On April 28, 2017, the Office of the Superintendent of Bankruptcy (OSB), released its report of its investigation into business practices between debt advisors and Licensed Insolvency Trustees, (“LITs).
The OSB was becoming increasingly concerned about LIT’s relationships with debt settlement companies and the influence they may have had over the Trustees independence and objectivity in assessing the financial situation of the debtor and in administering consumer insolvencies, in particular consumer proposals. The review likely came about as a result of the debt settlement companies insisting on discount clauses in the consumer proposal. That is the debtor would pay less than the face value of the proposal if it was paid out early. What was not being said was that the debtor would borrow the funds from the debt settlement company (or some related entity) at a high interest rate under some appearance of credit rebuilding.
The aim of the OSB’s evaluation was to ensure that the integrity of the insolvency process was being maintained and to recognize, as well as analyze, possible threats related to the honesty of some elements of the consumer bankruptcy procedure including the assessment of the debtor and counselling.
Some of the findings are as follows:
Of all consumer proposals filed in 2016, the debtor paid for financial advice in 17% (9,300) of the cases before being directed to an LIT.
- That is almost 10,000 times where a debtor could have come to see an LIT for free. That is 10,000 times a debtor paid for advice that they didn’t have to pay for. And who knows if they received the right advice.
Of the cases reviewed, the fees paid by consumer debtor to the debt consultant averaged approximately $2,400 and reached as high as $4,200.
- That is over $23 Million Dollars that could have been paid to creditors. That is $23 Million Dollars in referral fees that debtors didn’t have to pay. They paid a fee to an unqualified debt consultant company to refer them to an LIT where all they would have to do is go on the internet and contact us directly for free. Consumers paid millions of dollars more than they needed to and creditors may have received less than they were otherwise entitled to.
Consumer borrowers usually had between two to four conferences with the debt management companies prior to being referred to an LIT and paid for that service. In contrast, they typically only met with the LIT once and sometimes for as little as five minutes.
- So how could the debtor be receiving the proper professional advice about their situation.
The LIT relied upon the debt settlement companies to do all the work relative to gathering, evaluating as well as confirming the borrower’s information, and reviewing and recommending on the bankruptcy alternatives.
- There shouldn’t be an issue with receiving information from third parties, LITs receive information from third parties all the time. But there is a real issue with unqualified and untrained debt consultants handing out insolvency advice without the requisite training.
In some instances, due diligence by the LIT’s administrative staff occurred only after the proposal was filed with the OSB.
- Performing due diligence after the filing in itself is not unusual, but in the cases of a proposal, the LIT must exercise more due diligence than perhaps in a bankruptcy as the LIT is recommending to creditors to accept the proposal. The LIT is using its professional judgment to make a recommendation. How can you do that if you haven’t done proper due diligence.
In situations where the LIT had a regular relationship with the debt settlement companies, all facets of the procedure before declaring were normally executed at the offices of the debt management companies.
- The LIT should be meeting people in their office. They need to show the debtor their independence and objectivity.
What is not highlighted in this report is the number of bankruptcies that may have occurred where the debtor also paid a referral fee to a debt consultant/credit counsellor. As far as we know, the OSB has not looked into that.
The other issue to note is that LITs are under strict advertising rules. Whereas any one else in the debt consultant/credit counsellor world has no such restrictions. Slick advertising is costing consumers money they don’t have and that they don’t need to pay.
The entire OSB report can be found here.