The Loans Canada Team Explores: Should You Trust A Debt Settlement Company?

The Loans Canada Team Explores: Should You Trust A Debt Settlement Company?

Written by Matthew Taylor
Fact-checked by Caitlin Wood
Last Updated August 23, 2021

There are a number of services and programs in Canada that can help you manage your debt. While some can be solved with a simple re-evaluation of a budget, others may require a more intense form of debt relief. Depending on your financial situation, a consumer proposal or bankruptcy may help, but they are extreme versions of debt relief. If you’re looking for a milder program, you may consider a debt settlement.

While there are benefits to working with a debt settlement company, there are also many risks to consider. In particular, Canadians should watch out for misleading claims that some debt settlement companies make. Read on to learn more about how debt settlement companies mislead Canadians and how you can protect yourself against their deceptive practices.

What Is A Debt Settlement Company?

A for-profit debt settlement company works with consumers and their creditors to help reduce debt loads. Typically, they will negotiate a one-time lump sum payment, which should be lower than what is actually owed.  Most debt settlement companies require the debtor to transfer the full amount to them, which they will then disperse to the appropriate creditors.

Misleading Claims From Debt Settlement Companies to Watch Out For

Debt settlement companies may claim that they can do a lot more to help you navigate your debt than they are actually allowed to do. They make these claims in the hopes of securing clients. Here are some of the claims that debt settlement companies use to mislead Canadians:

They Claim That Creditors Will Always Agree to The Negotiations

Creditors don’t have to meet with debt settlement companies and there’s nothing that the company can do about it. Creditors have the right to refuse to cooperate and do not have to accept and offers. 

They Claim They Can Stop Wage Garnishment

Debt settlement companies cannot stop your creditors from taking you to court to try to recover the money you owe them. These companies cannot offer you any legal protection from what creditors do. For example, if a creditor seizes your house, there’s nothing that a debt settlement company can do about it.

They also cannot prevent creditors or collection agencies from taking money from your bank account (if you have an agreed-upon preauthorized payment schedule with them) or from garnishing your wages.

They Claim They Can Stop Calls From Creditors or Collection Agencies

Debt settlement companies don’t have the authority to stop calls from creditors or from collection agencies. They may be able to offer certain recommendations for dealing with collection agencies like writing to a creditor to ask that they only contact you in writing.

They Claim They Can Help With Bankruptcy

Only a Licensed Insolvency Trustee can help navigate you through bankruptcies and consumer proposals. Debt settlement companies cannot deal with these kinds of government-regulated proceedings.

Debt Settlement Company Red Flags

Other than misleading claims, there are a few other red flags to watch out for when it comes to working with a debt settlement company.

Delaying Payments

Sometimes debt settlement companies will delay making payments to creditors on purpose. They do so as a negotiation tactic in an attempt to get creditors to reduce a consumer’s debt even further. This tactic may hurt your credit because, to creditors, it can look like you can’t pay back your debt. You may also end up paying interest and late payment fees. Even if the debt settlement company can’t make a deal with your creditors, you’ll still have to pay all these fees plus the entire loan.

They Try to Pressure You to Sign

Debt settlement companies often use aggressive, high-pressure sales practices to get you to agree to use their services. You may be pressured into saying yes to the company, but you’re not obligated to do so. A reputable company would not resort to pressure tactics.

Upfront Fees

If a for-profit debt settlement company requires you to make upfront payments before you have met with them or before they even start working for you, this is a red flag. No debt settlement company can guarantee that they will be able to reduce your debt load and asking for upfront payment to secure your spot, should not happen. 

How To Protect Yourself From Misleading Debt Companies

Even if the odds seem to be in favour of the debt settlement companies, you can still protect yourself against their misleading practices. 

  • Are They Licensed – Before working with one of these companies, double-check to see if they are licensed in your province. You should also check with the Better Business Bureau to see the company’s record.
  • What Are Their Qualifications – Check the qualifications and credentials of who you’re working with, because poor advice may make your creditor take legal action against you.
  • How Much Are The Fees – Also, check the company’s fee structure. Oftentimes, debt settlement companies charge high fees regardless if they are able to settle your debt. This can leave you with more debt than what you started with.

Debt Settlement Company Faqs

Can a debt settlement affect my credit?

Yes, a debt settlement can affect your credit. Typically, debt settlements will affect your credit negatively, but its impact won’t be as bad as not paying at all. Moreover, it’ll stay on your credit report for 7 years. However, it’s important to keep in mind that debt settlement companies are not always able to settle the debt with your creditors. If that happens, your credit score may suffer more.

How does a debt settlement work?

A debt settlement company helps eliminate a portion of your debt by negotiating with your creditors on your behalf. Typically, they’ll offer a lump sum payment in exchange for settling your debt for a lower amount. For example, if you owe $10,000, your creditor may be willing to settle the debt if you make a lump sum payment of $6,000.  

How long does a debt settlement take?

A debt settlement can take years before it’s settled. Generally, it takes one to three years, but this number can change depending on how much debt you owe and how much of your payments you can afford.

In Closing

Debt settlement companies often mislead Canadians by making false claims. All they can really do is try to get your creditors to the negotiating table to make a deal to reduce your debt. Even if these companies are unsuccessful, they may still charge you high fees. If you know what debt settlement companies can and can’t do, and know how you can protect yourself against their misleading practices, you should have no problem dealing with these companies should you need to use their services.

Rating of 5/5 based on 2 votes.

Matthew joined the Loans Canada writing team in 2021 while was finishing up a Bachelor's degree at the University of Saskatchewan. It was there that he discovered his love of writing. His work has appeared in several publications, including the Canadian Student Review and In his spare time, Matthew enjoys reading, geocaching, and spending time with his family and pets.

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