September 20, 2012

Debt-settlement companies draw increasing criticism

“Creditors have better memories than debtors.” If it weren’t for those words inscribed on the wall, visitors to Richard Cooper’s Markham, Ont., offices could be forgiven for thinking they’d wandered into a management consulting firm. But those who deal in debt have their own lingo, their own humour—and Cooper understands that Benjamin Franklin quotation better than most. His business is helping creditors and debtors forget.

Cooper’s company, Total Debt Freedom, is one of a handful of niche players performing a specialized service for indebted Canadians. Known as debt settlement, it’s a process by which consumers stop paying unsecured creditors, wait months or even years until creditors have given up hope of collecting, then offer to settle outstanding balances for mere fractions of the amounts owing. In Cooper’s shop, salesmen accept initial inquiries and enrol people in debt-settlement programs in one room. In a larger room nearby, negotiators attempt to hammer out cease fires with creditors on behalf of existing clients.

Although debt settlement has been practiced informally for years, Cooper was among the first to pursue it exclusively in Canada. He founded Total Debt Freedom in 2004 after spending a dozen years managing collections departments, and says he feels far better about what he does today. “We’ve definitely beaten the path,” he says. “I’ve trained a lot of my competitors.” But during the past year, Cooper has become aware of some new competitors he didn’t train. New entrants, some of which hail from Florida, Texas and California, are aggressively soliciting cash-strapped Canadians. They’re seizing business from those who have traditionally served indebted citizens, notably credit counsellors and bankruptcy trustees.

The most visible of the new firms, Cambridge Life Solutions, launched a marketing campaign during the past year on radio, television and the Internet. It’s fronted by Ontario-born actor and pitchman Alan Thicke, star of the 1980s sitcom Growing Pains. In a mellifluous baritone, Thicke promises Cambridge can persuade creditors to reduce their outstanding balances by substantial amounts. “And I mean serious savings,” he says in one commercial. “Up to 70%, sometimes even more.” In barely a year, Cambridge has become—both in its own estimation and that of other industry insiders—Canada’s largest debt-settlement operation. So far this year, Cambridge reports it has eliminated more than $10.5 million in debt on behalf of clients. “I definitely couldn’t afford that marketing campaign,” Cooper says wistfully.

Not everyone is celebrating Cambridge’s success. Trustees and counsellors have criticized debt settlement publicly, asserting that they’re left to pick up the pieces when debt settlement companies fail. Cooper himself lashed out at Cambridge online in blog posts. Cambridge struck back with a $2-million libel suit, claiming defamation and “malicious, high-handed and arrogant conduct.” Other critics, too, have been threatened with legal action.

Cooper didn’t come out swinging just because he was worried about losing market share. “The biggest impact to my business is the bad media they’ve gotten,” he says. South of the border, the model that Cambridge and most other large Canadian operators use—charging high up-front fees before settling any debts—was declared an “abusive practice” by the Federal Trade Commission not long ago, and in 2010 the FTC banned the charging of up-front fees outright. The question now is whether Canadian regulators will do the same.

As for Cambridge, its team has roots in the American debt-settlement business that has drawn so much fire—and some of its earliest employees have been linked to companies accused of legal and regulatory violations in the U.S., according to court and corporate documents obtained by Canadian Business. Yet for all the attention the company has attracted, few in Canada know much about its origins. “I’ve Googled the owner’s name,” Cooper says. “I have no idea who he is, I don’t know where he gets his money.”

In an ideal case, debt settlement works like it did for Laurie Tyrrell. Two years ago, Tyrrell had more than $18,000 in credit card debt. She’d spent more than a decade trying to pay if off, she says, but despite contributing as much as she could every month, she was no closer to eliminating the principal. Last year, after hearing an ad on the radio, Tyrrell signed up for a 12-month Cambridge Life Solutions plan. Right away she stopped paying her credit card bill and started paying $740 a month into a dedicated account set up through the company. For the first few months—if Tyrrell signed a typical Cambridge contract—that money went to the company in fees. (Cambridge usually charges 15% of enrolled debt.) After that, minus a monthly maintenance charge, most of it was directed toward funding a future settlement. The credit card company caved 10 months later. She says Cambridge arranged to settle her debt for $4,700, less than a third of what she originally owed. “I still can’t believe it,” she says. “It’s too good to be true.”

But debt settlement doesn’t work for everyone. Nancy Larose, 57, lives just outside Ottawa. She built up a stack of unsecured debt before the credit crisis devastated her investments in 2008. By 2011, she had more than $65,000 in unsecured debts alone. Hoping to get out from under it, Larose signed up for a 36-month Cambridge program last fall. Under the contract—parts of which she shared with Canadian Business—Larose agreed to pay $1,054 a month into the settlement account. For the first three months, all of that money went to Cambridge in service and maintenance fees. For the following 13 months, more than half of the monthly payments would have gone to the company. Finally, more than a year into the plan, Larose would have been contributing money mostly into her own savings account.

But Larose never got that far. Her creditors deluged her with collections calls and court actions. By the spring of 2012, RBC, to whom she owed more than $30,000 on a line of credit, was garnisheeing her wages, and other creditors were telling her they wouldn’t deal with Cambridge. (Debt-settlement operators report that’s a common negotiating tactic.) Larose dropped out of the program entirely this summer. In total, she says she paid $4,500 in fees to Cambridge and received a few phone calls to creditors and little else in return. Debt settlement, she says, cost her money she didn’t have and left her far worse off than she was before. “I feel bad because I’ve always paid my bills, and I’ve always taken care of myself,” she says. “And now I just feel like such a loser.” Larose declared bankruptcy in July.

Nobody involved in the debt-settlement industry, as critic or booster, denies that cases like Larose’s or Tyrrell’s happen. They do argue stridently over which is more likely to occur. Unfortunately, there are no statistics—at least publicly available ones—that reveal how many clients successfully complete debt-settlement programs in Canada. But there is data available in the U.S.—where state and federal regulators have sparred repeatedly with debt-settlement firms—and none of it looks good for the industry. For example, in April 2004, the Federal Trade Commission sued a debt-settlement company called National Consumer Council and its affiliates. As part of the suit, a receiver was appointed to wind down the company’s business. Out of more than 44,000 enrolled customers, he discovered, only 1.4% had settled any debts. Forty per cent of customers dropped out entirely, after paying the company more than US$34 million in fees. That’s likely an extreme case, but other investigations by state attorneys general and the Federal Trade Commission have routinely found debt-settlement companies with completion rates of 10% or less.

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