The MapleMoney Show » How to Save Money » Debt

Debt Relief Options to Get Back on Track, with Doug Hoyes

Presented by EQ Bank

Welcome to The MapleMoney Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom. I’m your host, Tom Drake, the founder of MapleMoney, where I’ve been writing about all things related to personal finance since 2009.

Do you feel as though your debt is getting the better of you? Are you struggling to manage your payments, and wonder if you’ll ever find relief? My guest this week is Doug Hoyes, host of the Debt Free in 30 Podcast, and a licensed insolvency trustee. For over 20 years, Doug has been helping Canadians eliminate their debt. Today, Doug joins us to discuss a variety of debt relief options, and how they can help you regain control of your finances.

If you’re feeling weighed down by payments on multiple loans and credit cards, you’re not alone. These days, many Canadians are feeling the pressure of debt, while the cost of living continues to rise. Thankfully, help is available. Doug shares a number of debt relief options with us, such as bankruptcy, consumer proposal, debt settlement arrangements, and consolidation loans, letting us know when to consider each option, as well as the costs involved.

Doug explains the differences between bankruptcy and consumer proposal, including how each one will impact your credit report. He also shares tips on dealing with collection agencies, and tells us which creditors will never stop chasing you if you owe them money.

Our sponsor, EQ Bank, has partnered with TransferWise, to give Canadians a better way to send money abroad. The result is fully transparent and remarkably quick international money transfers that are up to 8X cheaper for EQ Bank customers. To find out more, visit EQ Bank today.

Episode Summary

  • The difference between consumer proposal and bankruptcy
  • Consumer proposal is has become more common than bankruptcy
  • The effects of a consumer proposal on your credit report
  • The impact of bad loans on bank profits
  • Tips for dealing with collection agencies
  • When it’s a good idea to consult an insolvency trustee
  • Debt settlement vs. consumer proposal
Read transcript

Do you feel like your debt is getting the better of you? Are you struggling to manage your payments and wondering where to find relief? My guest this week as Doug Hoyes, host of the Debt Free In 30 podcast and a licensed insolvency trustee. For over 20 years, Doug has been helping Canadians eliminate their debt. Today, Doug joins us to discuss a variety of debt relief options and how they can help you regain control of your finances.

Welcome to the Maple Money Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom. Our sponsor, EQ Bank, is partnered with Transferwise to give Canadians a better way to send money abroad. The result is fully transparent and remarkably quick. International money transfers are eight times cheaper for EQ bank customers. To find out more, visit maplemoney.com/eqbank. Now, let’s chat with Doug…

Tom: Hi, Doug, welcome to the Maple Money Show.

Doug: Great to be here, Tom.

Tom: I wanted to have you on because there’s something I don’t have any experience with. I came close at one point when I was younger, but just dealing with debt to the point where you’re looking at terms out there like “consumer proposals” and bankruptcy. I did have a lot of debt when I came out of college. It wasn’t just student loans. It was more credit card debt. I was at the point where I start getting calls that I missed my payment and asking if I could make sure to get that in. It wasn’t truly that terrible but it was getting to the point where it started to feel unmanageable. Once I started getting a better income coming in, I was still kind of in this point where it was the credit line pays off the credit card and then I slowly pay off the credit line. It kind of became this cycle where it felt like it was getting out of control. But there is a stage further than that where people are starting to feel really burdened by their debts and start looking at these kinds of terms. One of the bigger questions I see is what’s the difference between a consumer proposal and personal bankruptcy?

Doug: Both are legal procedures. They’re both governed by the Bankruptcy and Insolvency Act, which is federal legislation so it applies everywhere in Canada. There are some tiny little differences in different provinces, but is federal legislation. In a bankruptcy, I think everyone conceptually understands what a bankruptcy is where they say, “Well, I’m losing my stuff.” Yup, that’s pretty much how a bankruptcy works. If you have more debt than you can possibly hope to pay off, then these are the two options to consider. When someone comes in to talk to me, I say, “Let’s start at the beginning here. Who do you owe money to? Can you service it on your own? Can you get a second job? You have assets to sell?” The vast majority of Canadians are able to deal with their debt on their own doing it like that. But the people that we are helping the most have much more debt than that. Perhaps it is $40,000, $50,000, or $60,000 of unsecured debt or more and their incomes just don’t support it. If your minimum payments on your debt are $2,000 a month and your paycheck is $2,500 a month, it’s pretty obvious the math isn’t going to work. So then we look at these two legislated settlements. In a bankruptcy, once the bankruptcy starts, you are required to report your income to your licensed insolvency trustee for a minimum of period of nine months. And the trick in a bankruptcy is that you lose whatever assets you have that aren’t exempt. For example, we’re not going to take your and chair or your clothes and things like that. But if you have a fancy house, car or investments or whatever, then those are subject to being sold for the benefit of your creditors and you’re required to make a payment based on your income. The government says you’re allowed to make a certain amount each month based on the size of your family and some other factors, so each month you report to the trustee what your income is. And, if you’re over the limit, you make an additional payment based on that. A bankruptcy can be somewhat open-ended. Well, what if I get a raise at work? What if I get a better job? Well, the cost of the bankruptcy can increase. As a result, the government created an alternative, which is a consumer proposal. In real simple terms, it is a deal. It’s a settlement. We go to all your creditors and we say, “Look, I know I owe this much money. I can’t pay it back in full but I don’t really want to go bankrupt. Let’s make a deal. I owe $60,000 in total, how about I make a deal where I pay back $20,000? I’ll pay back $400 a month for 50 months—something like that. So the creditors look at it and say, “Well, we’d like to get all our money, but we understand if we don’t take this deal, you’ll go bankrupt and we may end up getting less. So, okay, we’re willing to take the deal.” And for the debtor, the person who owes the money it’s like saying, “Okay, I can afford to pay $400 a month and that’s far better than the $1,000 a month in minimum payments I’m making just to pay the interest so it becomes a win-win situation.” It works for both. And as a result, in Canada, here in 2020, there are more consumer proposals filed than bankruptcies. It has become the go-to solution as compared to bankruptcies in the past.

Tom: Both of those sound like an easy way out. What’s the downside here? Is it affecting your credit? What are the consequences to these actions?

Doug: The upside is you’re getting rid of your debt. For the people we’re dealing with, they really have no choice. It’s like going to the doctor with a medical issue and the doctor says, “We can either do surgery or you’re probably just going to die.” I guess you’re going to do the surgery, right? I don’t like to compare a proposal to a perfect world because, obviously, there are already problems. If you do nothing, the creditors are going to keep calling. They’re going to garnish your wages, freeze your bank account. It’s going to be a lot worse. But to answer your question, the first downside is there is a cost to it. You’re paying money. In the example I gave, a consumer proposal might be $200, $300, or $400 a month. It’s all is based on your income so it’s not free. And even in a bankruptcy, you’re making a payment, again, based on your income. So it’s not free. It does appear on your credit report. A bankruptcy stays on your credit report for roughly seven years. The credit bureaus handle them slightly differently but it’s generally six years after you are discharged. A bankruptcy can last for nine months, 21 months—it just depends on your circumstances. But for roughly seven years there’s a note on your credit report that says you filed bankruptcy. If you file a consumer proposal, there’s a note on your credit report that says you filed a consumer proposal. And that note stays there for three years after the proposal is completed. If it ends up taking two years to complete your proposal, it would be on there for five years. The maximum period it’s on your credit report for is six years. The maximum period of a proposal is five years. The maximum time it would be on your credit report would be six years after you start. So, in the future if you go to get a car loan, a mortgage, or borrow money, there will be a note on your credit report that says you did a consumer proposal or a bankruptcy. That doesn’t mean you can’t borrow. It means you have to take steps then to begin to rebuild your credit. Getting rid of all that debt is a huge starting point. I met with a lady yesterday and we were having this discussion and she said, “Well, I went to my bank and they wouldn’t loan me any money because my credit’s too bad.” Focusing on how this is going to hurt your credit really isn’t a big issue because your credit is already damaged. You already can’t borrow money. So, yes, there is a note on your credit report but there are certainly steps you can take once the debt is gone to begin to rebuild your credit. And as a result, I’ve dealt with hundreds of people over the years who have, two, three, or four years after their proposal is done are able to get a perfectly good car financing or buy a house—whatever. It’s not a permanent thing. It’s a bump along the road where we take steps to alleviate going forward.

Tom: What’s the upside to this compared to not paying your debts? Obviously, you’re going to have creditors calling you every which way. But I believe if you don’t pay your debts, isn’t the timeline pretty much the same as the bankruptcy in that seven year range?

Doug: Yes. There are two different concepts here, though. Equifax and TransUnion, as a general rule, purge data after six years. So if you just stop paying your debts, six years later, that debt will drop off your credit report. The problem is; are the creditors just going to do nothing for six years? If you owe back taxes (which doesn’t even appear on your credit report) is Revenue Canada just going to do nothing for six years? No. The CRA (Canada Revenue Agency) is going to garnish your wages, freeze your bank account, whatever. If you owe the credit card company money and just stop paying, they will turn it over to a collection agency. They will phone and yell and scream at you but at some point they will probably also say, “Hey, look, we want our money back. We’re going to take you to court, sue you and garnish your wages.” So, if you have no income or assets, then I totally agree, just do nothing. It will eventually go away. But if you have a job, then your wages could be garnished. If you have any assets (like money in a bank account or anything else) then the potential for that to be taken is there. In the United States, they call it “creditor protection.” And that’s kind of what it is. I’m filing this consumer proposal to get protection from my creditors so they can’t take those further steps. If my choice is do nothing and have my wages garnished for $1,000 a month or file a consumer proposal and pay $400 a month, it’s a pretty simple decision.

Tom: Now, I don’t want to go too far down this path where they’re just not paying off their debts but you mentioned it comes off your credit report after six years? Do you still owe that debt? Can credit companies come to you 10 years, 20 years later and still be looking for that money because they’re not really forced to take it off their books.

Doug: Yes. Again, there are a couple of different concepts here. You owe the debt forever. The question is; what can they do about it? If it’s not showing up on your credit report because enough time has gone by, then I guess it’s not affecting your ability to borrow in the future. There are in most provinces in Canada what are called limitations act; legislation that limits when a creditor can take action against you. And I don’t want to get into the weeds on that because you’ve got people listening to this from all over the country. And if you’re listening in another country, then it’ll be different. In Ontario, for example, there is a two year limitations period for normal types of debt; credit card, bank loans, things like that. So if a credit card company doesn’t do anything for three years and then takes you to court and sues you for it, you can go to court and say it’s been more than two years. And the judge, (if he understands the law) will throw it out. They can’t sue you. As a general rule, they have to sue you within two years. If they don’t, then it will appear on your credit report for a total of six years but then it’s gone. What will typically happen if you get behind on your debts is for the first two or three months you’ll get letters. They’ll phone you then turn you over to a collection agency that will really ramp up the collection efforts. And then somewhere maybe around the six months to 18-month mark, they have to decide if they’ve had enough or actually going to commence legal action to take you to court and sue you. Once they get a judgment against you, that judgment stays there forever. Once they’ve sued you and have a judgment, they can come back four, five or 10 years later and attempt to garnish your wages. Doing nothing works in some cases but backfires in others. And what I just said there applies to standard creditors. It doesn’t apply to CRA. They live forever. So if you don’t pay your taxes from 10 years ago, they can still come after you. It doesn’t apply to CMHC if you had a shortfall on your house. I see them coming back 10 years later. It doesn’t apply to things like child support arrears, spousal support arrears. There’s no limitation period on that. Before you just put your head in the sand and do nothing, it’s a good idea to talk to a licensed insolvency trustee, which is what I am. We are licensed by the federal government to do this. It’s probably better to get some expert advice as to what the ramifications of whatever course your plotting would end up being.

Tom: A lot of this sounds like a bad deal for the banks or any kind of lender. Is this kind of baked in a little bit—similar to just a regular person investing? This is kind of what they’re doing, right? They know there’s going to be some losses with their gains and it all works out in the end?

Doug: Yeah. Again, I’m not a bank analyst but I can tell you, if you look up on the inter-web, what the biggest bank in Canada earns… I won’t even tell you what color they are because I don’t want you getting sued for what I’m about to say. But they earn about a billion dollars a month. That’s the biggest bank in Canada. All the others are making tons of money, too. So, yes, a bank wants to loan enough that they’re making as much as they can. And they know that in some cases, some of their loans will go bad so they have a loan loss provision, obviously. The typical person who comes in to see me has had that credit card for years and years and years. They’ve been paying on it for years and years and years. They’ve probably paid back the full amount that they borrowed originally. And now it’s interest on the interest on the interest. So when they file a consumer proposal and the bank agrees to take a settlement of perhaps 30 percent of the full amount owing, the bank is losing a chunk of the interest on the interest. It’s not like they’re losing money they’ve actually put out. They’re losing interest on top of interest. They are losing some of their profit. Banks, as a general rule, are fine with it because they’re making so much money anyways. They would much rather someone file a consumer proposal where they get something as opposed to a bankruptcy or you just walk away and do nothing. As a result, the vast majority of consumer proposals we file end up being agreed to by the creditors.

Tom: One other thing you said I want to circle back to was with the collection agencies. Are they working for a bank or some sort of lender? Or are they buying that debt at a cheaper cost? Or maybe it’s a bit of both?

Doug: Both, it’s both. The typical collection agency process is they are a collector on behalf of the original creditor. After a few months, the bank says, “You know what? We don’t want our own staff bothering people. It’s not a good vibe. It makes the bank look bad so we’re going to turn it over to a third party collection agency and we’re going to pay them a commission for what they collect.” For the first handoff, when it’s a relatively fresh loan, maybe the collection agency is only earning 10 or 20 percent commission on what they collect. If it’s the second or third handoff or it’s more than two years old, maybe the collection agency is going to get half of the money they collect or three quarters of it. That’s your typical scenario. That’s why a collection agency will almost never sue you. They may threaten it all the time, but they won’t sue you because whatever they collect they’re only getting a portion of, anyways. If they can’t collect they send it back to the original creditor and it’s that bank that will then make the decision to sue you. Now, there are certainly large debt buyers here in Canada who will buy debt from the banks. There’s a big one that as soon as you file a consumer proposal, they buy that debt from the bank. There are other ones that will buy it on a forward flow basis or they will buy it after a period of time. Anything that’s a year old, they will buy it from here. They’ll give you three cents on the dollar, five cents on the dollar or 10 cents on the dollar. In that case, they own it. And again, obviously, they want to collect as much as they can to recover their original investment so in that case they might actually be suing you. But from your point of view as the person who owes the money, whether the collection agency owns the debt or not, they’re still collecting from you and you’ve got to come up with a plan to deal with it.

Tom: Yeah, I’ve seen messages in forums and where there is sometimes confusion with people who claim they just made a payment but it’s not good enough because it’s really not that company’s debt anymore.

Doug: Yeah. And a collection agency doesn’t really want you sending them $100 a month. They are much more willing to accept a lump sum settlement. They’ll say, “If it’s a $10,000 debt and you can come up with $8,000 tomorrow we’ll wipe out the rest,” or $2,000, $4,000 or $6,000 depending on how old the debt is. For them to be collecting $100 a month from you for the next five years and they’re only getting to keep 10 cents of it is way more work than it’s worth. So if you do have an account in collections, you’ve got a much better chance of making a settlement with them if you can come up with a lump sum of money. Of course, the reason the account is in collections is you don’t have a lump sum of money, which is why the consumer proposal then becomes the obvious option. That way you’re making the payments over time which is much more affordable.

Tom: If someone’s at this point where they’re getting these collection calls, should they be dealing with them directly or are they better to go with a consumer proposal? What’s the better end result when it comes to your credit report and everything like that?

Doug: It depends on the numbers. If you have an old cell phone bill from a year ago that you forgot about and they’re hounding you for $500 and you’ve got the $500, then you’re better off just paying it. You’re not going to do a consumer proposal for $500. If it’s the only debt you have, again, dealing with the collection agency may make perfect sense. But the people who are coming in to see me don’t just have that one debt. They’ve got four others or 10 others. And so making a deal with that one collection agency to deal with that one debt often is worse because now it gets reported on your credit report that you’ve made a settlement with them and all the other creditors who’ve been waiting to see if you’re going to come to life or not say, “Wait a minute. He’s got money now,” and all of a sudden the phone calls are starting up again along with the legal action and whatever else. If you’re going to come up with a solution, you want a solution that covers all of your problems, not just one of them. If I have four cuts on my arm, is putting one Band-Aid on going to help me? A little bit, but I’ve still got a real big problem. I think you’ve got to look at the big picture. My advice to everyone is, if you’ve got debt give a licensed insolvency trustee a call. By law, we are not allowed to charge an upfront fee. So until you actually start the process, we can’t charge you anything. That’s the law. The code of ethics we are subject to also says we have to present all reasonable options. I can’t just tell you about a consumer proposal when maybe in your case, doing nothing would be a perfectly good alternative. By talking to us up front, we can point you in the right direction and then you can decide. There is no commitment on your part. It’s an initial call or meeting that costs you absolutely nothing. And then you can decide in your specific case what makes the most sense. If you’re a pensioner, that’s different than if you’re working. If you have assets or don’t; if you are self-employed or not, if you have tax debt or not, if you have payday loans… Many different factors factor into this. It’s better to have an expert take a few minutes with you and give you some ideas that apply to your specific situation. There’s tons of information on the internet and I have no problem with people going on Reddit and saying, “Hey, here’s my situation. What do you think” You can do that with medical issues too, “Hey, is this a serious medical issue—people of the Internet?” Maybe it’s better to actually talk to a professional and get a more precise answer that’s applicable to your situation.

Tom: Finding information online is a great segway because it was on your site and I wanted to just run through a few things. I noticed you had five debt relief options listed. Two of them were the consumer proposal and the personal bankruptcy. We’ve kind of went through that already. But there were three other options that were kind of interesting. Just to kind of run through a list, debt settlement; how is that different than a proposal? Is that just dealing directly with the creditor?

Doug: Essentially. In a consumer proposal, it’s a legal settlement governed by federal law. There is a very specific process. You have to deal through a licensed insolvency trustee to do that. We make sure all the rules are followed. It’s all done on the up and up. And the beauty of a consumer proposal, mechanically, the way it works is we go to the creditors and with a deal. They then have 45 days to vote on it and each unsecured creditor gets one vote for every dollar you owe. So if more than half of the dollar value say yes, then it becomes binding on everyone. That’s why it’s a legal settlement. In a debt settlement, it’s informal as opposed to a formal procedure. What you could do if you’ve got four credit cards is phone them all up and say, “Look guys, I owe you each $10,000 but I can only afford to pay you $3,000. Will you agree to it?” They may or may not agree. What happens if three of them agree to your settlement and the fourth one doesn’t? Well, I guess you got a good deal with the other three and that fourth guy takes you to court and garnishes your wages and the whole thing falls down. So the problem with debt settlement is it is not a legally binding thing. Now, if you’ve got debts that are four years old and they can’t sue you for them anyways, and they’re all willing to settle for 10 cents on the dollar, then make a settlement with them directly. There is no big downside to doing that. But again, in most cases, the people we’re dealing with have more than one debt and they don’t really want to be trying to negotiate with a whole bunch of different creditors. And how do you know that the settlement you’ve negotiated becomes legally binding? Do you know what kind of letter you need to get back to them that signs off so they’re not going to be suing you? With a consumer proposal you don’t have to worry about any of that. A debt settlement works in very specific situations. And if you’re motivated enough and have the knowledge to be reaching out to all the creditors, working out deals, getting it all in writing and you’ve got the money to support it, then that’s fine. But for most people it’s just not a feasible option.

Tom: In your example there where you’ve got three credit card companies agreeing and the fourth not, it makes it really hard to make that agreement with those three if you still owe the full amount to the other one. Even if they don’t come after you, they’re still expecting a regular payment so it’s going to change your monthly finances. That kind of brings me to the next idea which is debt consolidation. Let’s say you’ve got these four credit card companies. How does that work?

Doug: Debt consolidation is really simple to understand. You owe $10,000 to four different credit card companies and the interest rate you’re being charged is 19.9 percent on each one of them. So you go to your bank and say, “Hey, will you give me a $40,000 loan or line a credit at something less than 19.9 percent?” Then you can take that money and pay off everybody else. Now you’ve saved a considerable amount of interest every month. That’s fantastic, but there are two problems with that. Number one; what you’ve done is exchanged $40,000 in debt for $40,000 in debt. You actually haven’t reduced your debt. You have saved interest. And if you have the ability to continue making those payments, that’s fantastic. What are the chances, though, that your bank is going to give you a $40,000 unsecured loan at a really good interest rate?

Tom: Especially if you’re already having payment problems.

Doug: That’s the thing. Your credit is perhaps already compromised. If you can get that and you can afford to pay it back, fantastic. I think it’s an excellent idea. But it is not always practical. And certainly as we’re recording this here in 2020, for the people watching this in 2030, maybe the world is changed. But the Canadian banks have tightened up considerably over the last year or two. What they would have perhaps been willing to do in the past, they may not be willing to do in the future. Maybe they want a cosigner. Maybe they want security or it’s got to be a second mortgage on your house. You’ve got to decide if all of those things actually make sense for you. So, yeah, in theory, a debt consolidation loan makes a lot of sense in practice. Now, you may not qualify or you may not get it. The big problem I see with people is, they go to the bank and the bank says no. So then they go to one of these alternative lenders. Again, I’m not going to mention the names of them because no sense you get sued for it, Tom. But the alternate lenders will be charging you perhaps 30 percent, 40 percent, up to 60 percent interest which is the maximum allowable under the criminal code. So, you’ve consolidated so you’ve got one monthly payment. That’s great. But you took four credit cards where the interest rate was 19.9 percent and consolidated into a loan where the interest rate 35 percent. That doesn’t help you. You probably don’t qualify for the consolidation loan. But even if you do, you’ve got to make sure it’s actually better for you than what you are doing already.

Tom: Are there situations where this is all kind of rolled together? Do you ever setup a debt consolidation loan that pays off under a consumer proposal? Does this all become a thing or is it all a pretty separate?

Doug: No, they’re separate. Again, thinking of that example; I go to the bank and borrow $40,000 to pay off my credit cards and then I go to that same bank the next day and say, “Guess what? I can’t pay back the $40,000. How about we make a deal with $20,000?” They’re going to think you’re trying to commit some kind of fraud and they’re not going to accept that deal because they just loaned you the money yesterday. So they are separate events. We have had cases in the past where someone is in a consumer proposal because they had equity in their house and as they pay down the consumer proposal, perhaps they can refinance their mortgage and use that money to pay off the proposal. Or perhaps a family member or something has access to credit and can pay off the proposal that way. But I’m not a big fan of that because the consumer proposal has no interest. You can continue paying it off and pay it off as quickly as you want. Why take on a loan with an interest rate to pay off a consumer proposal with a zero interest rate? It doesn’t make a whole lot of sense to me. And again, you’re going back into debt when we’re trying to give you a fresh start by getting you out of debt so I’m not a big fan of that approach.

Tom: Well, that’s a good point. Just to clarify, when you do the consumer proposal, there’s no interest rate. You’re just saying, “This is what we’re going to pay you monthly until such and such date,” and that’s kind of the end of the math, right?

Doug: Yes. You’re making a deal; I owed you this amount and I’m going to pay you back 30 percent of that. That’s the number. I did a consumer proposal yesterday for a lady who’s going to pay $200 a month for five years which works out to $12,000. If two weeks from now or two months from now her brother says, “Here’s the $12,000,” she can pay it off and be done. Whether it takes two months or five years, she is still paying $12,000.

Tom: With these consumer proposals, what happens if they don’t pay? Does it mean the deal is off and you’re back to the original? How does that work?

Doug: Yes, that’s essentially exactly it. The proposal is annulled. The rules say if you get up to three payments behind, the proposal is automatically annulled. Now you back to where all the creditors are still there. They can start adding interest from the past and so on. So we only want to file a consumer proposal if we are reasonably confident that you’re going to be able to do it. We don’t want to get you into something where you’re paying $600 a month when you can really only afford $300. Maybe in that case a bankruptcy would have been a more appropriate option. We try to come up with as reasonable an amount as we can. Obviously, it has to be high enough for the creditors to agree to it, but it also has to be affordable for you. It has to be a win-win. What we’ll typically do at our firm is, if it’s a $200 a month proposal and you get paid biweekly at work, we’ll set up the payments to be $100 biweekly. We just take it out of your bank account every payday. Then when you hit a three pay month, you’ve actually made an extra half payment. So by the end of the first year, you’re actually a month ahead. It’s the same thing if you get paid weekly, we’ll split it up that way. That way you’re creeping ahead. And that way, if you do run into any kind of hiccup along the line, you’re a couple of payments ahead already, so it’s no problem. You can miss a payment and you’re still back on line. So it’s a very flexible approach and if it’s set up correctly the chances of success are really high.

Tom: The final option I saw for debt relief is credit counseling. Is this something that everybody goes through and they sit down with you? Is that the initial thing or is this something else where they’re going through some kind of a course or education?

Doug: Again, there are two separate concepts and it’s always important to be precise with the words. There’s this term called, financial planner. Is that a legal term that’s in an act somewhere? Or is it a term we bandy around? In different provinces it is a regulated term while in other provinces, it isn’t. It’s the same with the term, credit counseling. When you file a bankruptcy or a consumer proposal, by law, there are two BIA (bankruptcy insolvency act) insolvency counseling sessions that are part of the process. We refer to them by the shorthand of credit counseling. And what we do at those sessions is we talk to you about whatever it’s going to take to help you get a fresh start. So we’ll talk about things like budgeting, for example so you know where your money is going so you can stay on track. We talk about financial goals. What are you trying to accomplish? How can we help you get there? Maybe we need to help you set up a savings program. Maybe it’s helping you find a better job, talking about reducing your income, spending habits—all that kind of thing. That is part of the bankruptcy or consumer proposal process. And it’s frankly one of the best parts of it because a lot of our clients have never had anyone sit down and talk to them about budgeting, money management and all those things. For our clients, debt isn’t the problem. Debt is the symptom of the problem. The problem is; they lost their job, got sick, got divorced or they just were not very good with their money. If we can help deal with those issues we can get them a fresh start. Now, your question to me was, what about credit counseling as an option instead of a bankruptcy or a consumer proposal? In Canada, there are a number of “not for profit” credit counseling agencies. One of the services they offer is a debt management plan. Under a debt management plan they will negotiate with your creditors. The deal is you pay them back in full, but they can generally get you a break on the interest. So if I have $20,000 worth of debt and I’m thinking it’s credit cards and it’s going to end up costing me $40,000 to pay it back with all the interest over the next few years, a not for profit credit counselor can work out a debt management plan where you pay back the full amount at $400 a month for 50 months or whatever it is over five years. And the creditors will generally agree to forego the interest. That’s not credit counseling. That is a debt management plan. Again, it’s a perfectly reasonable option if it’s affordable to you. If you can afford to pay the debts back in full but you need a break on the interest, then a debt management plan is a perfectly reasonable option. Again, they have to get everybody to agree to it. So if they’ve got five credit cards and they’re all fine with it, but there’s a couple of payday loan companies that won’t agree to it, then the debt management plan may not be a great option. The Revenue Canada (CRA) will not include themselves in a debt management plan where you pay them back over five years with no interest. That’s not a thing. So if you have debts like Revenue Canada, then a debt management plan isn’t going to work. Most of the clients we’re dealing with can’t afford the payments in it because it’s not $20,000 with the debts they’re dealing with, it is $40,000 or $50,000 and they can’t afford to pay that back in full. They need the break of a consumer proposal. A debt management plan is not a legal settlement process. In other words, is not governed by federal legislation. It’s an informal negotiation where you have to pay the debts back in full. That’s the catch, if you will. With a consumer proposal (in the vast majority of cases) you’re paying back less than the full amount.

Tom: You mentioned this not for profit nonprofit. I see this a lot and I’m not sure—I get what it means, normally, but it seems to come up a lot with this credit counseling and debt consolidation. Everybody’s saying they’re nonprofit and I don’t see that with you guys. What’s the difference there? Why are they nonprofit? It seems like almost part of the marketing that makes them seem more official. Almost like they’re tied into the government or something like that. That’s kind of way it comes across.

Doug: Yeah, but it’s actually the opposite because I’m tied into the government because I am regulated by the government. You have a driver’s license, or at least I assume you do, Tom. If you have a driver’s license you are subject to the rules of that the government sets for driving your car. I have a licensed insolvency trustee license (as does my firm) whereby I am subject to certain rules. I am heavily regulated by the federal government. A not for profit credit counselor is not regulated by the federal government. They don’t have any licensing they have to go through. And just so people understand, I have a university degree. I am a chartered accountant (what we now call a CPA). I’m also a CBV and I am also a licensed insolvency trustee. After I became a chartered accountant, it takes generally somewhere between two to five years after that to get your trustees license. So it’s a very high bar. There are only roughly 1,000 of us in Canada that have that license. So it’s not a trivial thing to get. A not for profit credit counselor means their organization is set up not to make a profit. It’s as simple as that. My organization, Hoyes Michalos and Associates Inc., is a corporation. It is set up to make a profit. I make no bones about it. We are a business. We provide a service. Our fees are regulated by the government. But hopefully, if I’m doing it right, my fees are enough to cover all of my staff salaries and costs and I’m able to make a profit. A not for profit organization is not designed to make a profit. Now, there is a key distinction here, because when you hear that phrase “not for profit” what you think in your mind is that it is a charitable organization like a church or a junior hockey team or something like that.

A charitable organization is not the same thing as a “not for profit” organization. Not for profit just means we are not trying to make a profit. A charitable organization is registered with Canada Revenue Agency. They have the ability to issue tax receipts for charitable donations. They are doing charitable work. There are some not for profit credit counselors who are also charitable organizations. They’re able to issue charitable donation receipts. And there are others who are not registered. You can go onto the Revenue Canada charitable donation site and see who is a registered charity and who isn’t. The ones that are not, as a general rule, get the majority of their revenue from the debt management plans you and I talked about earlier. They charge a fee. They call it a fair share contribution from the banks. So they say to the banks, “Okay, we’re going to collect $100 from the debtor. You have to donate $20 back to us to cover our costs.” Whether that’s reasonable or not, I’m not going to argue with. They’ve got to keep the lights on as well. But Revenue Canada said, “Wait a minute. If most of your money is payments you are getting from the big banks and the big credit card companies, that’s not a charitable organization. It’s not a charitable endeavor. That’s kind of sort of like a business. So you can’t be registered as a charity at the same time. You can still be not for profit in that whatever money we generate, we pay our salaries. We run education programs but that’s different from a charity.” So if you are deciding if you should deal with a licensed insolvency trustee like Doug Hoyes at Hoyes Michalos and Associates, which is obviously a business—he’s doing this to earn an income so he can pay his staff and earn a profit or, should you deal with a not for profit agency? I think the first question is whether it’s a charitable agency or is it not for profit because that’s a subtle distinction. Secondly, what’s it going to cost? And what am I going to get? If by dealing with the not for profit agency, I end up paying 100 cents on the dollar, whereas with a consumer proposal, I could pay less, well it probably it makes sense to go the other way. With most credit counseling agencies, they will also charge you a fee on top of the 100 cents on the dollar you’re paying back. You may be paying back an extra $20, $30, or $40 a month. In fact, in most cases, you do end up paying slightly more than 100 cents on the dollar. There’s nothing wrong with that. It is just understanding what the two options are so you can make an informed decision.

Tom: This has been a great breakdown. If somebody is in one of these situations, how can they get a hold of you?

Doug: Oh, you just punch my name in on the Internet. You’ll see all sorts of stuff. My company is Hoyes Michalos. We operate in Ontario. We’ve got offices from Windsor all the way through to Ottawa. So our website, which you’ve already been on is, hoyes.com. That’s a fantastic source. And we have a lot of educational stuff on there as well as you alluded to earlier. Even though I am a profit making business, I do try to put as much information out there as possible so people can research their options so hoyes.com is a great place to find it. I’ve got my own podcast; Debt Free in 30, where we talk about issues like this every week as well as other things. But primarily, it’s debt related. For those of you who want to troll me on Twitter, my Twitter handle is my name. Doug Hoyes so it’s @doughoyes. Those are some great places to track us down.

Tom: Great. Thanks for being on the show.

Doug: Thanks, Tom.

Thanks, Doug, for explaining the various ways Canadians can find debt relief when it becomes too much to manage. You can find the show notes for this episode at maplemoney.com/doughoyes. Have you become a member of the Maple Money Show Facebook community? If you haven’t yet joined, I’d love to connect with you there. It’s a great place to ask questions and interact with money-minded folks like yourself. To join, head over to maplemoney.com/community, anytime. Be sure to listen next week as Melanie Lockhart joins me to discuss the connection between mental health and finances.

Focusing on how (a consumer proposal) is going to hurt your credit isn’t a big issue, because your credit is already damaged, you already can’t borrow money…there are steps you can take once the debt is gone to rebuild your credit. It’s not a permanent thing, it’s a bump along the road. - Doug HoyesClick to Tweet

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