Using a debt settlement company
Some companies offering help to pay off debt or repair credit are misleading consumers.
A debt settlement company negotiates with your creditors and will offer them a lump sum of money to eliminate your debt. This amount of money is often lower than your total debt. If your creditors agree to the offer, you must provide the lump sum to your debt settlement company. The debt settlement company will then pay your creditors.
Some credit counselling agencies may also offer this service.
There are many different names for the practice of debt settlement, including:
- debt consolidation
- debt arbitration
- debt negotiation
- debt relief
- debt pooling
- debt reduction
- debt elimination
Creditors aren’t required to negotiate with a debt settlement company. It's completely up to them. Some or all of your creditors may not agree to lower your amount of debt or even work with the debt settlement company. Be aware that a debt settlement company may still charge you fees even if your creditors refuse the offer.
Debt settlement companies don't always provide credit counselling and money management advice. They are usually for-profit businesses that make money from fees that they charge their clients.
A debt settlement company may offer to handle all communications with your creditors. They may ask you to sign a power of attorney to give them this ability. Before you sign, make sure the debt settlement company agrees to inform you of payments they will be making to your creditors when they have power of attorney. This ensures you can confirm that your payments are being received.
What to watch out for when considering a debt settlement company
Be aware that some debt settlement companies may engage in the following practices.
Some debt settlement companies offer their services through aggressive telemarketing calls. High-pressure sales practices create a difficult environment to make clear decisions. If you get a call, don't feel pressured to agree to something right away.
Be aware that some debt settlement companies may make unrealistic promises about what they can provide. They may promote their services in a misleading way.
Debt settlement companies cannot:
- guarantee to reduce your debts by a large percentage
- ensure your creditors will always agree to participate in debt settlement negotiations
- prevent creditors and collection agencies from garnishing your wages or taking money from your bank account if you have a bank account with them and owe them money
- stop your creditors from trying to recover the money you owe in court
- stop phone calls from creditors
- offer legal protection from creditors’ actions such as seizing assets
- handle government-regulated proceedings that release you from debt, which are part of consumer proposals and bankruptcies. Only a licensed insolvency trustee can offer you these two options.
Some companies may also offer you a loan suggesting it will help repair your credit score. The company may claim that making timely payments on this loan will repair your credit. When you sign up for this type of loan, you may never actually receive any money because the company will tell you the loan amount will cover its services or programs.
Instead, you make regular payments to the company to repay the loan. Be aware this type of loan usually has a high interest rate. This service does not help eliminate any of your other debts. You're required to keep making your payments on any other debts you owe. You may only be left with more debt and no change to your credit score.
You may be required to pay upfront or advance fees or monthly fees. You'll likely still be charged the upfront or advance fee even if the company is unable to get creditors to reduce your debt. Fees charged by debt settlement companies may be very high.
Some debt settlement companies intentionally delay making payments to your creditors. They do this in the hopes of getting better results in negotiations to reduce your debts. This will hurt your credit score because it can make it seem like you're less able to repay your debts. Always ask for receipts for any payments you make. It's important to know what is happening with payments to your creditors.
Before you sign up for debt settlement
Make sure you do the following before you sign up with a debt settlement company or agency.
Research the company’s reputation
Do a background check. 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 made to:
- the Better Business Bureau
- l'Office de la protection du consommateur (Quebec)
- your provincial or territorial consumer affairs office
Review the contract carefully
Don’t agree to anything under pressure. If you decide to sign up with a debt settlement company or agency, read the contract carefully before you sign it. Ask questions if you don't understand any of the terms and conditions. Make sure you keep a copy of the contract.
Don't sign anything or agree to any service before researching the company.
Making a complaint about a debt settlement company
Provincial and territorial governments are responsible for regulating debt settlement companies and investigating consumer complaints.
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