credit counselor Archives - Ira SmithTrustee & Receiver Inc.

Not all debt management programs are created equal

I have written previous blogs and made vlogs in the past about debt management programs, including:

Non-profit credit counselors are the good guys in the debt relief industry, which is otherwise full of players that are bursting with lies, scams and sketchy practices.

We have done the consumer proposal or bankruptcy of many people who first paid upwards of $2,500 to for profit “counselors” who ultimately did no more than pass the people on to a licensed insolvency trustee. They could have received a better service just going straight to a trustee for a free consultation.

Contrary to popular belief, a licensed insolvency trustee by law must first evaluate to see if the person can AVOID bankruptcy. So as you can see, not all debt management programs and companies are equal.

Do debt management programs work for everyone?

Debt management credit counselors need to acknowledge that their signature offering — the debt management plan — doesn’t work for everyone.

Debt management programs are promoted as the best bankruptcy alternative and an affordable way to pay back credit card debt. Borrowers make payments to the counseling agency, which then pays the creditors. Thanks to standing agreements that counselors have with credit card companies, the plans typically cut the interest rates, fees and payments that borrowers need to make. Full repayment of the debt often takes four to five years.

If borrowers make all the payments and repay the principal completely, debt management programs have much less impact on their credit scores than other types of debt relief.

Debt management programs were rampant in the United States

During the financial crisis in 2007-2009, debt management programs could be found on infomercials day and night. There were so many shady characters in the industry, the States ultimately had to enact laws to reign the shady operators in.

Needless to say, the shady operators did not give any worthwhile service for the fees they charged. But even the legitimate and well-meaning credit counselors mistakenly believed that their debt management programs were good for everyone. What I have found in my experience as a licensed insolvency trustee, is that no two people’s situations are the same, and one size does not fit all.

The story of Francine Bostick

Francine Bostick, a woman who lives in Kansas and paid off more than $120,000 in credit card debt in 2012, says she emerged with credit scores good enough to buy her first-ever new car. “It was exciting and made me a little nervous when they did the credit check,” says Mrs. Bostick, 66. “We got 0 percent interest for the life of the loan.”

This sounds great, but, yet Mrs. Bostick is also an example of what may be wrong with credit counseling because:

Her husband Jim Bostick had Alzheimer’s disease and she was his caregiver
Francine worked 12-hour days to earn the money to make debt payments while also caring for her increasingly incapacitated husband, who died in May
She had to do this when others her age were retiring
She never got to spend quality time with Jim before his death

If she lived in Toronto or Vaughan, what would I have advised?

Francine had never been bankrupt before and she did not have any significant assets. She and Jim rented – they did not own a home. In Francine’s case, she would not have had to make any surplus income payments in a bankruptcy. Although a consumer proposal is a great alternative to bankruptcy, Francine could not afford to complete one by only working one job in an 8-hour day, but she and Jim would be able to live on those earnings and their pensions.

In this case, I would have advised Francine that bankruptcy was a better alternative because:

Francine could have spent more time with her dying husband – that she can never get back now
She would received an automatic discharge after 9 months, and not worked so hard for several years
Just like in bankruptcy, she had no access to credit while in her debt repayment program
She could have begun rebuilding her credit faster after the bankruptcy
There is little leeway for missing a payment in debt management programs – many times if you miss 1 payment the entire program ends
Some people find that they simply can’t afford the payments on debt management programs, while others drop out because of setbacks such as job loss, unexpected expenses or illness
If you cannot fully complete the debt management programs, creditors can resume collection efforts, and borrowers also have flushed thousands of dollars down the drain and might not have enough money left to live on

What should you do if you have too much debt and are considering one of the debt management programs?

So, those thinking about debt management programs should book an appointment with an experienced licensed insolvency trustee first. (The first consultation is free.) That way, they will be able to understand the choice they make.

Ira Smith Trustee & Receiver Inc. brings a cumulative 50+ years of experience dealing with diverse issues and complex files and we deliver the highest quality of professional service. Contact us today and Starting Over, Starting Now you’ll be well on your way to overcoming your financial difficulties.