Debt management firms set for regulation?
The government is launching a consultation into debt management companies which could see the sector become regulated.
Debt management firms typically offer to condense your payments to an affordable monthly amount and will negotiate with your creditors to get them to agree to lower your payments.
Around 150,000 people enter into debt management plans each year.
However, the sector has recently come under fire by charities and the Office of Fair Trading (OFT) for not being transparent with their charges.
Most debt management firms will charge an initial set-up fee as well as ongoing monthly fees, pushing a person’s overall level of debt up higher.
Charities such as Citizens Advice, National Debtline and the Consumer Credit Counselling Service (CCCS) will help borrowers draw up a debt management plan for free.
The government says it wants to examine the debt management sector to make sure customers are getting appropriate help with tackling their debt problems.
The consultation will explore whether there would be benefits for debtors through more consistent operators’ charges, interest and other charges being frozen once a payment plan has been agreed as well as the opportunity to pay off debts over time without requirements to sell homes or other assets.
It will also look at whether the sector is fine as it currently stands or whether it should introduce a new code of practice for companies operating in this area or bring debt management under a formal system of regulation.
The consultation is expected to finish in December, with the government to make an announcement early next year.
Justice minister Bridget Prentice says: "Debt can affect all kinds of people, especially in the current economic downturn, and it is important that we protect people from sliding deeper and deeper into debt.
"We aim to benefit both debtors and creditors, ensuring debts can be paid off without the vicious cycle of charges, interest, fees, confiscated assets and relentless creditor contact that can turn a debt problem into a debt nightmare."
Consumers are feeling the effects of the recession and the financial crisis at large.
The number of people seeking help over debt from Citizens Advice jumped 21% for the first three months of the year.
Debt remained the biggest volume of enquiries at CAB with 1.93 million new debt problems in 2008/2009, an 11% increase from the previous year.
To contact Citizens Advice and find your local office, log on to its website.
CCCS offers online debt counselling or consumers can phone its freephone helpline on 0800 138 1111 to speak to a debt counsellor.
To contact National Debt call 0808 808 4000 or visit its website.
Debt management companies are currently covered by the OFT but the industry is not formally regulated.
Later this year, the OFT will launch a review of its debt management guidance to get a clearer picture of compliance levels within the debt management sector.
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.