Debt charities under threat
Debt-help charities in the UK play an important role in helping over-indebted consumers resolve their debts, without charge. However, there must now be serious concern about their future if the level of their government funding is in question.
The credit crunch means these charities are busier than ever. The Citizens Advice Bureau sees, on average, 9,300 new debt enquiries every working day and it was reported that National Debtline was unable to answer around 20,000 telephone enquiries in one month alone, not the year.
With an estimated four million debt enquiries generated throughout 2009, some of which will arguably be multiple applications to numerous debt management agencies, there are still a huge number of consumers that need help in getting control of their debts.
Although difficult to be precise, many experts believe that the free sector of the debt advice industry can only cope with around two million enquiries per year.
So where does this leave the rest, especially when funding for these agencies is under threat?
Scare-mongering I hear you say? Not necessarily, given a comment made to me at the recent Debt Resolution Forum’s annual conference in Manchester.
I got the chance to ask Greg Hands, the Conservative Treasury spokesman, whether his party would maintain, increase or decrease the level of funding to the charitable debt organisations, if elected to power.
The answer was short and to the point: “We cannot rule out cuts to this funding”.
So, what if cuts are to be made? It is debatable whether any government will be able to afford to continue or increase the level of funding to charitable organisations to help them support over-indebted consumers.
Many consumers find it too stressful to approach their lenders when in a time of crisis so instead they turn to debt management companies. These are firms that act as a go-between for a consumer in debt and negotiate an informal arrangement with the lenders.
Payments are usually made monthly by the consumer to the debt management company and they, in turn, distribute a payment to the lenders. Consumers who need such a service can either go to a charity organisation (and not pay a monthly fee for this service) or employ a debt management company and pay a fee - usually set at 15% plus VAT.
There are numerous arguments for and against paying for debt service (not to be confused with debt advice). With a non-fee firm, it can take anywhere between six and 10 weeks, according to the volume of workload, to set up a telephone appointment to go through one’s finances.
For some this is just too long, which is why they then go to a fee-charging firm; it will generally deal with the issue on the same-day contact is made and some will say that this is what you pay for.
The alternative is to queue up outside the local Citizens Advice office, in front of all and sundry, in the hope you can get some immediate advice. Even then, Citizens Advice only gives your case a limited shelf life because it has a flood of other cases coming in every day.
There are pros and cons for using either arrangement but with more and more consumers expected to call for advice next year, where is the money to fund the support needed going to come from?
All the political parties, bar the present government, are stating there will have to be cutbacks - which is why I am raising this concern now.
Here’s a contentious question for you. Should consumers now be expected to pay for debt service? After all, you pay to use a solicitor or accountant so why should you not pay for professional debt service?
The counter arguement is that people suffering with debt issues cannot afford to pay for help – they are broke, after all. But if it is decided that the consumer can do an individual voluntary arrangement (or IVA) then lenders pay the fees, not the borrower, so that argument does not stand up.
Anyway, I believe consumers should have the right to choose – after all, people pay for private education and healthcare, even through this is available for free. Why? Because they want an improved level of service.
The issue of funding for debt charities is a concern not just for consumers but also for lenders and those who work in the free sector.
New rules mean there is a distinct possibility that the fees in a debt management plan may be capped, and there is no decision as yet whether fees will be paid by lenders.
Such a move would put the non and fee-charging firms on a level footing and not a bad idea at that. Expect a lot to happen over the next four to six months.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
An alternative to bankruptcy, an Individual Voluntary Agreement is a legal agreement drawn up between the debtor, all creditors to whom money is owed (banks, credit cards etc) and a licensed insolvency practitioner who then administers the arrangement. Unlike a debt management plan (DMP), which is a more casual arrangement, an IVA is a legal process by which your unsecured creditors cannot then pursue you for payment of your debts outside the agreement. To qualify for an IVA, you must be a private individual (not a company), your debts must exceed £15,000 and you must have a regular income. If you are a homeowner with equity in the property, you may have to remortgage and use the equity to clear some of the debt before you enter into an IVA.
Debt management plan
Not to be confused with a consolidation loan or bankruptcy, a DMP is a service offered by a specialist debt management company that will negotiate with your creditors to change the terms of how they get their money back. The debt company will renegotiate your debt repayment terms and then deal directly with your creditors on your behalf, and you then pay the debt management company, which passes the money to your creditors minus its initial and subsequent monthly fee. This can be as high as 20%, which means you’ll pay down your debts slower than you thought.