According to Statistics Canada, Canadian household debt has hit a record high. At the end of 2021, the average Canadian owed $1.86 for every dollar of disposable income, an increase of 6% from the end of 2019 prior to the COVID-19 pandemic.
With household debt at an all-time high, the number of Canadians looking for debt help is also skyrocketing. When debts become overwhelming, it can be tempting to find a quick solution. There are many debt settlement companies promising to eliminate your debts quickly and easily, which can seem tempting, but the problem with these companies is that they don’t always provide credit counselling and money management advice. This means that without proper financial education, you may rack up debt again, leading to a vicious cycle.
Here are five things about debt settlement services that you should understand before engaging them:
- They charge you high fees. Debt settlement companies are for-profit businesses that make money from fees that they charge their clients. You may be required to pay upfront or advance fees or monthly fees, and you’ll likely still be charged the upfront or advance fee even if the company is unable to get creditors to reduce your debt. These fees are typically very high, and for someone in debt, they simply can’t afford these kinds of fees.
- Creditors may not cooperate. An increasing number of major creditors are saying they are no longer working with for-profit debt settlement companies, and instead will only work with reputable, non-profit debt settlement services companies. This is a fact that most for-profit companies will not reveal up front. Furthermore, if you engage a debt settlement company to communicate with your creditors, and your creditors refuse to work with them, you may still be on the hook for the fee to the debt settlement company.
- You could be taken to court. When you use a debt settlement company, you pay them, and the company in turn pays your creditors. If your creditors don’t get paid, they can come after you legally. Since your debt settlement company will be handing all communication with your lenders, it’s a good idea to make sure the company agrees to inform you of payments they will be making on your behalf. This ensures you can confirm that your payments are being received. If your creditors don’t see payments, they will come after you and not the debt settlement services company which has failed to deliver. Your assets can be seized and sold, or a judgment may be granted against you to put a lien on your house or garnish your wages so the creditors can recover what is owed to them.
- Your credit can be ruined for six to seven years. A debt settlement program gone wrong can leave a mark on your credit report and rating for at least six years from the time the last payment is made on every debt. On the flipside, when working with a not-for-profit agency, they are authorized by law to erase all records of debts settled through them after two years. This means you can have a clean record and good rating after two years compared to six or seven years.
- No legal recourse. If things don’t work with a debt settlement company, you won’t have any legal recourse. Their contracts typically allow them to collect fees from clients without providing services in return. The Consumer Protection Office in your province can advise you on whether a company is licensed and a check with the Better Business Bureau will reveal if they practice ethically.
Tried, trusted, and legal
Before engaging a debt settlement company, you should reach out to a not-for-profit credit counselling agency such as SolveYourDebts.com. Non-profit organizations will always have your best interest at heart and will educate you on how to properly manage your money, so that you won’t get back into debt.
If you need help with debt settlement or have questions about your personal finances, contact us today for a free consultation.