Will the new government help people with debt?
Just over a year ago I had the opportunity to meet both Gordon Brown and David Cameron in the House of Commons. Although the meetings were short they gave me enough time to voice my concerns about the number of consumers suffering from unmanageable debt.
So when the Conservatives, Labour and Liberal Democrats released their election manifestos in mid-April I took time out to scrutinise them to see what help would be on offer for people struggling with debt. Unfortunately, they all made somewhat disappointing reading.
The Liberal Democrats only had three aims under their ‘consumer issues' heading.
One is to legislate against unfair bank and financial transaction charges; the second is to improve access to banking for all with a PostBank and the third, to impose maximum interest rates for credit cards and store cards.
The last proposal will involve consultation with the personal finance industry as well as consumer groups and would need to account for fluctuating interest rates - not a simple task - and all it will do is spread the cost to consumers. None of the proposals will help those already with unmanageable debt.
In the meantime, Labour says it will create a People’s Bank at the Post Office, offering a full range of competitive and affordable credit products. It will also give all consumers with a valid address the legal right to a basic bank account and a right to redress if this is refused. Most banks refuse accounts to those with fraud convictions, or those who are undischarged bankrupts.
It adds it will clamp down on the interest rates and other fees charged by instant loan companies and payday or doorstep lenders, tackling the very high cost lending that hits low-income communities hardest.
Next, Labour will introduce a single regulator for consumer finance to restore confidence and trust, with responsibility for the supervision of all unsecured lending being passed to the Financial Services Authority.
One point worthy of note, Labour will make ‘the Savings Gateway account’ for people on lower incomes available to over eight million families from July 2010, providing 50p for every £1 saved up to a limit of £300. In my view, this will encourage consumers to save and will help towards people avoiding dropping into debt.
I put Labour’s manifesto for consumers with debts ahead of the Liberal Democrats, but still no help for those with unmanageable debts.
Now onto the Conservatives. Under their ‘Tackling poverty & inequality’, they would look to ban excessive interest rates on store cards, and launch Britain’s first free national financial advice service. But will this include debt advice? I doubt it.
They will also introduce a seven-day cooling off period for store cards, which is welcomed.
Other proposals would be to require credit card companies to provide clearer information; this is coming anyway but could be improved.
My suggestion would be to highlight the following sentence on credit card applications and monthly statements: "If you fail to pay your credit card bill and are a house owner then we may take you to court and put this debt on your house."
The Tories will also ensure that no-one is forced to sell their home to pay unsecured debts of less than £25,000. At the moment, any lender can change the status of an unsecured debt - such as credit or store card, personal loan or overdraft - and even catalogue debts to secured by applying to the court for a county court judgement, commonly known as a CCJ.
Once issued, the lender can then apply for the charging order to secure the debt. This can be contested by the borrower, but if the charging order is granted by the court then the debt becomes a priority and becomes secured on the property. Non-payment of this debt can lead to having the house repossessed, so for the time being, the Tories clinch it for this proposal alone.
Although some of the measures proposed by each of the parties will benefit certain consumers, what is worrying is there is no real help for those who need to resolve their current debts.
To give an indication of the size of the debt problem for consumers, here are some staggering statistics supplied by Credit Action early this April:
* 390 people today will be declared insolvent or bankrupt - this is one person every 3.69 minutes
* 2,000 CCJs were issued every day in the first three months of 2009
* 126 properties were repossessed every day during 2009
* 219 mortgage possession claims are issued and 185 mortgage possession orders are made each day
• 1,000 people a day are seeking to enter into some form of debt resolution with their lenders, and the Citizens Advice Bureau is dealing with just under 10,000 new debt cases every day
So what would I like to see done by the political parties? In my book, we need:
1. More protection from debt collectors and lenders for consumers who are in debt. Upon notification from any appropriately licensed debt management company or debt adviser, including debt charities, that the debtor is seeking advice on their debts then no action can be taken for a period of two months from the date of notification. This will enable a way forward to be planned, which in the long term will benefit the lender as there will be no recovery and tracing costs.
2. To ensure high standards and a quality service I’d like to see a requirement, similar to that in place for mortgage selling, for debt advisers to be professionally qualified.
3. Effective self-regulation of the debt management industry under the beady eye of the Office of Fair Trading or similar body, or full regulation.
4. Statutory debt management plans offering borrowers protection from unsupporting creditors or debt recovery agents with interest and other charges frozen and in certain circumstances debt relief on these plans.
5. The re-introduction of Simplified Individual Voluntary Arrangements (SIVAs), which will replace the current IVA where 75% of the lenders have to agree to it, to being based on a simple majority.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
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.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
A County Court Judgement is a legally issued strike by a lender against a person who has failed to keep to the terms of a credit agreement, usually by habitually failing to make the payments on a loan, credit card or mortgage. A CCJ will appear on a person’s credit record for six years and will certainly affect future applications for credit.