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When it comes to getting credit, the worst thing you can do is continue to blindly apply after being turned down once. Here I show you how to repair your credit rating.

My daughter recently asked if I could help out with one of her friends, Claire. Claire is 26, has been employed for 8 years and is really desperate to get control of her credit card debt.

She‘s been making the minimum payments, but the outstanding balance of £2,100 has hardly reduced as the interest rate is 28%.

My advice? Move the balance to a 0% balance transfer card - not difficult really and makes good sense as long as you don’t keep spending on it or drawing cash.

“I tried that a few weeks ago and got turned down, the same thing happened about a month ago, no-one wants me!” moaned Claire.

Unfortunately Claire is one of the whopping 25,000 people who, according to Credit Action,  are turned down for credit each day. (Figures from December 2009.)

Let’s get one thing clear; entitlement to credit is not an automatic right.  However, while there’s no overnight fix, as lenders want to minimise their risk, there’s a lot you can do to help improve your chances of getting credit.

Before attempting to rebuild your credit you should be confident of your financial situation and, unless you are moving to consolidate or move credit, borrowing further when you are in a difficult situation is rarely a good idea. 

There is a general rule of thumb that says if you are unable to obtain credit,  two years of ‘good behaviour’ should enable you to then get ‘simple’ credit (mobile phones, utilities, satellite TV etc) again. Good behaviour would generally mean maintaining payments on existing credit arrangements and settling defaults and County Court Judgements, CCJs.

If you can see no reason for being repeatedly declined credit then you should look at your credit file immediately. This can be done online for as little as £2 or by post.

What if the information on my file is incorrect?

If the information is incorrect you can write to the agency asking it to either remove or change the entry that you think is wrong. Within 28 days of receiving your letter the agency should tell you that it has either removed or changed the entry or taken no action. 

Notice of Correction

If you are unhappy with the response or would like an explanation for the information on your file you can send a notice of correction. This is a statement of up to 200 words that will be added to your file as long as it isn’t defamatory, frivolous or incorrect. Again the agencies have 28 days to respond.

If the agency still takes no action, resend the notice of correction. If information is amended the agency must send details to any lender who has enquired in the last 6 months.

If an agency declines your notice of correction it must refer you to the Information Commissioner.

What can you do if you are refused credit?

The lender is under no obligation to give you the reasons you are refused. However, for loan applications of up to £15,000, individuals have the right to know which agency supplied the credit information, provided you request this information within 28 days of the initial application.

The three key steps to getting back on the lending ladder

1. Repair your Credit File 

2. Maintain & Reduce existing credit 

3. Apply for the right types of new credit 

Once you understand how you’re going to ‘tidy up’ your past financial situations you should then look at your current situation. You need to understand how lenders look at your file, what counts for you, and what counts against.

Do you:

- Have associations (other family names) on your file that aren’t helping? (Claire, possibly with other tenants.)

- Have lots of small loans and balances on credit cards? (Claire, yes.)

- Have repeated applications for further credit? (Claire, yes.)

Are you:

- Maintaining regular payments? (Claire, sort of.)

- On the electoral role? (Claire, no.)

- Making lots of applications for credit? (Claire, yes.)

What hasn’t helped Claire is that every year she moves into different rented accommodation so there is yet another new address on her file. The previous tenants of this rented property may have had credit problems, which could impact on Claire’s application.

Also, depending on when she moves, she may have been too late to go on next year’s electoral roll, which is another source of information used by credit reference agencies. Furthermore the repeated application for credit when her credit file is untidy virtually guarantees failure.

So don’t keep applying for credit hoping someone will give in to you. The more you apply the worse it will get. Work hard at repairing your file and let the lenders give credit where credit is due.

Read more: Work hard at repairing your file and let the lenders give credit where credit is due.

 

Seeing a friend in financial strife is difficult and can often prompt people into handing over their own money in order to help them. Just be wary before you part with your cash, says debt wizard Mike Thomas.

Jack and Polly had been living together for about a year but something was not quite right. Every time they went out for a meal or had to buy something for their new home, Jack would make excuses as to why he could not contribute towards the cost.

One day it all came out; Jack had a credit card debt of £1,800. He had missed monthly repayments and now the credit card provider was pressuring him to repay the entire balance.

Polly, smitten with love, stepped in, took out a credit card in her name and used the entire limit to pay off Jack's debt in fell swoop. Problem solved, she thought. But was Polly right to do this?

A friend in need...

Several years ago something similar had happened to me. I helped a friend who was behind with his tax, on the verge of having his overdraft called in, while even just another small debt had been ignored and the company was threatening legal action.

Instead of taking out a loan or credit card in my name to cover his debt, I decided to part with £5,000 of my savings. The reason? Like most people with debt issues, my friend was under considerable stress, was often depressed and found sleeping difficult.

Being in the position to help, it is quite natural that I would want to. But, while I don't regret my actions and our relationship is still intact, in this case, it ended in tears for both of us...

The full picture

My friend assured me that £5,000 would wipe out all of his debts and get him back on an even keel. However, a few months after advancing the money and paying off his creditors I discovered that the full picture was a lot more ugly than this.

My friend had hidden other debts from me – a staggering £62,000 worth of loans, credit cards and mortgage arrears!

Through his embarrassment and feelings of low esteem he had not told me everything and, as a result, I ended up facing sleepless nights, let alone my friend!

In short, my intervention of £5,000 did not change or alter his debt position one iota; my friend was still unable to pay the other debts and he subsequently went bankrupt.

Where did that leave me? Just the same as any other high street lender or credit card provider – a creditor in his bankruptcy.

What I have learned from this experience is not to "never lend money to a friend in need", but to arm yourself with the full facts first and be sure that the amount you are offering will make a material difference in resolving the debt issue. If it won't then don't do it – it will just be good money after bad.

So what can you do?

The fact that the debtor has taken their head out of the sand and is talking to you about their debt issues is a welcome sign.

You are now in the position to support and encourage them to talk to a professional and explore their options. By the way remember, you are not that professional!

Even if it transpires that bankruptcy is the only way forward and you still want to help them, you may wish to offer to pay the £600 to cover the petitioning costs.

That way at least you know your involvement has helped resolve matters as all the debts will be taken care of in the bankruptcy order. What's more, it's a lot cheaper than loaning thousands of pounds!

Protect your credit file

If you are connected with your partner, for example on a mortgage, loan or rental agreement then you have an association which will be recorded with credit reference agencies.

These are companies that hold – but do not determine – your credit file, a history of all your previous borrowing that will be scored on how well it is managed.

If the debt is not your fault, it is possible to disassociate yourself from your partner on your credit file by writing to the credit reference agencies and requesting it.

Unless the agency has a good reason to doubt what you tell them, it must not continue to give lenders information about the other people that you have mentioned.

You need only write to the one agency that supplied you with your file, as disassociation information will be shared between the other main agencies.

The agency may wish to make some enquiries or checks to ensure that you are not just trying to avoid a bad credit record. There is no cost for this other than the fee to access your credit file in the first place.

Still want to lend?

If, after reading this, you still feel inclined to advance large sums of your hard-earned cash then perhaps adopt this philosophy; "Only lend what you are able to afford to lose".

Read more: Friends, debt... and how to make sure your help is effective

 

A Deed of Acknowledge is a particularly sinister form involved in home repossession that, if signed can leave you legally responsible for any shortfall after the sale. What's the best way around it? Don't sign it, says DebtWizard Mike Thomas. 

Mark, a police officer, is about to have his home repossessed by his mortgage lender. Sold at auction, it is expected to fetch around £44,000 less than Mark's outstanding mortgage.

Combined with his credit card and personal loan debts, which total around £46,000, this will take Mark's final debt to at least £90,000.

As the debt is so high, in my opinion, there is only one solution – bankruptcy. Mark's marriage has also broken down and, due to the separate living costs, he has no spare money at all each month with which to repay his liabilities.

Most people think that once they go bankrupt, that's it and all the debts – including the shortfall on the previously mortgaged home – get wiped clean. But do they?

More pain in store

Not necessarily. The mortgage lender may spring something upon the bankrupt that could have devastating consequences in years to come.

When a borrower voluntarily surrenders the home and hands back the keys, the mortgage lender will request that some forms are signed. Among these can lurk a particularly sinister form called a Deed of Acknowledgement (DoA).

The purpose of this is for the mortgage lender (or secured creditor) to ensure there can be no dispute as to the amount of any shortfall when the house is sold, and act as an agreement that can hold the borrower to repaying some of the bankruptcy debt over the next 12 years.

Some lenders will insist that the keys to the home cannot be voluntarily surrendered without signing the DoA – and worse still, the document can also be sent to any non-bankrupt joint owner/borrower if the property was previously jointly-owned.

But don't be misled by the lender; you CAN surrender your home by posting the keys, recorded delivery, or handing them to the official receiver without having to sign the DoA.

What if I have already signed the DoA before bankruptcy?

If you have already signed the DoA and are not yet officially bankrupt, the best you can do is state you want to include ALL of your debts within the bankruptcy, including any shortfall in sale of the house.

Unfortunately however, there is no guarantee as to whether this shortfall issue would be accepted by the Official Receiver (OR).

There can be a clause in the DoA whereby you, the previous borrower and now shortly to be the bankrupt, agree that this debt will not be included in the bankruptcy – but you will pay it after the bankruptcy has concluded.

What if I signed the DoA AFTER the bankruptcy?

The biggest concern for the bankrupt will be that, if they sign a DoA after being declared bankrupt, new debt might be created for the secured element. However, this would exclude legal and repair costs as these would be unsecured and would have been included in the bankruptcy.

What the Insolvency Service says

Bankrupts cannot expect to be protected from the perils of the DoA by the Official Receivers.

A spokesperson from The Insolvency Service said, "The Official Receiver (who would only be involved once the person is already bankrupt) should not object to the completion of a DoA if he/she becomes aware that the bankrupt has been requested to provide such a deed.

"Instead the Official Receiver should suggest that the bankrupt seeks his/her own legal advice. It is not for the Official Receiver to influence the bankrupt about how to proceed in this matter".

Knock-on effect

If the mortgage shortfall debt is in joint names then, as with any joint loans secured or unsecured, the non-bankrupt joint owner will be liable for the appropriate portion of the debt whether a DoA is completed or not.

For the record, mortgage lenders have six years to recover the interest element of the debt and 12 years for the capital sum, this being from the date of the last payment on the account or acknowledgement.

By signing the DoA the 12-year time limit therefore starts the day you add your signature.

Some debt advisers argue that a post- bankruptcy DoA is unenforceable whilst others say it still could be pursued.

The simple and best advice to avoid all this is, don't sign it!

Read more: Repossessed borrowers - sign a 'Deed of Acknowledgement' at your peril

 

Taking the decision to deal with your debt is an important first step, but make sure you follow these tips to avoid any unnecessary hardship.

If you’ve had enough of debts controlling your life and never having any money left a week after payday, then you might feel it’s time to sort your debt problems out. 

According to one consumer group around 1,000 people are seeking some form of formal debt rescheduling every working day.

Some of these people wish to negotiate directly with the lenders themselves and bypass a debt management company, but dealing with lenders in this way can be a very stressful and emotional time.  

To help you through this I’ve put together some simple tips on what to do and what not to do. 

The first thing to do is to get a filing system going. If you have a few lenders then it is best to start with an index. You may think this is a bit over the top but trust me, to be able to easily find letters and figures will be a great advantage and reduce further stress in trying to locate lost papers with their telephone numbers and references.

The do list

• Keep copies of all correspondence to and from lenders. 

• Reply to letters from creditors promptly and enclose any documentation that supports the case, such as a doctor's certificate if signed off work or a redundancy letter etc. 

• Reply to any court summonses promptly. 

• Attend court hearings with all documentation and if possible have someone who is qualified to represent you. 

• Think about how creditors are going to be paid. If a cheque bounces then you could well be charged around £30 or more by the bank for returning the cheque. Consider sending postal orders, (these cost additional money though) which are available through the Post Office. Or perhaps use a repayment book issued by the creditor. Creditors prefer regular payments, even if they are small compared to larger irregular sums.

• Above all, be realistic and accept there is a problem which will only go away if something is done about it, either by dealing with it yourself or with the help of agency such as those illustrated in the DebtWizard support team

The don’t list

• Don’t be intimidated, threatened or bullied into making an offer or promises that cannot be kept. 

• Don’t give up. If a creditor refuses the offer or refuses to stop interest, reaffirm efforts and get them to give up.

• Don’t borrow more money to pay creditors without professional advice to the contrary. 

• Don’t ignore the problem hoping it will just go away. 

• Don’t be frightened to ask for specialist help and advice, see who can help

• Don’t hesitate to take professional advice immediately, either from insolvency practitioners or solicitors if a creditor refuses an offer and threatens legal action such as bankruptcy. 

You may also find my five diy steps to dealing with debt guide helpful.

Read more: The important do's and don'ts when dealing with debt

 

With the number of home repossessions dropping slightly, DebtWizard explains how mortgage lenders still recover their losses many years later, just when you think it is all over.

“Help, I can’t believe this is happening to me” gasped the man on the phone. “Surely they cannot do this to me, this house was repossessed some 10 years ago and now they are chasing me for the mortgage shortfall after they undersold it!”

I get quite a few such calls from desperate people that have previously had their home repossessed and not heard anything for years but then, right out of the blue, a solicitor’s letter drops on the doormat claiming thousands- in this particular case £66,381.

How lenders claim such large amounts

It is not unusual for lenders to sell a repossessed property at auction for a lot less than what the previous owner though it was worth. With the sale price often not covering the mortgage, the lender will add to this interest, arrears, administration, disbursements, court fees, selling costs, advertising, locksmith and gardener charges, etc. Then there will be additional legal costs for the lender to defray under any settlement.

So what can be done?

If contact is made you do have options. One is to refuse to pay anything and rely on the outcome of any legal proceedings that the lender or their agents may well begin.

Most people however either go bankrupt to wipe out the debt and any other credit card debts, propose an Individual Voluntary Arrangement (IVA) and include the lender’s claim, or make an offer to go away in full and final settlement.

Sometimes this settlement figure can be between 5% and 10% of the claim. So in the example of the above claim of £66,381 this would be anything from £3,300 to £6,600.

With skilful negotiation a full and final settlement can often be reached by paying a fraction of the initial claim. However, every case is determined on its merits and may take into account whatever assets you may have.  What the lender or agent is trying to do is see whether they can put the debt they say you owe onto your current home, if owned,  or whether you can pay back something each month.

All the mortgage lenders know that it is unlikely that the person is able to pay the full amount and they are generally open to an offer.

If you have substantial equity in your current property, (the difference between the value and the outstanding mortgage), then you are at greater risk as the lender or their agents know they can secure the debt on your current home and they would not accept a lesser sum, as illustrated above.

Mortgage Indemnity Guarantee (MIG)

If you decide to settle on an amicable basis then ensure that the MIG is also included. MIG is controversial, as the borrower has to pay the premium for the benefit of the lender.

A condition of any claim is that the lender must try to recover the loss from the borrower and pass it on to the insurer. However I know of cases where the lender has separately claimed from the borrower the amount that the MIG may not cover.  The borrower then believes they have settled the matter only to find the MIG moving in at a later date, so be warned!

Time limits to recover mortgage shortfalls

If your property was repossessed more than 6 years ago and you have not had any contact from the lender or an appointed agent then you should cite the Council of Mortgage Lenders (CML) directive, which came in to force on the 11 Feb 2000. This directive provides that those that have not been contacted by the lender for more than 6 years from the date of the sale of the property will not have to repay their mortgage shortfall debt.

Unfortunately this is a voluntary code and applies only to new cases and not those with existing shortfall debt repayments or where the lender has already started recovery procedures.

If the lender obtains a “money judgement” (MJO) at the time of the re-possession hearing then there is no set time limit for recovery of the deb. However, if the MJO is 6 years old then the lender has to re-apply through the Court, otherwise lenders need to abide by specified limitation rules.

Generally, lenders have six years in which to recover interest and twelve years for the capital sum. This limitation begins when:-

  •  the lender was first able to issue proceedings (and would be much earlier than the date the property was repossessed) or,
  •  the last time any payment was made irrespective of the amount, or
  •  the last time the debt was acknowledged by the client or his/her agent in writing.

Joint names on the mortgage

If the debt is of a joint nature and only one of the party concerned is making a payment then the other person can be bound by the time limitation, even without their knowledge, e.g. if they were separated or divorced. This means that the 12 year time limit will start again, from the date of the last payment or acknowledgement!

Acknowledging the debt

Telephoning a lender just to enquire about the debt is not regarded as acknowledgement. Generally, for the time limit to start again, the acknowledgement must be in writing and signed by the debtor/borrower or his or her agent.

Warning

Those borrowers that have had a home repossessed need to address the situation sooner rather than later. Lenders do not pursue a distressed borrower immediately after repossession because they know that money worries led to losing the home. They do however have a habit of popping up many years later, for example when you are in another home, possibly married and with children and earning good money, and just when you thought it was all over.

If you are worried about a mortgage shortfall debt then it is important that you take legal advice as case law can change.

Read more: How a re-possessed home can come back to haunt you

 

As the number of consumer insolvencies continues to rise, Mike Thomas calls on the public and the banks to start supporting bankrupts instead of ostracising them.

With the government announcing 34,743 individual insolvencies in England and Wales in the second quarter of 2010 - 5% up on the same time period last year - spare a thought for those individuals who have been battling unemployment and credit problems and who have now decided that insolvency is the only route left. 

Many people regard bankruptcy as an easy way out of paying debts. I simply can’t agree with this as I have often seen the pain and suffering of those going through the experience.

Insolvency involves an individual either going or having been made bankrupt, or successfully proposing an Individual Voluntary Arrangement (IVA), which is seen as a less stringent form of insolvency. 

An IVA allows a borrower to enter into a repayment programme, usually for five years with interest and charges frozen and with the remaining debt written off upon completion of the arrangement. This is unlike a debt plan, where you pay back the debts in full and interest and charges can still be added.

From my experience the majority of consumers who end up going bankrupt have previously been able to meet their commitments until they suffered a trigger such as unemployment, a breakdown in a relationship or illness. 

For some it is just too much to recover from and they end up being plagued by debt collectors who harass them into paying monies they do not have. They then become ill, depressed and often turn to alcohol, crime or gambling.

Their debt problems can also impact on their relationships, their friends and their work. What support do we offer these people? Not a lot.

Instead we advertise their names in the local papers, though thankfully, from April this year, this has stopped for most cases. 

We put their names, occupations and home address on a public register and then bar them from having bank accounts and future credit. What further compounds the matter is that we are fast moving towards a cashless society.

This makes it harder for those who have been through financial difficulties, as they can’t pay by direct debit, receive wages electronically or use the internet for purchases if they don’t have a debit card. 

The banking industry isn’t helping matters either. Only two out of 17 banks seem prepared to offer bankrupts an account and credit facilities are difficult to come by or are denied. It’s no wonder then that people find it hard to get back on their feet.

Are we sowing the seeds of unrest by making these people feel like outcasts in society? Isn’t it about time we started to support and help them manage and rebuild their lives instead of ostracising them? 

I agree that it’s right to investigate bankrupts so that anyone who has been negligent or reckless pre-bankruptcy is subject to a bankruptcy restriction order (BRO). Once imposed on the bankrupt, this restriction means after discharge (usually 12 months) the bankrupt will be subject to certain rules for between two and 15 years.

Furthermore, if they have any money left over each month after paying normal reasonable expenditure they have to contribute to the bankruptcy by making monthly payments for a period of three years.

My forecast for 2010 is for insolvencies to peak at around 165,000, made up of 110,000 bankruptcies and 55,000 IVAs. This dwarfs the number reported for last year, which was 134,142, so this problem is not going away and is growing by the day. 

Perhaps the truth is that some of us who can pay our debts have a problem in accepting the stigma of bankruptcy could disappear and that a different view could be taken in the future. Creditors in particular need to wake up and listen and support borrowers that are prime candidates for bankruptcy.

Read news article covering more in depth figures and further DebtWizard comment: Consumer insolvencies dip 3% but are expected to rise later in the year

BBC Essex

Mike was live in the studio and offers one reason why he feels the bankruptcy figures are down 20%, debt advisers steering consumers prime for bankruptcy to other arrangements such as IVAs and debt plans. He also staggers Dave Monk when he reveals what the fees are for advising bankruptcy compared to an IVA, which by the way, numbers are up 10%.

Listen

 

Read more: Isn't it about time we started supporting the bankrupt?

 

A cab driver recently told me that if he had a debt problem he wouldn’t know what to do to resolve it or even where to start, so I gave him a quick DIY guide to debt resolution from the back of his cab, and here it is!

When you are trying to deal with debts it can be hard to know where to start. This means many people end up burying their head in the sand, which allows their problems to worsen.

So, to help prevent your debts spiralling out of control I have put together a five-point plan.

This is aimed at those who have low to moderate debt with numerous unsecured creditors. 

1. Find out what you owe and to whom

Take your credit cards, loans and bank overdrafts and make a separate list for each of the following:

  • those in your name only 
  • those in your partner's name only (if applicable) 
  • those in joint names (if applicable) 

2. Establish if the loans are secured

Secured loans include mortgages, loans on a property and hire purchases such as those on a vehicle, these are priority debts. Also identify other priority creditors such as utilities and council tax.

Remember if you don't pay secured creditors then you may lose the security (your house for example) and if you don't pay priority creditors such as your electricity or gas provider then you might lose the services they provide. Make a separate list of your unsecured creditors.

3. Work out your disposable income

This is the amount you have available to pay unsecured creditors - credit and store cards and personal loans for example - after you have paid the secured ones in full.

To calculate your disposable income  you  will first need to work out the total family income including pensions, benefits, family allowance and tax credits. Then list all your outgoings, including those to secured creditors.  

Once you have subtracted this amount from your income you will see exactly what your disposable income is and what you can truly afford to pay toward your debts.

This will help you assess your options when it comes to dealing with your creditors.

Click on our budget wizard to help you work this out for free.

4. Work out how much your assets are worth

Now you need to work out what assets you own. This could be your house, even if you have a mortgage on the property. The difference between the remaining mortgage and the estimated value of your house is known as equity, and this is an asset. If the home is jointly owned, however,  then the other named person may well be entitled to half the equity. 

For example, if your mortgage debt with your partner stands at £80,000 and your house is valued at around £140,000, then there is equity of £60,000. Once this is divided between you both, you would each have a share worth £30,000.

5. Get in touch with your creditors

If you fail to make payments to your creditors and don't communicate with them, you will be regarded as someone who won't pay rather than can't pay. This leaves your creditors little option but to take legal action against you to recover their losses.

So contact your lenders, who will request the information detailed in steps one to four, and who can then make a decision on how best to help you.

Above all, be realistic and accept there is a problem, which will only go away if something is done about it. If you feel you can't deal with it on your own then see the DebtWizard list of agencies you could consider.

Read more: London cab driver inspires Mike to write this 5 point DIY debt guide

 

Is there anything you can do to stop a bank taking money out of one account to pay off debts in another account you hold with them?

During the past week or so I received calls from two people, both of whom had money taken from their bank accounts by their banks to pay off their credit card debt. 

Both asked, “Can a bank do this, legally?” and I said, “The short answer is yes.” This practice is known in the trade as “setting-off” and while there are some restrictions it is perfectly legal.

What exactly is setting-off?

Setting off is when a bank uses the money held in one account to pay off a debt in another account held with the same bank.

So for example, if you have an account you pay your utility bills from at the end of each month and your credit card bill, with the same bank, is due a week before, you bank could potentially take money out of this account to pay the bill if there are insufficient funds in your other account to pay for it. 

This would be unbeknown to you, as you will not receive notification from the bank in case you move the money away. So the bank takes money from the account to pay the credit card bill and it is no longer there to pay your utilities. 

Can I get my money back?

If you’re caught out, as in the above scenario, then you need to contact the bank and ask for your money back but you will need to prove that you suffered as result of the bank’s setting-off. 

In the case above the bank has set-off on one account to pay its non-priority, unsecured credit card bill leaving you with no money to pay your priority utility bills, which could also include your mortgage or rent. You will need to send copies of your late payment reminders on any of your priority bills, stating that they were caused by the bank setting off, and demand the bank refunds the money it took under this set-off.

Also, make the point that the bank is to treat you fairly, sympathetically and positively, as required by its banking code. 

Why are the banks allowed to do this?

According to the Financial Ombudsman Service (FOS), the right that allows a financial firm to set-off dates back to the 19th century. This entitlement allows the firm to monitor a customer’s financial position and to combine accounts held by that customer, even though this is not detailed in the terms and conditions of any accounts.

The size of the set-off that the bank can take from other accounts must relate to the size of the missed payment. This means the bank can only take money equal to the size of the monthly payment that was due, not the whole loan.             

The Lending Standards Board issued minimum standards which came into force on 1 May 2010 covering the use of the right to set-off. 

Those customers most likely to be affected by a set-off are those on lower incomes and those struggling with their debts and missing payments on loans or credit card commitments to the bank or institution.

What’s an institution?

Some banks are connected to each other such as Santander, Abbey, Alliance & Leicester and Bradford & Bingley and classed as being under one institute. It is, however, difficult to know exactly who belongs to who. To help you narrow it down, take a look the FSA's list of UK banking and savings groups, it’s not a full list but it gets close. 

The bottom line is that accounts with different banks that come under the umbrella of one institution can be raided.

The bank has refused my claim

If 8 weeks passes from the date you raised your complaint about setting off and the bank has not resolved the issue to your satisfaction, then you can go to the Financial Ombudsman Service (FOS). This is a free service and they will investigate your complaint. Contact the FOS online or call  0800 0234 567.

How do I prevent this from happening to me?

Have sufficient funds in your bank account to pay your debts when they are due!

If you can’t do this because you are struggling to meet your bills, including debts, then get professional advice.  You may also need to think about getting a new bank account, preferably with a bank or institution that you do not owe money, as this would stop the credit card or loan repayment being taken.

Some people will say you need to pay your debts off using your savings and I can’t really argue with that. Especially since savings offer very little interest at present and credit cards charge massive interest.

Is setting off a big problem?

It has been difficult to establish the exact number of consumers caught out as those affected do not necessarily report it to the FOS when it happens. The FOS has said that they have so far handled over a 1,000 cases - just make sure you are not one of them!

Keep control

To save any risk of this happening to you keep your finances under control. If you are missing payments and the overdraft, credit cards are maxed out then think about getting professional advice fast.  We have a list of very useful contacts.

Read more: Is it fair for banks to raid your savings to pay your debts?

 

While some people may think those who are bankrupt deserve to face harsh restrictions, I say banks are only making the problem worse by treating them like pariahs of society.

Very few people run up debts with a view to going bankrupt. For the average consumer, it’s caused by an unexpected trigger, such as a relationship breakdown or job loss.

For most people, going bankrupt is a last resort and one they usually take after getting professional advice. While many will say people have an outright duty to repay their creditors, it could be argued that if creditors adopted a more supportive approach, there might be less pressure to petition for bankruptcy in the first place.

Unless you’ve been through bankruptcy yourself you can only begin to imagine the stress, trauma and anguish these people go through.  And to top it all off, they are then often denied even a basic bank account, which is demoralising, impractical and makes it extremely difficult for them to take control of their finances and make a fresh start. 

It means bankrupt people may face the burden of having to ask friends or family members to use their accounts, resulting in a dependence on others. Without a bank account, people are unable to benefit from direct debit discount schemes, or online discounts, and can be charged extra to pay bills in cash. In the worst scenario it can result in people losing their jobs or failing to obtain employment, because their employer can’t pay their wages into a bank account. 

So why do banks treat current and previous bankrupts as pariahs of society?

What has bankruptcy or even a chequered credit history got to do with opening a basic bank account? A basic bank account has no credit facilities, no chequebook and no credit card. But it gives the account holder a cash card so at least salary payments can be made direct into the account.

Out of 17 UK banks and building societies only two now offer bank accounts to current bankrupts - the Co-op and Barclays - so why don’t the rest? See list.

It doesn’t wash with me that they cost money to run and are not cost effective.  It works well for the Co-op and I am getting good reports about the sympathetic and supportive way they deal with bankrupt consumers. 

As far as I’m concerned the banks should, by law, make banking facilities available to all and not just cherry pick their customers. After all, the banks contribute to the bankrupt’s demise. They, like the borrower, could have said no!

There is no risk to the bank from supplying bankrupts with a basic account - If you are not offering money then it cannot be owed.

The banks see it differently though. What worries them is ‘fear of liability’ which they feel may come about if the bankrupt has a windfall or large payment of cash dropped into their account and it is hidden from the Official Receiver (OR) the body responsible for overseeing the bankrupt’s finances. For some reason the bank feels they may be liable if the money goes AWOL.  

I’ve heard some pretty lame excuses in my time but I’ve never heard of this happening, and I also fail to see how the bank would be liable.

Are we sowing the seeds of unrest by denying those unfortunate enough to go bankrupt the right to have a bank account?  I’m not suggesting they get the full monty of a credit card and overdraft, just the basic account that allows them to function in a modern society where cheques are being phased out.

We need plastic to start a tab in a restaurant, book car insurance on line, make a purchase on the internet or book a holiday.

So now is the time to support those that have had money woes and put them on an equal footing with the rest of society. Many bankrupts actually rebuild over time and continue to pay their way in society through taxes and national insurance contributions.

Read more: Why do banks punish poorer customers?

 

As families struggle to pay their bills and credit remains hard to come by, unlicensed lenders will try to take advantage but there are ways you can beat them at their own game.

When my team and I talk to people to help them overcome their debt problems, part of the assessment is to identify all the lenders to whom they owe money, including family and friends. 

Nothing unusual here, you may think, but digging a little deeper reveals an alarming trend where often, through embarrassment, some individuals will say their debt is to a relative or friend when in reality, they owe money to a loan shark. 

According to a recent report, around 200,000 people in Britain are at risk from illegal loan sharks because they can’t access credit from traditional lenders. 

In addition, over 100,000 people from the UK's poorest families borrowed a total of £29 million from loan sharks to get through last Christmas, which meant they started 2010 already crippled by debt.

It's estimated that these vulnerable families will pay back around three times the amount they borrowed. On average, they borrowed £288 with an interest rate of 800%, but for some this rate could be even higher and the average expected repayment period is one year.

With millions of consumers in the UK finding it difficult to meet monthly bills, it is inevitable that more will now fall foul of the loan shark. 

What is a loan shark?

According to the English thesaurus a loan shark is a 'swindler', 'crook', 'double-dealer' or 'con artist'. I can't really argue with that, but what is clear is within the law a loan shark is an unlicensed moneylender. 

A person or firm can only legally lend money if they are licensed and regulated by the Office of Fair Trading (OFT) and they also must follow the OFT's strict codes of practice.

The disadvantages of using a loan shark are: 

  • You pay a very high rate of interest. 
  • You get a loan on terms that suit the lender and not you. 
  • You may be put under pressure to borrow more to pay off another debt as this makes more money for the loan shark. 
  • You may be harassed or intimidated if you get behind with your repayments. 

Since loan sharks are not licensed, they operate outside the law, which means they can’t rely on the law and courts to collect unpaid loans.

Identifying a loan shark

So how do you find out if a lender is licensed?  The OFT has formed a Consumer Credit Public Register that lists everyone with an OFT licence and includes anyone that has previously applied for one or has had one taken away or suspended.

The register also details trading names and the activities for which a business is licensed - this information is free to access.

You access the 'Consumer Credit Public Register' here or you can call them on 020 7211 8608, between 9.30am and 4pm, Monday to Friday.

If you find a lender isn't listed as having a current licence to lend, then don't borrow money from them.

Alternatives

If you’re stuck, need to borrow money and have been unsuccessful with a bank then consider joining a credit union. 

The government recently relaxed the rules on credit unions to make it easier for them to operate. Credit unions help you to save a little each month and in return they eventually make an advance to you, but with a very fair interest rate. 

For example, if you had a £200 loan, often the interest will only be around 1%, which in this case will make the interest payable at £2 per month. Your nearest credit union can be found here.

If you are worried you may have borrowed from a loan shark, your first step is to search the Consumer Credit Public Register. If you draw a blank, think about contacting your local Trading Standards Office as they have staff trained to help you deal with loan sharks. 

Visit tradingstandards.gov.uk to find your nearest Trading Standards Officer by entering your postcode.

A common question I get asked is ‘Do I legally have to repay the debt to a loan shark?’ The simple answer is no. You are under no legal obligation to repay the debt. If the lender is not licensed by the OFT then they have no legal right to recover the money. 

Because of this, a tactic often used by loan sharks is to intimidate and harass you for payment, but it is an offence for any lender, whether licensed or unlicensed, to harass you.

If this happens, keep a note of the harassment - the date and time it took place - and try to get a witness. You should report any harassment to your local Trading Standards Office and any threats or use of violence should be reported to the Police.

Word of warning

Always go to a licensed lender as this gives you protection under the Consumer Credit Act. Bear in mind, however, that although the lender is licensed, this doesn’t mean they will offer the best interest rate.

The licence covers practices and codes of conduct and is not given to a lender because they are competitive, so always do your research and seek the best deal from three or four lenders.

The last government set up Illegal Money Lending Teams mainly consisting of former police officers, to tackle loan sharks.

If you need help or know of someone that is caught up with a loan shark then contact the support team by calling 0300 555 2222, texting ‘loan shark’ and your message to 60003, or emailing This email address is being protected from spambots. You need JavaScript enabled to view it..

Read more: How to reel in a loan shark

 

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