Getting help from a credit counsellor

From Financial Consumer Agency of Canada

Consumer Alert

Some companies offering help to pay off debt or repair credit are misleading consumers.

What you need to know when getting help to pay off debt or repair your credit.

If you're having trouble paying back your debt or keeping up with your payments, you may want to talk to a credit counsellor. Simply talking to a credit counsellor won't affect your credit score.

A credit counselling agency can provide a range of services, such as:

  • one-on-one counselling
  • group courses, tips and seminars on topics such as how to make a budget and stick to it or how to use credit wisely
  • debt management plans

Finding a credit counselling agency

Both not-for-profit organizations and for-profit companies offer credit counselling services.

Do your research to find a trustworthy organization and a qualified counsellor. Make sure you know what services they offer and how much it will cost.

Research the agency’s reputation

Make sure that the agency is in good standing with a provincial or national association. These associations require members to maintain specific standards of practice.

Find agencies through these associations:

Find out if there have been any serious or unresolved complaints about the agency. This includes late payments to creditors or false advertising.

Check for complaints about the agency with:

Look carefully at the agency’s advertising

Be cautious. If it sounds too good to be true, it probably is.

Some agencies or companies may claim or misrepresent that they:

  • can solve your debt problems quickly for only a fraction of your debt
  • can quickly and easily fix your credit score
  • offer services as being part of a government program

Keep in mind:

  • you may still need to pay fees even if your creditors refuse to negotiate or make a deal to settle your debt
  • it’s impossible to change or erase information that’s part of your credit history, unless information is inaccurate
    • improving your credit score will take time
    • you have to show your creditors that your habits have improved and that you're paying back your debt on time
  • agencies or companies should never try to coerce you into using their services (be wary of any credit counsellors doing this)
  • if you’re not sure a company is part of a government program, contact the government department or agency that is responsible for the program
    • ask them to confirm that the company’s representation is genuine

Find a government department or agency:

Find out about the agency’s services and costs

The services offered and the fees charged by credit counselling agencies can vary greatly.

Ask the following questions about services to help find an agency that is right for you:

  • Is the first consultation free
  • What services does the agency provide
  • Will the agency provide you with a written proposal describing how they will help
  • What type of support will the agency give to help you to improve your money management skills
  • Will the agency provide you with monthly statements of payments

Ask about the counsellor's qualifications

Credit counsellors aren't legally required to have any specialized training. However, many credit counsellors have some training.

Ask about the counsellor’s qualifications, including:

  • education
  • specialized training
  • years of experience

Common specialized training may include:

  • Accredited Financial Counsellor Canada designation, offered by the Ontario Association of Credit Counselling Services
  • Insolvency Counsellor’s Qualification Course, offered by the Canadian Association of Insolvency and Restructuring Professionals

The purpose of the training is to provide counsellors with the unique skills required to support consumers in the areas of personal finance, consumer credit, money management and counselling.

Are you comfortable with the credit counsellor

If the credit counselling agency seems to fit with your needs, ask to meet with a credit counsellor. This way you can see if it's a good match. No reputable credit counselling agency will charge for the first meeting.

Make sure that you trust the counsellor’s opinion and judgment. If you're not comfortable, ask to switch to another counsellor.

Debt management plans

You can sign up for a debt management plan through a credit counsellor.

A debt management plan is an informal proposal your credit counsellor makes to your creditors on your behalf. It allows you to consolidate your debts into one affordable monthly payment. In some cases, you may not have to continue to pay interest on your debt. You'll usually have to repay 100% of your debts.

Before you enroll in a debt management plan, you’ll meet with a credit counsellor. The credit counsellor will assess your situation, help you make a budget and give you some tips about dealing with your debt.

If you decide to sign up for a debt management plan, a credit counsellor will contact your creditors on your behalf to ask if:

  • they will reduce or eliminate the interest rate or fees on your debts
  • they will extend the period of time which you have to repay your debt

A debt management plan is a voluntary agreement between you and your creditors. Creditors who choose not to work with you on a debt management plan may continue to contact you or garnish your wages or take money from your bank account if you have a bank account with them and you owe them money.

If some creditors don't accept your debt payment plan, your credit counselling agency will usually suggest you make payment arrangements directly with those creditors.

If your creditor accepts the payment terms of your plan, you'll then make regular payments to the credit counselling agency and the agency will use your payments to pay off your creditors according to the plan.

Keep in mind that creditors can still use collection agencies to recover the money you owe. Your credit counsellor can ask creditors to stop, but they have no legal power to make them stop.

There are also other options if you have serious financial problems. You may consider working with a licensed insolvency trustee. A trustee is licensed by the federal government’s Office of the Superintendent of Bankruptcy to handle debt problems under consumer proposals and bankruptcies. Both are legal processes you follow to pay off your debt.

When you meet with trustees, they will first assess your financial situation. They will typically provide this financial assessment for free. If it suits your financial situation, you may then consider working with them for a consumer proposal or bankruptcy.

What to consider before you sign up for a debt management plan

Think about the following before you enroll in a debt management plan.

Will it save you money

A lower interest rate will save you money. But the credit counselling agency may charge you a fee for its services.

Compare the credit counselling agency’s fees with what you'd save in interest on the debt management plan. If the agency’s fees are more than what you'd save, you may be better off seeking help from other sources.

Be aware that some credit counselling agencies may promote a debt management plan over other options, because they make money from creditors by getting a percentage of the debt that they recover.

You may consider other options, such as a consumer proposal or even bankruptcy. A licensed insolvency trustee can typically offer you free advice on these two options. Credit counsellors are unable to offer consumer proposals or manage bankruptcies.

Find a licensed insolvency trustee.

How much it costs

Make sure you know what fees they charge. These can include:

  • initial set-up fee
  • monthly maintenance fee
  • application fee
  • membership fee
  • upfront fee or fee for each creditor

Ask if they will reduce or eliminate fees if you can't afford to pay them.

The type of debts covered

Debt management plans may not cover all types of debt. You'll need to continue to make payments on any debt not included on your debt management plan.

They usually cover unsecured debts, such as:

  • credit cards
  • lines of credit
  • unsecured loans

They usually don't cover secured debts such as:

  • Canada Revenue Agency debt
  • Quebec Revenue Agency debt
  • student loans
  • car loans
  • mortgages

Debt management plans usually don't cover secured debts because the company you owe money to could take your asset if you don't make payments.

Make sure that the credit counsellor explains exactly which of your debts the program will cover.

What will happen to your credit report

Entering a debt management plan will have a negative impact on your credit report. Your credit score will decrease. There will be a note on your credit report that you're making regular payments on your debts through a special arrangement with a credit counsellor.

This information will stay on your report for two years after you pay your debts. During this period, anyone you allow to access your credit report will see this information. This includes creditors, landlords and employers.

While a debt management plan may have a negative impact on your credit report in the short-term, in the long-term it may help you improve your credit report faster because you're making regular payments and reducing your debt.

Find out how long information stays on your credit report.

Are you able to use credit

You're often able to use credit during a debt management plan, however, credit counsellors will usually recommend you don’t take on any new debt. The counsellor may ask you to sign a disclosure statement to confirm you'll not get or use credit.

After you've completed your debt management plan, a good way to rebuild your credit is to apply for a secured credit card.

Find out how to apply for and use a secured credit card.

Understand your responsibilities

When you're following a debt management plan, you must make sure to:

  • disclose all your debts
  • make your payments on time
  • not take on any additional credit

If you don't make payments on time, your debt management plan may be cancelled. Make sure you know what costs are involved and what services you'll receive. Before making a decision, talk to different credit counsellors and licensed insolvency trustees to compare your options.

Review your agreement carefully

If you decide to sign up for a debt management plan, carefully read the agreement before you sign it. Make sure you know what costs are involved and what services you'll receive. Ask questions if you don't understand any of the terms and conditions. Make sure you keep a copy of the agreement.

An agreement for a debt management plan should clearly state:

  • how much you'll pay in fees
  • when the agency will process your payments
  • your responsibilities
  • what you can expect from the agency
  • what will happen if you can no longer make payments because of a change in your financial situation

What you need to know before you sign a contract.

What to do during your debt management plan

Ask the agency for regular written status reports on your plan. Ask also for receipts of all transactions involved with the debt management plan. This will provide you with proof that the agency made your payments. While you're in a debt management plan, companies you owe money to may stop sending you monthly statements.

Carefully review your status reports or monthly statements. Make sure the agency is paying your creditors on time. This will avoid any late fees or negative entries on your credit report.

You can also monitor your progress, by reviewing your credit report. It includes information on whether you're making regular payments.

Order a copy of your credit report.

Compare your options

Everyone’s situation is different. Before making a decision, talk with different sources to see how they can help with your situation. This could include:

  • financial advisors
  • accredited credit counsellors to discuss debt management plans
  • licensed insolvency trustees to discuss consumer proposals and bankruptcy

To help you decide on the best option for your situation, you may want to ask the following questions:

  • how much of your debt will be repaid
  • what type of debts will be repaid
  • how long you'll be making payments
  • how much your monthly payment will be
  • what happens if you can't make a monthly payment
  • what will happen if your financial situation changes and you need to reduce your payments or can no longer make payments
  • can creditors or a debt collection agency continue to contact you
  • what will happen to your assets
  • what will happen to your credit report
  • how much you'll pay in fees
  • can a creditor change their mind and withdraw from the agreement

Compare the advice you get from each reputable source before you decide which option is best for you.

Table 1: Comparing options to help you repay your debt
Questions Debt management plan Consumer proposal Bankruptcy
What are my options?

This is an informal process where you work with a credit counselling agency.

They will negotiate with your creditors to consolidate your debts into an affordable monthly payment.

This is a legal process where you work with a licensed insolvency trustee.

They will negotiate a debt payment plan with your creditors.

This is a federally-regulated process when you can't afford to repay even a portion of your debt.

You'll work with a licensed insolvency trustee who will handle your legal paperwork and arrange payment with your creditors.

What debts are covered Unsecured debts such as credit cards, unsecured loans and unsecured lines of credit. In some cases, you may be able to include secured debt.

All debts including tax debt.

There are some exceptions:

  • some student loans depending if you finished being a full-time or part-time student 5-7 years ago
  • spousal or child support payments
  • a fine or a monetary penalty imposed by the courts
  • debt arising from fraud

 

All debts including tax debt.

There are some exceptions:

  • some student loans depending if you finished being a full-time or part-time student 5-7 years ago
  • spousal or child support payments
  • a fine or a monetary penalty imposed by the courts
  • debt arising from fraud

 

How much of your debt do you need to repay The full amount of what you owe. Usually you won’t have to pay interest.

You’ll most likely end up paying a percentage of what you owe with no interest.

This amount is based on your ability to make payments. The trustee calculates the amount by considering your assets, your income and some of your expenses.

Some assets can be taken and other assets are protected.

If you have assets that are taken, the trustee will put them towards your debt.

Can you keep your assets (what you own) Yes, however, you may choose to sell some of your assets to pay down your debt. Yes, however, you may choose to sell some of your assets to pay down your debt.

No, however, some assets are exempt.

Trustees will explain what assets can't be taken by provincial or federal law and what assets you may lose or have to pay to keep.

How long do you need to make payments Up to a maximum of 5 years. Up to a maximum of 5 years.

9 or 21 months for a first bankruptcy (depending on your surplus income).

24 or 36 months for a second bankruptcy (depending on your surplus income).

What happens to your credit score There will be a negative impact on your credit score for 2 years after you complete the debt management plan. There will be a negative impact on your credit score for 3 years after you complete the consumer proposal.

There will be a negative impact on your credit score for 6 or 7 years for a first time bankruptcy (depending on your province).

There will be a negative impact on your credit score for 14 years for a second time bankruptcy after you complete your bankruptcy.

Can creditors continue to contact you Yes, however in most cases they don’t unless you miss payments. No, legally they aren't allowed. No, legally they aren't allowed.
Can a creditor change their mind and withdraw from the agreement Yes, however in most cases they don’t unless you miss payments. No, once accepted the consumer proposal is legally binding. No.
What are the fees for each option? Fees are unregulated. Companies can set the price. However, not-for-profit organizations have mandatory price limits. Their prices are also based on a client's ability to pay.  Fees are regulated by the Bankruptcy and insolvency act. Fees are regulated by the Bankruptcy and insolvency act.

Making a complaint about a credit counselling agency or credit counsellor

Provincial and territorial governments are responsible for regulating credit counselling agencies and investigating consumer complaints.

Contact your provincial or territorial consumer affairs office.

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