Have you noticed the proliferation of credit counseling companies in Canada? The bait some use is intriguing: $10,000, even $25,000, minimum level of debt to qualify! For some people in debt, this hook is so tempting that they regret their low debt to begin with!

What is causing this flurry of activity? Canada’s household debt continues to skyrocket. Previously, Canadians bragged that our relative debt was much less than that of the Americans. Although it is no longer true, today, many people hold this view.

Canadians are drowning in debt. Fueled by historically low interest rates, Canada’s household debt rose steadily during the last recession. In 2010, Canada’s household debt ratio, at around 150% of disposable income, surpassed that of the US. Bankers, real estate agents and other vested interest groups continue to say that Canadian households are not in risk. I do not agree. They argue that our increase in debt was gradual and that lending conditions were tougher than the US was before the 2008 recession. So our footing is more secure.

Still, if you’re in debt, should you use a credit counselor? It depends on you, and your circumstance.

Let me assure you that there is one and only one way to lasting debt relief: change your lifestyle. People don’t understand the differences between financial juggling and lifestyle management and therefore jump to credit counselors’ seductive advertising about easy debt relief. Let’s look at these two approaches.

financial juggling

Here, you and your advisors are focused on your finances, not where they should be: on you. It emphasizes reorganizing your finances, the numbers: refinancing, second mortgages, debt consolidation. Often, you’ll end up with a debt that’s less than your total debt before juggling the numbers and a reduced monthly payment. So, you have more disposable income and you may think that life will be better and everything will be fine; Correct? Wrong. This approach is a platform for more debt.

Only the numbers changed. Instead of having four credit cards with balances, a large line of credit balance, and more, you end up with consolidated debt, but your behavior remains unchanged.

No doubt, by rearranging the numbers, you may be exposing yourself to good budgeting habits. However, the gist of the procedure is to fix the numbers, fix the credit score!

Changes in lifestyle

Getting out of debt permanently starts with understanding how you got there, not why, and learning from your mistakes. You must change those bad behaviors; start budgeting, get a pre-spend decision procedure and be responsible. Juggling numbers follows behavior changes. Credit counseling that does not emphasize behavior change will never work.

credit counselors

Who are these people? In Ontario, if an entity negotiates with creditors for you and collects funds from you to pay your creditors, it must register with the Department of Consumer Services. Likewise, it must present audited financial statements, annually.

Some credit counselors are for-profit, others are not-for-profit. And like I said before, some set a baseline debt level, like a minimum debt score of $10,000 or $25,000.

Some nonprofit organizations are funded by financial institutions (creditors) and may have a conflict of interest! Don’t assume they’ll be taking care of you. Although their fees may be lower than for-profit companies, beware of conflict of interest.

Credit counselors are licensed in each province, but there is no uniform Canadian standard.

What do they do

Licensed advisers negotiate with your creditors to reduce your debt, and you typically end up with reduced debt, lower interest, maybe none at all, and a repayment period of less than five years. They will charge a commission on the new payment amount that will vary depending on your circumstance. Let’s say 15% fee, $1,500 monthly consolidated debt payment, reduced from $3,000, they could charge around $225 per month; over five years, that’s $13,500 in fees.

You would pay $1,500 a month into their trust account, from which they pay your creditors.

Generally, these counselors will work with you only if they believe you will be able to pay off the reduced debt.

they can help

They can help, but you need to understand the nature and cost of their assistance. I repeat, lasting debt relief requires lifestyle changes. Counselors can juggle financially by contacting creditors and reducing your debt, but you must do the hard work of the lifestyle change.

Should you use them?

Before you decide to use a company, you should do your due diligence, which should include the following:

1. Interview at least two: for-profit and non-profit. Remember, they are dirty people, so look past their facades.
2. Check that they are licensed. Contact the relevant provincial government department to see if there are any complaints against you.
3. Make sure you understand what they do and their fees. Don’t just look at the rate, look at the package.
4. Ignore the testimonials on the websites; Ask to speak to someone who has been through your program.
5. For the non-profit company, check to see if it has ties to creditors and is therefore in a conflict of interest. If you are working for a financial institution, make sure you understand the relationship.
6. Discuss this with your spouse and someone who is knowledgeable about this procedure.
7. Sign an agreement only after understanding your responsibility and the role of the company.
8. If you are a Christian, ask the Lord to guide you.

Which counselors to avoid

1. They tell you the process will be easy.
2. Your show sounds too good to be true.
3. They don’t emphasize that you have to work on a budget and that you need to make lifestyle changes.
4. They don’t try to understand you or your trip.
5. They are in a hurry and they rush you to sign an agreement.
6. They will not give you the information you request before asking you to register.
7. Before signing, they will not allow you to speak to a previous client, with that client’s consent.

Can you do it alone?

You can do it only with help and encouragement. First, you must accept your situation and make the necessary changes in your lifestyle.

1. If you are a Christian, as you repent, confess the previous abuse of His funds, ask the Lord to direct you how to move forward.
2. Go on a spending fast for a month to identify your spending habits and spending drivers.
3. Make a simple financial plan, a budget, and a debt repayment schedule that shows how much you’ll be able to pay.
4. After the prayer, and feeling confident that you will be able to meet your commitments, contact each creditor and ask for relief. With a credible plan, you are likely to get help. However, you must follow the plan.
5. Ask a trusted person to hold you accountable.

Resume

Credit counselors provide a service that may help. However you do the work, you must make tough decisions. They provide a structure to help you stick to a payment plan. Here’s the real deal: To get out of debt, do you need a credit counselor to guide you through making consistent lifestyle adjustments that affect your finances?

Copyright (C) 2011, Michel A. Bell