Do You Need to Hire a Debt Consultant?

Who Can Help You File A Consumer Proposal?

According to the laws surrounding Consumer Proposals in Canada, only a Licensed Insolvency Trustee (LIT) is permitted to administer a Consumer Proposal. While an individual can talk directly to a Licensed Insolvency Trustee and work with them to make a proposal to creditors, for various reasons an LIT often isn’t the first person people reach out to when they have a debt problem that could be solved by a Consumer Proposal. Some reach out to a trusted friend or advisor or a not-for-profit credit counsellor, who end up referring them to a LIT at no cost. Others meet with a for-profit debt consultant (sometimes called a debt restructuring agent or a credit consultant) and engage them to help them deal with their debt. Having determined that the individual needs to file a Consumer Proposal, these debt consultants refer them to a LIT after charging the individual a significant fee.

What Does The Debt Consultant Fee Cover?

Those who engage a debt consultant should understand what they are paying for. The fee paid to the debt consultant is totally separate from the payments you will make to the LIT for your Consumer Proposal. Consumer Proposal payments made to the LIT are deposited into a trust account for the benefit of your creditors. When the LIT makes a payment to your creditors from this trust account, it will take a portion of the funds as its fee, based on a specific calculation controlled by the government (which means any LIT would get the same fee for administering the same proposal). To be clear, you do not make a separate payment for the LIT’s services – it comes from the money your creditors agreed to settle for.

The funds you pay to the debt consultant go directly to the debt consultant only – none of it goes to the LIT or your creditors. This is the fee for the services the debt consultant provides. Keep in mind, that the debt consultant does not prepare, file or administer your Consumer Proposal, nor do they deal with your creditors – only an LIT can do this.

So what services does a debt consultant's fee cover?

Aside from referring you to an LIT, typically a debt consultant will provide some or all of the following: advice on your options, recommendations in regard to proposal terms, financial education and/or counselling, and information about rebuilding your credit. Some will also loan you money (with interest) or connect you with someone who will, or offer you additional products or services related to your finances.

Are the services you pay a debt consultant for necessary?

It is not necessary to entertain offers for new debt or additional products or services. In fact, we caution that these can be detrimental to the fresh start you are looking for, or may not be appropriate until after you've dealt with your debt and taken time to work on your budget and financial goals.

The LIT is capable of providing all of the necesary services to file a Consumer Proposal – for no extra fee.

• LITs are very well-versed in the options for dealing with debt (not just Consumer Proposal and bankruptcy options) and routinely provide free consultations to give advice on those options.
• LITs are very experienced in developing the terms of a proposal that is both achievable for you and likely to be accepted by your creditors.
• As part of their duties in administering your Consumer Proposal, LITs provide two financial counselling sessions to discuss financial topics like budgeting, setting financial goals, and building good credit, and they are often available to answer any other questions you may have.

Will The LIT Have Your Best Interests In Mind?

Despite what you may have heard, LITs do not work for your creditors, nor do they work for the government. An LIT is an independent officer of the court. Although LITs are subject to government (and sometimes Court) oversight, when preparing a Consumer Proposal an LIT does not answer to any particular person, group, or entity. Their role is to act as an un-biased facilitator.

When you approach an LIT to discuss filing a Consumer Proposal, they will make recommendations based on what is best for you, considering your financial and family circumstances. That includes thinking about how your creditors will view the proposal, because the goal is to file a proposal that will be accepted by a majority of your creditors.

Is the LIT your advocate?

As mentioned, an LIT will work with you to prepare a viable proposal, one which they can recommend your creditors accept. Regardless of whether you have engaged a debt consultant to advocate for you, an LIT will not recommend a proposal to your creditors unless it is a) in compliance with the laws and regulations and b) has a reasonable chance of success – ie. it is possible for you to meet your end of the bargain. Once a viable proposal is made, the Trustee will send a report to your creditors which will contain their recommendation. They’ll also be the point of contact for answering any questions your creditors have, and, if it appears the creditors will not accept the terms, they will work with you to adjust it.

An LIT is not a lawyer, so there is no solicitor/client confidentiality. They are an unbiased facilitator, so they will have to be honest with your creditors and disclose pertinent information. They must stick to the facts if there is a dispute between you and a creditor over some aspect of the proposal.

So while the LIT will be working hard to help you succeed (and most LITs have chosen this career path specifically because they want to help people) it would not be accurate to describe them as your advocate. Some people like the idea of engaging a debt consultant to play this role. If that’s something you are willing to pay a significant fee for, that’s up to you to decide, as long as you are aware that you don’t NEED to hire a debt consultant to file a fair and achievable proposal. You can get great service directly from an LIT while avoiding unnecessary fees and pressure to take on new debt or services you don't require.

Charla Smith & Company is a Calgary-based Licensed Insolvency Trustee, serving the southern Alberta region. We regularly help individuals navigate their options for dealing with overwhelming debt. If you would like a free, no-commitment consultation to review your options, contact us.

Disclaimer: This publication provides general information and should be seen as broad guidance only. The information contained herein cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon this information without obtaining specific professional advice relating to your particular circumstances. Charla Smith & Company Ltd. does not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.