Growing (debt) pains - Macleans.ca

Growing (debt) pains

Cambridge Life Solutions offers a lifeline to indebted Canadians—using a model that’s banned in the U.S.

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Growing (debt) pains

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“Hello, Alan Thicke here. We’ve talked about a lot of things over the years: sitcoms, kids, health care, hockey. But the big thing on everybody’s mind these days is money.” So begins an ad for Cambridge Life Solutions, a debt settlement company that’s been operating in Canada since late 2010. In the ads, Thicke—a Canadian who played the father on the hit ’80s sitcom Growing Pains—pitches the idea that, with Cambridge Life, consumers can cut their unsecured debts by up to 70 per cent. It sounds tempting—especially with the Bank of Canada warning last week that household debt continues to grow at dangerous speeds in this country.

But the model Cambridge Life uses is a controversial one. The United States Federal Trade Commission (FTC) calls one of the core elements of its business “an abusive practice.” The model it uses, which relies on consumers paying fees to the company before it reaches deals with creditors, was outlawed in the U.S. in 2010 and is illegal in Manitoba. The company says its program takes discipline, and those who see it through often see outstanding results. Phill Allopenna, the company’s Toronto branch manager, says successful clients pay back an average of 40 cents for every dollar they owe. Critics, however, say the program can leave the unwary with more debt, less money and bad credit.

Cambridge Life Solutions is not the only company in the debt settlement business, nor is it the only one using the model now banned in the U.S. But thanks to a recent blitz of advertising—including the Thicke spots and a blanket Internet presence—it is among the most visible. When you register for a Cambridge Life plan, you agree to set up what it calls a “set aside fund” and pay into it for 12, 24, or 36 months. Once you have at least 30 per cent of your outstanding debt in your account, the company will approach your creditors and offer them deals to settle for less than you originally owed. Clients also agree to pay service fees equal to about 15 per cent of their original debt. Most of those fees get paid up front, before Cambridge Life strikes a deal with creditors. For the first three months of some programs, every penny customers pay into the plan goes to the company. In one contract Maclean’s obtained, a customer paid Cambridge Life more than $2,000 a month in service and maintenance fees for the first three months.

Allopenna says Cambridge Life never tries to hide what it charges. The fees, he says, are no different from those a lawyer or a contractor would require, and every customer agrees to them, both in a recorded compliance call and in their written contracts. But the practice of charging upfront fees for debt settlement has a muddied history in the U.S.

As consumer debt exploded there, the debt settlement business grew with it and complaints about the sector soon followed. In response, in 2010 the FTC made it illegal for debt settlement companies to charge fees before they reached a deal with creditors. This February, Manitoba followed suit, passing a regulation—modelled on an existing Alberta law—that limits settlement fees to 10 per cent of debt and bans upfront fees entirely. “We want to make sure that people already struggling with debt don’t find themselves paying large fees . . . with no guarantee the service will actually reduce their debt,” Manitoba’s Consumer Affairs Minister Jim Rondeau said in a statement.

Cambridge Life Solutions doesn’t operate in Manitoba or Alberta. But in the provinces where it does—all the others minus Nova Scotia and Newfoundland—Allopenna says clients have had their debts cut by as much as 90 per cent. He would not say, however, what percentage of clients who enrol in the program actually finish it. FTC and state investigations in the U.S. have found that less than 10 per cent of consumers typically complete debt settlement programs there, according to the U.S. Government Accountability Office. Allopenna says it doesn’t make sense to compare the U.S.—where he says the debt settlement market “spun out of control”—to Canada.

Anna Jarvis, an Ontario woman, dropped out of Cambridge Life Solutions after four months. She had built up about $10,000 in debt after separating from her husband. She always made sure to make her payments, but couldn’t chip away at her principal. When she heard a Cambridge Life ad, she thought the program might be for her. She signed up last year and started paying in, assuming the company would take care of her creditors. A few months in, one lender sent her file to a collections agency after not receiving payment. Now she’s worried she may have to declare bankruptcy over a relatively small debt. “Part of that’s my fault,” she says. “A lot of it is in there [in the contract]. But it just didn’t sink in somehow. I didn’t realize they basically wouldn’t do anything.”

Allopenna says in the vast majority of cases, Cambridge contacts creditors within 30 days of a client signing up. Only in “extremely rare” cases for “unique clients” will the company hold off, he says. However, under the Cambridge Life contract, it isn’t obliged to contact creditors until clients have at least enough money saved for a settlement.

As for Alan Thicke, he’s standing by the company. “Debt relief is a relatively new and growing product,” he said through a spokesman. “My due diligence clearly supports Cambridge as a leader in the field.”