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Credit counsellor vs Licensed Insolvency Trustee: what’s the difference?

Posted on 11 September 2022

Written by Jeff Adiken

If you have arrived at this article, you are likely trying to understand the difference between a credit counsellor and a Licensed Insolvency Trustee (LIT). If you are struggling with debt, you may be wondering which of these professionals may be able to help you find debt relief. Both credit counsellors and Licensed Insolvency Trustees offer valuable services, but it is important to tell the difference between the two. In this article, we share the difference between a credit counsellor vs Licensed Insolvency Trustee so that you can understand which may be the most helpful resource for you in your situation.

What is a credit counsellor?

A credit counsellor can help if you are struggling to pay back your debt. Consulting a credit counsellor will not affect your credit score, and they can help by offering services including one-on-one credit counselling, sharing tips and courses on topics including how to budget, and offer debt management plans. Credit counsellors are typically found at either a not-for-profit organization, or a for-profit business. It is important to carefully research credit counsellors, and to find an organization you can trust. The business will need to be recognized by a provincial or national association, like Credit Counselling Canada. You can also check if there have been any complaints about the agency including false advertising via the Better Business Bureau. It is important to be cautious, as some credit counselling agencies can claim that they can solve your debt problems quickly for just a small percentage of your debt, or easily fix your credit score. You need to be wary as you may still need to pay fees even if your creditors refuse to participate in negotiations. Once you have elected a credit counsellor, you need to ensure you understand their services and the fee they charge, if applicable. You should check if they will share a proposal of how they can help, or the kind of support they will provide to help you. You may also want to confirm the kind of qualifications or accreditations the credit counsellor has.

What is a debt management plan?

Debt management plans are most often provided by a credit counsellor. A debt management plan is an informal proposal shared by a credit counsellor to your creditors. It is a format of debt consolidation into a single manageable monthly payment, and in some scenarios you may have your interest rate reduced or cleared. Typically, you will need to pay all of your debt without any reduction. When you enrol in a debt management plan, you will meet with your credit counsellor who will review your circumstances, prepare a budget with you, and share some tips about handling your debt. Your credit counsellor will ask your creditors if they would be willing to reduce or clear the interest rate on your debt, or if they will extend the amount of time to make your repayments. It is important to note that a debt management plan is purely voluntary, and creditors do not need to participate in negotiations. If your creditor accepts the terms of the debt management plan, you will make your payments to the credit counselling agency who will then pay your creditors. Creditors are still able, however, to use collection agencies to try to reclaim their money. Before signing up for a debt management plan, you may want to check if the plan would save you money considering the fee. You should also check to see which kinds of debts are covered – are credit card debt and student loan debts covered, for instance? You should also note that enrolling in a debt management plan will also have negative consequences for your credit report.

What is a Licensed Insolvency Trustee?

A Licensed Insolvency Trustee is a federally regulated professional that provides debt relief in Canada. Licensed Insolvency Trustees are strictly regulated by governing bodies, including the Office of the Superintendent of Bankruptcy. This regulation ensures that Trustees are qualified and represent the best interests of their clients. They are the only professionals legally able to offer all forms of debt relief to businesses and individuals, including most commonly consumer proposals and bankruptcy. A consumer proposal is a legal form of debt settlement that can reduce your debt by up to 80%. It is the process of formally negotiating a reduction in your debt with your creditors to an affordable monthly payment, which your Licensed Insolvency Trustee will try to achieve on your behalf. One of the key advantages of a consumer proposal is the ability to keep your assets unlike with a bankruptcy, and also protection from your creditors via a stay of proceedings. Filing bankruptcy, on the other hand, is ideal for starting a fresh financial future. It is the process of assigning any non-exempt assets you may have over to a Licensed Insolvency Trustee in exchange for the clearance of your unsecured debts. For many Canadians, it brings huge relief. A Licensed Insolvency Trustee will meet with you initially to review your financial circumstances before recommending a form of debt relief. At Spergel, unlike other bankruptcy firms, you are assigned a dedicated Licensed Insolvency Trustee who will support you each step of the way on your debt relief journey, instead of passing you from person to person. They can assist with all kinds of debt, including credit card debt, student loan debt, and tax debt.

What are the differences between a credit counsellor vs Licensed Insolvency Trustee?

The key difference between a credit counsellor vs Licensed Insolvency Trustee is the legal reinforcement of the forms of debt relief a Licensed Insolvency Trustee is permitted to administer. This means that the forms of debt relief they are able to file are in line with the Canadian government, and all involved parties must conform. A debt management plan formed by a credit counsellor does not have this legal enforcement. Both professionals have important roles that could support different needs for different people. For some, lessons in money management from a credit counsellor could be incredibly helpful, but for others debt reduction or elimination from a Licensed Insolvency Trustee may be what is needed most. In the table below, we outline the key differences between a credit counsellor vs Licensed Insolvency Trustee to help you understand which may be the best option for you.

Credit counsellorsLicensed Insolvency Trustee
Available debt relief optionsDebt management plan – an informal process offered by a credit counselling agency to negotiate with your creditors on your behalf to consolidate debts into affordable monthly payments.Consumer proposal – a legal process filed by a Licensed Insolvency Trustee to negotiate a formal debt payment plan with your creditors on your behalf, often reducing debt by up to 80%.
Bankruptcy – a legal process filed to eliminate unsecured debts completely. A Licensed Insolvency Trustee will administer a bankruptcy for you, and organize payment with your creditors on your behalf.
Debts coveredUnsecured debts including credit card debt, loans, and lines of credit. Occasionally, secured debt may be included.All unsecured debts including tax debt. Exceptions include any student loans that are less than seven years old, and spousal or child support payments.
Amount of debt to be repaidThe full amount of debt owed – often without interest.With a consumer proposal, often you will need to pay a percentage of the debt owed, without interest. This is dependent on what you can afford, your assets, and expenses. With bankruptcy, no debt is to be repaid. The only cost is the assignment of your non-exempt assets.
Assets permitted to keepYou can keep all your assets, but you may opt to sell some to go towards your debt repayments.With a consumer proposal, you may keep your assets. You could opt to sell some to go towards your debt repayments. With a bankruptcy, you cannot keep your assets, although there are some bankruptcy exemptions. Your Licensed Insolvency Trustee will explain what you can and cannot keep.
Length of time payments are to be madeUp to a maximum of 5 years.With a consumer proposal, up to a maximum of 5 years. With a first-time bankruptcy, 9 to 21 months dependent on surplus income; 24 to 36 months for a second bankruptcy.
Impact on credit scoreA negative impact for 2 years following completion of a debt management plan.With a consumer proposal, a negative impact for 3 years following completion. With a bankruptcy, a negative impact for 6 or 7 years depending on your province. For a second time bankruptcy, a negative impact for 14 years following completion.
Creditor ability to contact youThey can contact debtors – usually they will not unless you miss payments on your debt management plan.Not legally allowed to contact debtors after filing a consumer proposal or bankruptcy due to a stay of proceedings.
Creditor ability to change their mind and withdraw from the agreementThey can change their mind, however they usually will not unless you miss payments on your debt management plan.Creditors cannot change their minds – both consumer proposals and bankruptcy are legally binding.
Associated feesRegulated fees in some provinces – credit counselling companies can set the price, although there may be additional indirect fees. You should make sure you are aware of all the fees.Fees are regulated by the Bankruptcy and Insolvency Act.

How do I choose between a credit counsellor vs Licensed Insolvency Trustee?

If you are struggling to decide between a credit counsellor vs Licensed Insolvency Trustee, you should analyze the table above. You may also want to consider the following questions, and the importance of each of these for you.

  • Whether or not they provide a free initial consultation
  • Whether or not they are federally licensed or regulated
  • The amount of your debt that will need to be repaid
  • The types of debt you will need to repay
  • How long you will be making payments
  • How much your monthly payments will be
  • What happens if you cannot make a monthly payment
  • What happens if your financial situation changes and you need to reduce your payments
  • If creditors or collection agencies can continue to contact you
  • What happens to your assets
  • What happens to your credit report
  • How much you will pay in fees
  • Whether or not a creditor can change their mind and withdraw from the agreement

At Spergel, our Licensed Insolvency Trustees have been helping Canadians gain debt relief for over thirty years. If you are unsure which to choose between a credit counsellor vs Licensed Insolvency Trustee, book a free consultation with Spergel and we will point you in the right direction. Our Trustees will review your financial circumstances and recommend the ideal pathway for you to achieve financial freedom.

Jeff Adiken

Jeff Adiken

Jeff Adiken is a Certified General Accountant and Chartered Insolvency and Restructuring Professional with over 18 years’ experience as an LIT (Licensed Insolvency Trustee). He also manages all of Spergel's personal insolvency offices and is our resident expert on credit card debt and debt-free living. When his 'manager hat' comes off at the end of the day, Jeff is happiest spending quality time with his family at home.

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