Major changes made to a form required to make an insolvency filing

1. The form now clarifies the debtor’s responsibilities (or lack thereof) for future payments to any debt consultant who may or may not have referred them to the LIT.

It‘s still a common misconception that an individual must pay a debt consultant (sometimes referred to as a credit counselor, debt counselor, or debt advisor) when they need relief from their debt such as that offered by a Consumer Proposal. In our previous blog Do You Need to Hire a Debt Consultant? we explained that, while some may see value in hiring a debt consultant, it is absolutely not a necessary step to get relief from your debt. Only an LIT can provide you with the option of a Consumer Proposal or a Bankruptcy, but often when people see a debt consultant first, that person ends up agreeing to pay the debt consultant a significant amount of money, while the debt consultant refers them to an LIT to do the actual filing.

The government has recognized that the choice to pay a debt consultant is often a result of confusion, which can be created as a result of advertising by debt consultants, and/or by the use of debt consultants as a referral source for LITs [for clarity, Charla Smith & Company does not accept referrals from debt consultants], so they’ve been trying for years to find ways to educate the public about these issues.

As a result of this change to the form, an individual making a Consumer Proposal or bankruptcy filing with an LIT must sign an acknowledgement that any amount of money they’ve committed to pay to a debt consultant is optional and not required in order to file a proposal or bankruptcy, and that they are not required to make any additional payments for financial advice already received. In fact, it states that those charges can instead be discharged through the Consumer Proposal or bankruptcy.

This is a massive improvement to the effort to educate the public, as it puts the onus on the LIT to ensure the debtor is aware of the actual requirements. Once aware, some individuals may decide they want to continue paying their debt consultant because they feel it is worth it for the advice they received. But many people who make an insolvency filing can’t afford to pay unnecessary fees or could better use the funds to, for example, rebuild their emergency savings, so we suspect many people will stop making those payments.

And as word gets around that it isn't required, more people may choose to skip seeing a debt consultant and instead meet directly with an LIT to avoid incurring extra costs in the first place.

2. There's a new requirement that the Licensed Insolvency Trustee (LIT), with whom the proposal or bankruptcy filing is being made, certify that they've made the individual debtor aware of their option to receive services from the LIT either in person or by videoconference, and that they can change their mind later on. There is also a requirement for the individual to confirm this choice was discussed with them.

In the not-so-distant past, if an important meeting was required between the individual debtor and the LIT (for things like discussing the debtor’s decision whether to make a filing, or financial counseling), it was generally required to be held in person. However, after the pandemic caused many LITs to (at least temporarily) close their physical offices and work remotely, the government temporarily allowed these meetings to be held by videoconference or phone. Since that went pretty well, more recently the government made a permanent change to the rules to allow those meetings to be held either in person or by videoconference, depending on the individual debtor’s preference.

Most individuals were unaware of these rule changes, and there was a risk that people would feel they had to meet with the LIT using the same format used when they initially contacted the LIT. With the new change to the form, an individual is put on notice that they have the power to choose.

This is an important clarification, especially as many LITs have begun to offer their services to individuals who are located very far (across the country in some cases) from their office now that it's possible to meet by videoconference. But just because it's possible, it doesn't always mean it's the best choice for the individual. In these cases, it’s more likely that a debtor might have started out communicating with the LIT virtually and believe that’s their only option even if they don’t feel comfortable with that format.

This change to the form puts the onus on the LIT to ensure the debtor is aware of the consequence of having an LIT who is located very far from them, so they can make the choice that is best for them. At that point, it may be that the individual decides they'd rather work with a local LIT so that they don’t have to travel very far if they decide they’d rather have sensitive discussions in person.

In Summary

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 party, and an officer of the court. But the government controls who can be licensed as an LIT (to make sure they are sufficiently educated and trustworthy) and monitors what LITs do (to make sure they are fulfilling their duties properly). So when they make changes to a form like this, they are requiring the LIT to make changes to the discussions that are had with an individual prior to filing a proposal or bankruptcy. In this case, since both of these changes require an increase in transparency for LITs, we think they are positive (and not at all boring) changes.