Garry Marr, Financial Post · Wednesday, Dec. 22, 2010

It’s not just personal debt that has climbed to record levels. The companies offering to help you with massive debt are also proliferating.

Call them debt-settlement agencies, debt-solution providers or whatever you want. Their names are plastered on bus shelters and newspapers and call out of over the airwaves and the Internet. Unregulated, it’s almost impossible to get a true sense of how big the industry has become but based on the amount of advertising dollars being spent it’s growing.

“This was a nonexistent category and companies have sprung up. Companies and services spring up because there is a consumer need and you have to tell consumers you are offering the service,” says Sunni Boot, chief executive of Zenithoptimedia, adding the top advertiser in the category is estimated to have had a 10-fold increase in spending over the past year.

The debt-to-income ratio has reached a record high of 148% in the third quarter in Canada, Statistics Canada says, putting Canada ahead of the United States. Consumers are looking for answers to get out of their credit mess.

While bankruptcies are still relatively low in Canada compared with the U.S. market, they did set a record of 116,000 in 2009 and by the end of the third quarter of 2010 another 95,000 had been registered.

Of course, the industry is not without controversy. It has drawn the ire of the non-profit debt-counselling agencies that are available in most cities across the country that have partly run their organizations by getting donations from credit companies.

“We want to make sure Canadians make wise choices,” says Patricia White, executive director of Credit Counselling Canada, an umbrella group for non-profit agencies across the country. “We understand there has been a telephone blitz in Western Canada by agencies saying [they] can help you get rid of your debt.”

She says in the United States, the federal trade commission stepped in to control the industry in the summer with a rule that for-profit companies that sell debt-relief services over the telephone could no longer charge a fee before they settle or reduce a customer’s credit card or other unsecured debt.

“What I’ve heard is the fees can be enormous that they charge,” Ms. White says.

The executive director of Credit Canada, a non-profit agency in Toronto that is also a charity, said one of the key differences between her group and ones that work for profit is she can offer counselling.

“We are accredited in counselling,” says Laurie Campbell, referring to the Ontario Association of Credit Counselling Services. Other provinces have similar accreditation, but in Ontario to become a counsellor you have to pass a series of courses to counsel people on debt.

At the end of the day, credit-counselling companies do get a chunk of their funding from the credit companies — something for-profit agencies are now pointing out in attack ads.

“We get donations,” says Laurie Campbell, splitting hairs about the the fact her group gets money from credit card agencies when it settles someone’s debt.

Of course, the for-profit debt-management and debt-settlement agencies will try to arrange the same deals with the credit companies and be compensated for their efforts.

The question is who is going to get you the best deal? You have to consider the fact many of the private companies demand fees up front.

“When people are in crisis, they are desperate and when people are desperate there are predators,” Ms. Campbell says. “There is nothing wrong with being for profit, but you need to find out what they are all about.”

Barrie, Ont.-based Doug Nicholls, owner of Debtor Protection, says the nine-year-old for-profit company often negotiates with creditors before a person has to declare bankruptcy.

“If there is third-party money available I can do straight settlements and usually cash out the accounts for 35¢ to 50¢ on the dollar for a lump-sum settlement,” Mr. Nicholls says.

If you had, say, $100,000 in debt, he might ask you to pay $45,000 into a trust and he’ll settle with all of your creditors. If he can talk your creditors into taking less than $45,000, he keeps the difference.

He says a key advantage of signing up with him is the debtor gets someone looking after their interests. He says even if you decide to go the bankruptcy route, you need representation for yourself because a trustee doesn’t do that.

“The poor debtor goes out and hires a trustee and thinks the trustee is protecting only their interests,” says Mr. Nichols, adding by federal law trustees are officers of the court and by law mandated to work in best interests of the creditors.

“I sit down and analyze their situation and draft out a plan about what assets they want to keep and put it into a [consumer] proposal or bankruptcy plan and I literally take the client by the hand,” says Jeremy Kroll, a partner with A. Farber and Partners.

At the end of the day, though, you are going to have see someone like Mr. Kroll, a partner with A. Farber and Partners, and also a trustee in bankruptcy.

You can’t make what is called a consumer proposal or declare a bankruptcy in Canada without using a trustee. A bankruptcy stays on your credit record for six years after your debt is cleared, a proposal after three years.

Under proposal, you agree to pay your creditors more money than they might otherwise get from a bankruptcy. Mr. Kroll says consumers opt for the proposal because they don’t want to go bankrupt.

He says the problem with debt consolidation is it usually doesn’t address the underlying issues of the consumers. “You can’t use debt to solve debt. What happens is they take the consolidation because they hope managing one payment will simplify their lives,” Mr. Kroll says. “They don’t change their problems. They keep the credit cards that are now empty and build them up again. They’ve probably already had their mother or brother help them out and now they are in trouble again.”

He tells people the only way to avoid a trustee if you are in serious debt is if you can pay the debts in full without interest and all your lenders are with major institutions who usually have arrangements with the non-profit agencies.

“The for-profit agencies often do not have arrangements with all creditors,” says Mr. Kroll, who cautions consumers should be wary about paying a huge up-front fee. “The challenge is the consumers don’t know who the legitimate people, the unlicenced and unregulated people, are and they are getting very confused.”

Financial Post

gmarr@nationalpost.com