Using a debt settlement company
Learn how using a debt settlement company may reduce what you owe. This option involves risks, fees and limits you need to understand first.
Understanding what a debt settlement company is
A debt settlement company negotiates with your creditors. It offers them an amount of money to settle your debt. That amount is often lower than what you owe.
If your creditors accept the offer, you pay the debt settlement company. The company will then pay your creditors.
Some credit counselling agencies may also offer debt settlement services.
They may use other names, including:
- debt consolidation
- debt arbitration
- debt negotiation
- debt relief
- debt pooling
- debt reduction
- debt elimination
Creditors don’t have to work with a debt settlement company. They may refuse to lower your debt or take part in negotiations. A debt settlement company may still charge you fees even if your creditors refuse the offer.
Most debt settlement companies operate for profit. They earn money from the fees they charge their clients.
Debt settlement companies don’t always give credit counselling and money management advice.
A debt settlement company may offer to manage all communications with your creditors.
They may ask you to sign a power of attorney to give them this ability. Before you sign, make sure the company agrees to inform you of all payments they make to your creditors. This allows you to confirm that your creditors are receiving your payments.
Be cautious when looking for help with debt or credit repair
Some companies may mislead you.
What you need to know when getting help to pay off debt or repair your credit.
Considering risks with a debt settlement company
Some debt settlement companies may use practices that put you at risk.
High-pressure sales
Some companies use aggressive telemarketing calls to sell their services. High-pressure sales may make it harder to make clear decisions.
If you receive a call, you don’t need to agree right away.
Unrealistic promises
Some debt settlement companies may make promises they can’t keep. They may promote their services in a misleading way.
Debt settlement companies must not:
- make unrealistic promises:
- guarantee to reduce your debts by a large percentage
- ensure your creditors will always agree to take part in debt settlement negotiations
- prevent creditors and collection agencies from seizing your salary or taking money from your bank account
- stop your creditors from trying to recover the money you owe in court
- stop phone calls from your creditors
- offer legal protection from creditors’ actions like seizing assets
Debt settlement companies must not manage government-regulated proceedings that release you from debt.
This is part of consumer proposals and bankruptcies. Only a Licensed Insolvency Trustee (LIT) may offer you these 2 options.
Loans to repair your credit
Some companies also offer loans and claim they will repair your credit score.
When you accept this type of loan, you may never receive any money. Instead, the company may apply the loan amount to its services. You may still need to repay the loan.
You’ll need to keep making your payments on any other debts you owe.
These loans usually have high interest rates and don’t reduce your existing debts.
They don’t reduce your existing debts. You may end up with more debt and no improvement to your credit score.
High fees
Debt settlement companies may charge advance or monthly fees. You may need to pay fees even if creditors refuse to settle. Fees for debt settlement services may be very high.
Late payments
Some companies delay payments to your creditors on purpose. They may do this to try to improve negotiation outcomes.
Late payments harm your credit score. They might make it seem like you can’t repay your debts.
Tip
Always ask for receipts for payments made on your behalf.
Signing up for debt settlement services
Take time to review your options before signing any agreement.
Before you sign, make sure you:
- read the full contract
- don’t agree to anything under pressure
- ask questions if you don’t understand the terms and conditions
- check the company’s background
Tip
Review any serious or unresolved complaints, including late payments to creditors or false or misleading advertising.
Check for complaints made to Better Business Bureaus and your provincial or territorial consumer affairs office.
Check the complaints with the Better Business Bureaus.
Filing a complaint about a debt settlement company
Provincial and territorial governments regulate debt settlement companies. They also investigate consumer complaints.
Contact your provincial or territorial consumer affairs office.