What are debt settlement companies?

I’m sure you’ve heard the radio ads – how a government approved debt settlement company can settle and/or reduce your debts. This is very powerful messaging if you happen to hit on some hard times. But when something sounds too good to be true, it’s usually not what it claims to be.

For some time now these companies have convinced consumers with ambitious plans, and, in many cases, the consumer is worse off in the end and winds up filing for bankruptcy anyway. The Association of Credit Counseling Services has received more than 100 complaints a month about them.  In January, 2012 the Financial Consumer Agency of Canada issued a consumer alert urging consumers to be cautious.
The Ontario government recently decided to regulate debt settlement companies to protect consumers, following in the footsteps of Alberta, Manitoba and Nova Scotia.

So let’s take a look at these debt settlement companies and separate fact from fiction. First of all, the term “government-approved” is misleading. The government does not approve these companies.  It’s true there are regulations in place for the industry; however that doesn’t mean the government approves what a business sells or how they sell it.

The only thing a debt settlement company can do for you is to try and negotiate a settlement before your creditors take you to court. That’s it!  There is no legal protection for you. And all of what they do, you can do yourself.

On top of that they may ask for large fees up front. Some may use methods, which could cause more financial harm to the consumer.

Ontario’s proposed regulations would limit the fee for services and prohibit upfront fees. These companies would also be required to provide, “clear, transparent contracts”, subject to a 10-day cooling off period.

If you decide to work with a debt settlement company make sure to read the agreement carefully.  Question any guarantees. If there is a fee, make sure you are charged after a settlement is made. Check the Better Business Bureau. Do a Google search.

It might be more helpful to work with your local credit counselling service or talk to a Trustee in Bankruptcy to look at all the available options.


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