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Canada Eh

Over a hundred years ago, in Canada if you had crippling debt, you could quickly end up in debtor’s jail.

Fortunately, things have changed for the better, and the laws have been updated to be more consumer friendly.

When overwhelmed by debt in Canada these days, consumers have several options to regain financial control under the Bankruptcy and Insolvency Act.

These include credit counselling, consumer proposals, and bankruptcy.

      • Credit counselling involves working with a certified counsellor to create a debt management plan. This plan consolidates unsecured debts, like credit cards and personal loans, into a single monthly payment (It is like debt review lite).
      • Consumer proposals are legally binding agreements facilitated by a Licensed Insolvency Trustee (LIT) that reduce the amount owed and extend the repayment period, typically up to five years. This is perhaps the most similar to debt review in South Africa, and is designed to help protect assets while paying off smaller unsecured debt.
      • Bankruptcy is the most severe option, offering debt discharge but resulting in significant negative credit consequences including the loss of assets (In SA we use the term insolvency).

South Africa’s 2007 National Credit Act and the debt counselling provisions we use were in many ways, shaped by processes found in Canada. These processes were refined for SA and have since seen the inclusion of things like the NCR, taking matters to court, the NCT and the role of PDAs.

Credit Counselling: How It Works

When in need of financial counsel, Canadian consumers can go talk to local (or online) credit counsellors. 

As elsewhere, dealing with consumers remotely has become more popular since the pandemic.

Consumers in serious trouble can ask for credit counselling, which includes budget advice and negotiations with credit providers.

Serious debt normally results in a binding ‘consumer proposal’ that restructures their debt repayments – focusing on unsecured debt such as loans and credit cards (and even older student debt).

Secured debts like mortgages and car loans cannot be included in such a proposal directly, but are generally worked into the consumers monthly running costs in their budget plan. The idea is to keep those payments up to date.

There is no official cap on the value of debts in a credit counselling program, but an official ‘consumer proposal’ is limited to $250,000 (excluding any bond on their home).

In Canada, most credit counsellors work for not-for-profit organizations, meaning their services are low-cost or even free (there are a few for-profit agencies which charge upfront and monthly fees).

While it is not 100% obligatory, many qualified credit counsellors hold the Accredited Financial Counsellor Canada certification. Some also complete the Insolvency Counsellor’s Qualification Course (through CAIRP). Requirements vary depending on which counselling organisation is involved, but this is seen as best practice.

Note: In Canada there are many so called unregulated “debt advisor” services which are glorified lead providers to credit counsellors or insolvency practitioners. Their industry regulator (OSB) is actively trying to steer people away from paying for such intermediary services, since they are often superfluous or charge for things you can get for free.

How the Process Works

In credit counselling, after an assessment is done, a debt management plan is created.

This forces the credit providers to stop all legal action and any debits.  From then on, consumers make a single payment to the counselling agency, which distributes the funds to credit providers.

In the more serious case of a ‘consumer proposal’, the Licensed Insolvency Trustee or LIT negotiates with creditors to reduce the total debt and establish a payment schedule aimed at paying debts over 60 months. It all depends what the consumer can realistically pay over that time period.

All credit providers get to weigh in on the plan, based on the $ value of what they were owed and if more than half (in Dollar value) are happy then everyone has to stick to the plan. In rare cases serious credit provider disputes can end up in court.

The arrangement is captured showing as R7 on consumer credit reports during the process (for 6 years from when it starts or for 3 years after the consumer proposal is done). Access to new credit is then, for the most part, effectively cut off during this time.

Making Payments & Getting Out of Debt

In Canada, they do not currently have Payment Distribution Agents like in SA but the counselling organisations or LITs assist with payment distributions in most cases.

This basically means each becomes a mini-PDA and carries all that scary risk.

In Canada, they also do not have a formal Form 17.3 process like here in South Africa but they do make allowances for some missed payments during the plan. But if a consumer misses three payments on a consumer proposal, it is automatically annulled under the Bankruptcy and Insolvency Act. This means creditors can then add on missed fees and interest and resume collection efforts, including wage garnishments.

‘If, however, the consumer sticks to the plan and successfully keeps up payments over the 60 months, then any remaining debt …is written off’

If, however, the consumer sticks to the plan and successfully keeps up payments over the 60 months, then any remaining debt that couldn’t fit in that time period is written off (unsecured debts only, remember). The consumer then gets a Certificate of Full Performance showing they have completed the process.

The consumer can then re-enter the credit market.