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Credit Counselling: A Way Forward

This report provides an overview and a description of the current structure of credit counseling services in Canada. The first part will provide a snapshot of the industry starting with its origins, the types of credit counselling agencies and services they provide; including funding models, accreditation requirements for professional counselors and the challenges that the industry face in meeting the expectations of consumers. The second part will explore the legal framework, both at the federal and the provincial levels, to which the industry is expected to comply and the final part will include recommendations to improve credit counselling of services from the standpoint of Canadian consumers and their interests.

Consumer credit counselling agencies (CCCAs) provide debt reduction services and financial education to debtors. They assist consumers who are having problems dealing with the management of their personal finances and need help to pay down their debts and improve their credit rating. The feature services are debt management plans or DMPs, widely known as “debt consolidation”, that consist of taking lump-sum payments from debtors facing financial struggles, or who are unable to keep up with their monthly bills, and re-distributing those monies to creditors on a pro-rated basis. Credit counselling agencies will notify the creditor that the consumer has signed in to a DMP, and forward a request to obtain relief, negotiate late fees and possibly obtain interest rate reductions at the discretion of each creditor.

DMPs benefit creditors by lowering the risk of consumers filing for an assignment bankruptcy with the probable loss by the creditor of the full outstanding debt balance. In turn, the debtor obtains a benefit in the form of the relief described above, with the advantage of making payment in a consolidated form to the CCCA, instead of obligations to multiple creditors.

However, the main requirement for a customer to be eligible to have a debt consolidation plan approved, is a stable and regular source of income. Consumers who are unemployed, employed temporarily or without a reliable source of income are not eligible for debt consolidation, as creditors would not agree to consolidation in a context of income uncertainty regardless of the agency selected to set up the plan.

CCCAs have become an important stakeholder in the credit system and provide valuable assistance to consumers and in general, to over indebted individuals. However, in the United States, some of the largest CCCAs have been heavily criticized over the last years for a variety of reasons ranging from their close connection with the consumer credit industry and to their apparent failure to act in the best interest of their clients, financially vulnerable consumers.

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