Debt Settlement vs. Licensed Insolvency Trustees: Understanding the Costs and Risks

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When debt becomes overwhelming, it can be difficult to know which type of help to trust.

You may come across private debt settlement companies promising to reduce what you owe, while also hearing about Consumer Proposals through Licensed Insolvency Trustees (LITs).

Although both can involve reducing your debt, they work very differently.

Private debt settlement is a voluntary negotiation with your creditors. A Consumer Proposal is a formal legal process under Canada’s Bankruptcy and Insolvency Act.

That difference can affect your creditors, your payments and the legal protection available to you.

What Is a Debt Settlement Company?

A private debt settlement company negotiates with your creditors in an attempt to settle your debts for less than you owe.

The process may involve:

• Putting money aside each month for future settlement offers
• Negotiating separately with individual creditors
• Paying fees to the settlement company

The key thing to understand:

A creditor does not have to accept the settlement.

If one creditor agrees and another refuses, the creditor that refuses can continue its collection efforts and may pursue legal action available to it.

If you stop making payments while saving for settlements, you may also face:

• Collection calls and letters
• Additional interest or charges, depending on the debt
• Damage to your credit
• Potential legal action

Fees also vary between private companies, so make sure you understand exactly what you are paying and when.

What Is a Licensed Insolvency Trustee?

A Licensed Insolvency Trustee is a federally licensed professional who administers formal insolvency proceedings, including Consumer Proposals and bankruptcies.

A Consumer Proposal is different from private debt settlement because it operates under the federal Bankruptcy and Insolvency Act.

Instead of negotiating separately with every creditor, you make one formal proposal through a federally regulated process.

And that brings us to the most important difference.

The Key Advantage: Statutory Power Under an Act of Parliament

The fundamental difference between private debt settlement and a Consumer Proposal is the legal framework behind the negotiation.

As your LIT may explain it:

“The trustee operates under an Act of Parliament which forces the creditors to at least listen to your offer in a proposal.”

“Listen” does not mean creditors are forced to accept your offer.

It means they must participate in the formal process established by federal law.

When a Consumer Proposal is filed:

• Creditors receive the proposal.
• They have a defined period to review and respond.
• If a vote is required, creditors vote according to rules established by the Bankruptcy and Insolvency Act.
• If the proposal meets the legal requirements and is accepted and approved, it becomes binding on the affected creditors.

A private settlement company cannot create this statutory process through an ordinary settlement agreement.

The Legal Protection: Stay of Proceedings

A filed Consumer Proposal also triggers a Stay of Proceedings, subject to legal exceptions.

In simple terms, this can stop creditors from taking certain collection and legal actions relating to debts covered by the stay.

Depending on the circumstances, this can include:

• Wage garnishments
• Lawsuits
• Other collection actions covered by the legislation

A private debt settlement arrangement does not itself create this statutory protection.

This can be especially important if you are already dealing with collection calls, legal action or a wage garnishment.

What About CRA Tax Debt?

Tax debt can make the difference between the two approaches particularly important.

The Canada Revenue Agency has significant collection powers and, in certain circumstances, can:

• Garnish income
• Garnish money held in financial accounts
• Take other collection measures

A private debt settlement company cannot create the statutory Stay of Proceedings available through a Consumer Proposal.

Tax debt may be dealt with through a Consumer Proposal, depending on the type and circumstances of the debt. An LIT can review your particular tax debt and explain how it may be treated.

How It Plays Out in Practice

Imagine you owe $40,000, including credit cards, a personal loan and $6,000 in tax debt.

Private debt settlement

You are asked to stop making payments and put $400 a month into savings while the company negotiates with your creditors.

Some creditors agree.

Another creditor refuses.

While you wait:

• Collection activity may continue.
• Interest or other charges may continue, depending on the debt.
• Your credit may be damaged.
• A creditor may pursue legal action.

You could spend months saving money while still having unresolved debts.

Consumer Proposal

Now imagine you make a Consumer Proposal through an LIT offering creditors $14,000 over five years.

The $14,000 figure is only an example. A real proposal depends on your financial circumstances.

Once the proposal is filed:

• The statutory Stay of Proceedings takes effect, subject to legal exceptions.
• Creditors participate in the formal proposal process.
• Creditors vote according to the rules established by federal law.
• If the proposal is accepted and approved, it becomes binding on the affected creditors.

The important difference isn’t simply how much debt you repay. It’s that the Consumer Proposal takes place inside a federal legal framework.

What About Fees?

Understanding how each option handles professional fees can reveal an important difference: what you pay, when you pay it, and what happens if the debt-relief process doesn’t go as planned.

Private Debt Settlement

Fees vary between companies and agreements. Before signing, ask:

• What fees will I pay?
• When are they charged?
• Are fees charged before a settlement is reached?
• What happens if a creditor refuses the settlement?
• What happens if I cannot complete the program?

Consumer Proposal

LIT fees for Consumer Proposals are governed by federal rules and administered within the proposal process.

Before filing, your LIT should explain:

• Your proposed monthly payment
• The fees and costs that apply
• How payments are distributed
• What happens if you cannot maintain the proposal

What Happens to Your Credit?

Neither option is without consequences for your credit.

A Consumer Proposal will appear on your credit report. Current federal guidance says Equifax and TransUnion remove a Consumer Proposal three years after all debts included in the proposal have been paid, or six years after the proposal is signed, whichever comes first.

Private debt settlement can also affect your credit if you stop making payments and your accounts become delinquent or go to collections.

Before You Sign Anything

Make sure you understand:

• Who are you dealing with? A private settlement company or an LIT?
• What happens if a creditor says no?
• What legal protection do you receive?
• What will you pay in total?
• How will your tax debt be treated?
• What other options are available?

A Consumer Proposal is not automatically the right solution for everyone. An LIT can review your circumstances and explain the available options.

Understand Your Options Before You Commit

Private debt settlement and Consumer Proposals may both help people deal with overwhelming debt, but they are fundamentally different.

Private settlement relies on voluntary agreements with individual creditors. A Consumer Proposal operates under federal law, with a formal process, creditor voting rules and statutory legal protections.

Understanding that difference before you sign an agreement can help you make a more informed decision about your debt.

Book a free, confidential consultation at a GTA office near you or contact us at 1-888-545-5365 to discuss your options.

Contact Richard Killen
FREE No Commitment Consultation

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