselves in debt trouble are typically reluctant to come forward because they’re embarrassed.”

But not everyone’s on board with the new legislation that will come into effect. Richard Cooper, chairman of the Canadian Association of Debt Assistance, is one of them.

Mr. Cooper believes that this new legislation isn’t helping consumers, and that it’s only going to hurt those credible companies that are currently in business. He says there are also lots of those too, and that the handful of “bad actors making outrageous claims” are often the minority in the crowd. He also states that companies who are legit can help consumers cut their debt by 60 per cent.

What do you think? Is new legislation needed to protect the consumer? Or do you think that this is a case where the consumer must do their own due diligence, and work only with companies that they know are reputable?

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