Government Issues Notice To Creditors In Insolvencies

First, some background:

A person who owes money (a “Debtor”) and who is insolvent (meaning they can’t afford the amount of debt they owe) is typically eligible to make an insolvency filing using the insolvency system pursuant to the Bankruptcy and Insolvency Act, such as a bankruptcy or a Consumer Proposal, with the help of a Licensed Insolvency Trustee (“LIT”). The parties the Debtor owes money to are the “Creditors”.  As the OSB points out in the notice, “Creditors play an important role in upholding the integrity of the insolvency system by participating in the insolvency process”.

According to the OSB, “debt advisors” are defined as individuals or organizations, other than LITs, who in return for payment or consideration, provide services or advice about any BIA matter, including bankruptcy or consumer proposals. These debt advisors typically charge Debtors significant fees in exchange for services like collecting information, reviewing options and preparing documents. (We note that these are services that LITs provide without payment of such extra fees.) In addition, many debt advisors sell various other services to Debtors, such as credit rebuilding, loans in various forms, or insolvency filing insurance, which can sometimes be either unnecessary or ill-advised.

According to the OSB, some debt advisors are misrepresenting themselves by claiming to be LITs and/or implying they have the ability to directly provide debt relief. As such, the Debtor may be mislead into engaging a debt advisor, causing the Debtor to incur unnecessary costs for services that duplicate the services provided by LITs, which in turn negatively impacts the Debtor’s financial situation and reduced returns to Creditors. The OSB estimates that in 2023, Debtors either paid or committed to pay debt advisor fees totaling almost $20 million, which it notes is likely underestimated as Debtors have been known to underreport these fees.

This obviously affects the Debtors who are misled into paying unnecessary fees, and some of them have fought back, with two class action lawsuits having been filed against debt advisory companies alleging that the debt advisory firms had charged fees for debt restructuring services in violation of the Bankruptcy and Insolvency Act and the Business Practices and Consumer Protection Act in British Columbia. These lawsuits both resulted in settlements.

The OSB has previously raised alarms about these practices, including issuing a position paper on The Adverse Effects of the Debt Advisory Marketplace on the Insolvency System in December 2023. And debt advisors have been a hot topic of conversation among LITs, with many concerns raised and suggestions floated on how to ensure Debtors and Creditors are protected from concerning aspects of debt advisors’ practices.

The impact debt advisors are having on the insolvency system has not gone unnoticed by Creditors, though it has proven difficult for the lending community to coordinate a response to these issues. In its recent notice, the OSB attempts to assist the lending community by pointing out several things Creditors can do to address the impacts of the debt advisory marketplace. To summarize, some of the suggestions made are:

• Ensure they have the full picture of information. The OSB has recently made some changes to required forms for insolvency filings which will make it easier for Creditors to spot the use of debt advisors and identify the extent to which payments to these debt advisors may be impacting the Debtor’s financial situation. In order to make fully informed decisions on their acceptance or rejection of consumer proposals, Creditors will want to carefully review this information.

• Since most Debtors who approach a debt advisor end up filing a consumer proposal, consider the potential damage to the proposal being offered as a result of the involvement of a debt advisor. The OSB points out several signs that the use of a debt advisor may be negatively affecting returns to Creditors such as shortened proposal lengths, cashflow used to pay for financial advice instead of proposal payments, and credit used to pay a known debt advisor prior to filing the proposal.

• Use their voting powers in the case of a proposal made by the Debtor. The Creditor’s role is to weigh the benefits of the proposal versus what they might receive otherwise (such as in a bankruptcy scenario), and then vote whether to accept or not. As a majority of Creditors voting in favour is necessary for the proposal to go forward, creditors may be in a position to impact the outcome and even request an enhanced proposal, where a debt advisor has been engaged.

• Use the other powers available to Creditors in an insolvency administration if they have concerns about the fairness and reasonableness of a consumer proposal or a potential relationship between the LIT and the debt advisor. Suggestions include: asking for a meeting of creditors, rejecting or negotiating the proposal, submitting a complaint or having the LIT replaced.

The OSB points out that everyone involved in the insolvency system has a responsibility to work together to address the adverse effects of the debt advisory marketplace on Canada’s insolvency system. Getting Creditors involved is just another way to tackle this issue. In the meantime, the OSB continues to work with LITs to ensure they are doing all they can to address these issues, including launching a new LIT Compliance Activity Debt Advisory Relationship Review and taking enforcement actions against debt advisors that act as or claim to be LITs and/or solicit debtors into an insolvency.

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 their debt without involving debt advisors in the process. If you'd 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.