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Beware the debt-reduction pitch

The Globe and Mail

With Canadian household debt levels at historic highs, some consumers might be looking for ways to reduce what they owe - or at least make repayment a little less painful.

A number of companies offer debt reduction deals to help provide relief from creditors. But the Financial Consumer Agency of Canada (FCAC) has warned that by using them, sometimes consumers can wind up in worse financial shape.

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Fees, late payment charges and interest can all conspire to sink them into a bigger hole. And missed payments and misinformation can end up hurting their credit rating, which consumers may be desperately trying to protect.

“If an offer to reduce your debts seems too good to be true, it probably is,” FCAC commissioner Ursula Menke said in a statement.

For Blair Mantin, trustee in bankruptcy at Sands & Associates in Vancouver, the recent federal missive marked an unusual and “seismic” wakeup call, but he’s not surprised. His business - guiding people through the consumer proposal or bankruptcy process - has never been busier, but at the same time, Mr. Mantin has watched the debt relief outfits, with limited government regulation, ramp up their marketing. Sometimes they employ Glengarry Glen Ross-style sales tactics on vulnerable consumers.

“In general, and I’m speaking a bit harshly, but it is bald-faced lies at the end of the day,” Mr. Mantin said.

When considering debt reduction strategies, the federal government advises consumers to watch for:

  • Aggressive, high-pressure sales tactics over the phone, especially by an unsolicited telemarketer; don’t agree to anything right away.
  • Promises to cut large amounts of debt, such as 60 per cent or more. Creditors might not even agree to participate in debt negotiations, much less actually reduce debts.
  • Claims there won’t be a negative impact on credit ratings. Some debt reduction companies will delay paying creditors as a negotiation tactic, but in doing so, creditors may report missed payments and in turn, credit ratings suffer.

There are several things to consider:

  • Research the company through the Better Business Bureau, as well as with your provincial or territorial government office that deals with consumer affairs. Keep in mind that while these companies generally need to be registered or licensed, it doesn’t mean the government endorses the firm. Some companies might even give the impression they are approved by, or are part of, a government program.
  • Be cautious of upfront fees, someTIMES upwards of $1,000, charged even before debt reduction is confirmed, or continuing fees, such as required monthly payments or for cheques issued to creditors.
  • Keep in touch with your creditors to monitor for problems, such as late payments or no payments, even if the debt reduction company tells you to cut all contact and let it handle things. Some outfits may even ask consumers to sign over power of attorney.

The experts suggest consumers first attempt to handle the situation on their own.

Ask creditors for interest rate reductions or make payment arrangements. Consumers could approach their financial institutions for a debt consolidation loan.

Financial education can help through credit counselling agencies or debt management programs. Some jurisdictions even have debt assistance programs or links with local organizations. Meet with a trustee. The person can help people file for a consumer proposal, which is a legal process that allows certain consumers with financial woes repay a portion of what they owe, or as a last resort, file for bankruptcy.

For the 12 months ended Oct. 31, 2011, 44,702 Canadians filed consumer proposals, compared with 80,184 who declared bankruptcy, according Industry Canada.

Mr. Mantin now has a number of clients trying to get back on their feet after they said debt reduction companies failed them.

“They are really taking money from folks at their weakest, most vulnerable, and taking it for, I would suggest, no good value because you can get that advice free if you go and see a trustee,” Mr. Mantin said.