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As more and more debt firms are being found to fall short of the Office of Fair Trading's Debt Management Guideline, DebtWizard Mike Thomas says more should be done to name and shame the guilty parties.

This week, 129 debt advice firms out of an estimated 450 in the UK were identified as falling short of the Office of Fair Trading's Debt Management Guidelines – in other words, they are in need of dramatically improving their performance. So why then, is the OFT gracing them with a whole three months to get their act together?

In my opinion, they should be given three days to turn themselves around and, if they don't comply, have their licences to trade cancelled with immediate effect and be named and shamed at the same time. 

After all, if the OFT has clear evidence that an individual or firm has misled an already desperate, over-indebted consumer then surely immediate action is the only kind to take?

The only possible reason for the lengthy grace period must be to protect those customers for whom it's too late and are already embroiled with these firms.

What's the story?

Debt management companies are fee-charging firms that provide advice and solutions to consumers with debt problems. They operate alongside government-funded and charitable services, which are free.

The rot in this unregulated industry was discovered by Trading Standards Officers that the OFT instructed to visit firms and conduct mystery shopping exercises. It also carried out a thorough 'sweep' of all websites relating to debt management firms.

Three key areas of concern were identified as a result:

1. Misleading advertising implying services were free when they were not

2. Frontline advisers offering poor advice

3. No clear complaints procedure

Tricks of the trade

Some tricks of the trade were unearthed too. For example, the OFT found evidence of some firms 'recycling' their customers through different debt options to generate more fees.

Take an Individual Voluntary Arrangement (IVA), where a customer pays back a manageable chunk of debt over five years and the remaining debt is written off.

This arrangement will generate fees itself but a worrying trend has developed whereby some firms will put the customer onto a debt management plan while they prepare the IVA, thus generating double the fees for their coffers.

Some would say this makes good sense as it looks after the consumer on a number of levels but others argue (and I am one of them) that the biggest incentive lies with the firm – not its customer.

Another disturbing practice that was exposed by the OFT was the deliberate imitation of free debt charity websites.

For example, by use of similar content or misleading web addresses such as using the words; 'Government, debt and help' in the web address when, actually, the firm in question is purely a commercial.

Commission led practices

I have been concerned for a number of years about the type of debt advice that consumers are receiving because, like the banks, the paid-for part of the industry tends operate on a commission basis.

The OFT estimates that fees for commercial debt advice firms will reach a staggering £250m by end of 2010.

This commission-led culture can lead to some vulnerable and desperate people being steered towards a fee-generator option instead of a less profitable solution for the firms, such as bankruptcy.

So what can you do about it?

When scouring the Internet for a debt advice company, look at individual websites for the following:

1. Is there a contact telephone number available as well as an address?

2. Can you see a reference to its consumer credit licence details?

3. Is the firm registered with the Information Commissioner for data protection? Remember, it's your data you are putting in the enquiry form on the website.

4. Does it have a complaints procedure and clear terms and conditions?

5. Does it mention that most debt options will affect your credit rating and could affect future borrowing? 

These firms will often claim they are not giving debt advice; they are only a lead generator and therefore do not need to provide these details.

The OFT is divided on this issue but, in that is still an unregulated industry, it's very much a case of consumer beware.

Can the debt charities cope?

While it is always possible to obtain debt services for free from debt advice charities, whether or not you choose to rests on the same argument as choosing to pay for private education and health care. People do – simply because they want an improved level of service. 

The free Citizen's Advice Bureau for example, records around 9,000 NEW debt cases every working day and I am hearing of appointment waiting list of up to 10 weeks – far too long for people already on the edge and about to lose their homes.

That said however, debt ADVICE (the part before you arrive at the actual service) should always be free, whether it's obtained from a charity or commercial firm.

Who is to regulate these firms?

The OFT is to work with the two main trade bodies, the Debt Resolution Forum (DRF) and Debt Managers Standards Association (DEMSA) to support their initiatives to introduce higher standards into the industry. 

Whilst the DRF has the greater membership and is proving to be a thoroughly professional and growing trade body making great strides in improving the level of training within the industry and its status and image, I do not feel that self regulation is the answer and would welcome a move to a regulated industry.

Bad advice

Companies and individuals that have been exposed as giving the wrong advice are playing on debtors' desperation and lack of awareness surrounding their real options.

And some individuals, after taking so-called 'professional' advice still have no hope of ever repaying the debts in their lifetime! This bad advice can cost people their livelihoods, relationships and thousands of pounds in unnecessary fees.

I hear today that there are calls to regulate the car washing industry, unbelievable when we can't even regulate the debt management industry.

Read more: Why I feel the OFT should name and shame bad debt advice firms

 

Just because someone isn't wearing a neon flashing sign saying 'debtor', that doesn't mean they are debt free.

Next time you are out shopping, in a restaurant, or even supping a pint down the pub, just cast an eye around at the other people nearby. How many of them are debt free? 

Various reports estimate that twenty people out of every hundred have some form of debt issue. Are you one of them? Do you know someone that has unmanageable debts?  More to the point are they hiding it so well that you would not suspect? 

If the 20% figure is accurate then it means that around 12 million people in the UK have debts that vary from a few pounds to hundreds of thousands of pounds, either through credit and store cards or overdrafts and personal loans.  

According to the UK Payments Council there are more credit and store cards in the UK than people. At the end of 2009 there were 64.4m credit and charge cards in circulation compared with around 62m people in the country. Total credit card debt in July 2010 was £58.4bn of which the BBA state the proportion of balances bearing interest is 70%.

Is it not surprising then that over the past two or three years we’ve seen consumer debt levels soaring and insolvencies, bankruptcies and individual voluntary arrangements (IVAs) at their highest levels since records began in 1960. 

My concern is that they could be even higher because of what I like to call the “hidden debtor”.

The hidden debtor

I have many clients ranging from police officers and van drivers, to company directors, who owe anything from £40,000 to £200,000 in unsecured debt on credit and store cards, overdrafts and personal loans.

Apart from meeting their normal living costs, such as mortgage or rent, utility bills, food and travel expenses, they also need to find the money for their debts which can be anything from a few pounds to as much as £1,000 per month. In extreme cases I have clients that have needed in excess of £4,000 per month.

In reality, however, they only have a fraction of that to offer. By the time myself or my team go through their finances we find that in many cases the borrower has not missed a payment to his or her unsecured creditors simply because they are borrowing more on credit cards and taking out new loans to meet the payments

The trouble is, the banks don’t see them as a problem... yet!

Robbing Peter to pay Paul

The Banks believe 95% of their borrowers are okay because they have not missed any payments. But are they missing the point? Some of these are robbing Peter to pay Paul and as there are no alarm bells ringing at the bank, these hidden debtors are not on the banks’ radar.

The first time the bank knows there is a problem is just a month or so before the borrower goes bankrupt, enters into an IVA or embarks on a debt management plan.

Should we be worried? I certainly think so. What I’m seeing on a daily basis gives me cause for concern as these so called hidden debtors are at large in their thousands: walking down the street, opposite you at work, a member of your family or friend group. All just waiting to be found out.

Are you one? 

Let me know in the comments box below

If you need some help then post your comment/question on our forum

Read more: Are you a hidden debtor?

 

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.)

Entitlement to credit is not an automatic right

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

 

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.

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.

You're not alone

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.

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

 

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

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?

 

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