Keep the debt management wolves away
Beware wolves in sheep's clothing. They are debt management companies, using reassuring sales patter and false promises to lure the very individuals who can least afford their services.
These predators target vulnerable people who have tumbled into debt after turning to expensive credit cards and loans to survive the financial strains of the recession and the daily struggles posed by the rising cost of living.
Charity advice services say many debt management firms disguise themselves as good guys wanting to help those in trouble, but are actually baddies that cream off hefty fees at a time when borrowers could be using free services to pay off their debts faster.
These firms typically offer to set up either debt management plans, where the firm negotiates a repayment schedule with your creditors that may include freezing interest and charges, or Individual Voluntary Arrangements (IVAs), where part of the debt is repaid and the rest written off.
But while these plans can work well for borrowers, there are reputable firms out there who will arrange this for free, whereas the bad guys charge huge fees.
According to charity the Consumer Credit Counselling Service (CCCS), which, unlike commercial debt management operations, offers a free service (lenders give a voluntary contribution of 10% of each debt repaid, to cover the costs), someone with a debt of £30,000 seeking assistance from a debt management firm would typically pay almost £6,000 in fees over and above any loan repayments.
Paul Crayston, spokesperson for National Debtline, another charitable advice service, says: "Typical charges are around 20%. This adds years onto the length of time it takes to repay debts, and makes the process of repaying less sustainable.
"The longer the repayment period, the greater likelihood of repayments being derailed by other life events."
He adds: "One of the problems with fees is that they are often upfront or at least front-loaded, meaning you pay for the service of the debt management company before the full service is provided."
"Therefore the debt management company has significantly less incentive to see your plan through to completion. We've long argued upfront fees should be banned."
High ongoing fees also add to the debt spiral, as one client of the Citizens Advice Bureau (CAB), which also offers free debt guidance, found out. She approached her local bureau over concerns about paying a debt management firm £70 per month, £30 of which was an administration fee, to pay off a £4,000 debt.
After working out that she would end up paying around £7,000 over eight years and four months, including service charges and assuming the interest was frozen, the charity concluded she should be on a Debt Relief Order.
This is a form of bankruptcy suitable for people on low incomes who owe less than £15,000 and do not own their own home, allowing them to make low repayments over 12 months and then see their debt written off.
The costs of commercial debt plans aside, the industry is also riddled with dodgy practices, including firms
that wrongly represent themselves as charitable or even government-backed, those that pocket repayments rather than passing them on to creditors, and those that simply offer poor advice to their clients.
Part-time administrative assistant Gail Knight (not her real name) is a single parent who got into more than £18,000 of debt after being persuaded by her ex-partner to take out credit.
After the couple split up, Gail, who is on a low income, sought help from several debt management companies. All of them failed to help her and added to her financial problems instead, with one keeping £300 of her money until it could confirm the credit agreements.
She subsequently approached CAB, which discovered the firms had clearly failed to examine her income and expenditure accurately and had not properly negotiated repayment proposals with creditors.
Neither interest nor charges had been frozen, despite promises to this effect in their advertising. Gail's debt has barely been reduced and her creditors are still demanding repayment.
WHAT'S BEING DONE?
The Office of Fair Trading (OFT) has attempted to stamp out the worst misdemeanors in the sector. Although these companies are not regulated, they must have credit licences and are required to follow the OFT's Debt Management Guidance.
In a 2010 review of the market, the OFT found widespread use of misleading advertising, especially related to fees, and also established that many firms were employing incompetent frontline staff.
It also highlighted poor awareness of the Financial Ombudsman Service (FOS), which can help victims of poor advice seek redress. Following the review, it issued warnings to 129 debt management firms; since then 87 have pulled out of the market, either by choice or as a result of enforcement action, and a further 67 have received warning letters.
In March 2012, the OFT also issued additional warnings designed to stop firms bombarding clients with unsolicited emails and texts, falsely passing themselves off as charities or government-backed organisations, and using commission to incentivise staff giving debt advice.
Meanwhile, customer gripes keep pouring in. Complaints to the FOS about debt management companies leapt by 18% to 546 in 2011, with the service finding in favour of the consumer in about half of cases.
National Debtline, run by the Money Advice Trust charity, dealt with 18,486 calls – 355 a week – from those who needed help after going to a fee-charging firm.
Charities are particularly irked by the failure of many commercial outfits to provide prominent guidance to clients on the potential benefits of seeking help from free services, and by reports that some firms even tell clients the charities are too swamped to help.
National Debtline's Crayston says: "It is simply not true that charities are too inundated to help everyone. Our helplines are extremely busy, but National Debtline answers around 85% of all calls coming in. As such, almost all people who call more than once get their call answered.
There are some tips that can help make sure you get through – the most important being to call on a Friday, when lines tend to be at their quietest.
In addition to this, we run My Money Steps, an online service that has near limitless capacity; it is designed so those who are not suitable for online advice are referred to a more appropriate source straightaway."
But don't expect to be mollycoddled by the charities. You are required to show serious commitment to solving your debt problems. Una Farrell, a spokesperson for CCCS, says: "Our budgeting advice is tough but realistic, as we know that people have to pay for things like weddings.
But if someone comes to us reluctant to give up something non-essential, it's not going to work, as the creditors will not be so understanding. We had someone who owned a horse and didn't want to give it up. But they had to, otherwise the creditors would not have co-operated with us."
CCCS launched its debt management plan in the UK 20 years ago, inspired by schemes in the US designed to make repayments more affordable. But, says Farrell: "Soon firms started to see it as a market to make money out of, and now the current economic problems have seen it grow."
DON'T ACT IN HASTE
If you start to struggle with debts, the message is to act quickly but not rashly. National Debtline's Crayston recommends: "Know your situation before you contact a helpline or other service."
"You need to understand the difference between priority and non-priority debt. The former includes your mortgage, council tax, rent, gas and electricity and even your TV licence. The latter are things such as personal loans, credit cards and authorised overdrafts."
He adds: "The providers of the latter will work harder and pester to get the money back, so it is tempting to pay up to make them go away. But if you decide to pay the credit company instead of your TV licence, that's the wrong decision. You can end up in prison by not paying your licence, and if you don't pay the mortgage you risk losing your home."
There are several options for repaying debts outlined by the government's Insolvency Service. In an Informal Arrangement, you write to all your creditors to try to reach a compromise. Template letters are available from the likes of National Debtline. An IVA is a formal arrangement set up with the help of an authorised insolvency practitioner.
Administration Orders are arranged by a county court when one or more of your creditors has a court judgment against you and your total debts are no more than £5,000.
Debt Relief Orders (DROs) are designed for those who owe less than £15,000 and have assets worth less than £300 and less than £50 a month disposable income after normal living expenses. Finally, bankruptcy is similar to DROs but for bigger debts.
HOW MANY PREDATORS ARE THERE?
Tap ‘debt management advice' into Google and you'll get 51.5 million responses, a real minefield. But which names should you avoid? Paul Crayston, spokesperson for National Debtline, says: "We hear about so many that it would be completely incidental for me to choose one or two."
"What I would say is that the OFT found that over 90% of the firms it investigated in 2010 were in breach of guidelines, and we're not convinced things have improved much since then."
"It is harder to find a trustworthy firm than an untrustworthy one. In the end, why bother trying when free, not-for-profit advice is readily available?"
The OFT won't name and shame either, citing its impartial position, but in the past year it has taken action to prevent 61 companies from trading.
One has been forced to change its name as it used the word ‘helpline' in its previous title, which "failed to make clear to consumers the commercial nature of the business," according to the OFT.
More damningly, another had its licence revoked because staff "failed to demonstrate the necessary skills, knowledge or experience to hold a consumer credit licence".
David Fisher, the OFT's director of consumer credit, says: "We expect commercial debt management businesses to meet the standards that we set out in our guidance. If they do not, we will take action."
"I was told i was a lost cause"
Charities are often left to pick up the pieces after a debt management company has let down a client, as in the case of Cheshire-based Kirstianne. After separating from her husband, the 44-year-old found by the end of last year her debts had escalated to £6,000 on credit cards, a personal loan and a home order catalogue.
Kirstianne contacted a fee-charging debt management company after seeing an advert on daytime television, and began a debt management plan (DMP) with a monthly payment of £150. After six weeks, she was still receiving phone calls from her creditors chasing her for payment.
She discovered that of the £300 she had paid to the debt management company, only £1 had been paid to just one of her creditors - and that the remainder had been kept by the company as an upfront fee. Kirstianne complained and asked to cancel her DMP.
When she told the firm that she had been advised to contact CCCS, an adviser claimed that because it was a charity, her creditors would not take her seriously and would keep adding interest and charges to her debts.
At the end of the call she was told she was "a lost cause".
Kirstianne is now receiving free advice from CCCS and is complaining to the Financial Ombudsman Service about her treatment by the firm. Kirstianne says: "I would never have signed up with the company if I had realised what it was like. All it wants is its fee - it's not interested in the human being.
"The worst thing was being told I was a lost cause. I am not a lost cause. I just want to repay my debts and get back on an even keel."
HOW TO KEEP THE WOLVES AT BAY
First read up on your options, which can include a DIY approach.
The Insolvency Service offers a useful guide, In Debt? Dealing With Your Creditors at bis.gov.uk/insolvency/Publications
For free debt advice and services try:
Citizens Advice Bureau
Consumer Credit Counselling Service
0800 138 1111
0808 808 4000
If you can't resolve a complaint with a debt management company yourself, contact the Financial Ombudsman Service,
Generally speaking, insolvency is to businesses what bankruptcy is to individuals. A company is insolvent if the value of its assets is less than the amount of its liabilities, or it is unable to pay its liabilities (loan payments) as they fall due. It’s an offence for an insolvent company to keep trading, so the main options available to an insolvent company are: voluntary liquidation, compulsory liquidation, administration or a company voluntary arrangement.
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.
A person (or business) unable to pay the debts it owes creditors can either volunteer or be forced into bankruptcy – a legal proceeding where an insolvent person can be relieved of their financial obligations – but loses control over their bank accounts. Bankruptcy is not a soft option. Although it may wipe the financial slate clean, it is extremely harmful to a person’s credit rating (it will stay on your credit record for six years) and will adversely affect your future dealings with financial institutions. Bankruptcy costs £600 paid upfront.
If you’ve have a complaint about a financial service product you have bought but the company you bought it from refuses to resolve your problem after eight weeks, the Ombudsman can help. The Ombudsman will investigate and resolve the matter. The Ombudsman is independent and its service is free to consumers. The Ombudsman may find in the company’s favour but consumers don’t have accept its decision and are always free to go to court instead. But if they do accept an Ombudsman’s decision, it is binding both on them and on the business.