DEBTORS IN DANGER FROM DMP FIRMS, SAYS OFT

A BBC investigation has found that some debt management companies have been holding on to clients’ cash rather than paying it to creditors, The practice has left many debtors thousands of pounds worse off and facing financial ruin.

If a firm goes out of business and client funds have not been kept in a protected account, some or all of the money is likely to be lost and the debtor becomes liable for the shortfall.

The Office of Fair Trading (OFT) has condemned the practice as “totally unacceptable” and has promised a crackdown.

Repossession order

One couple mentioned in the report had to put their house on the market and could face repossession, after responding to a cold-call from a debt management company and taking out a Debt Management Plan or DMP.

That company, Global Debt Solutions, based in Bolton, offered to arrange a repayment plan for £40,000 of credit card debt and loans. However, after having made payments to Global Debt Solutions for several months, the couple found the money was not being handed over to creditors.

Those creditors have successfully taken the couple to court, so they now have County Court Judgements against them. They’ll also have to go to court on their mortgage, so their debt problems have got far worse instead of being solved. It could soon be at a point where they’ll lose their home.

A widespread practice?

Global Debt Solutions, later known as 3 Step Finance, has been shut down by the Insolvency Service, which found that it did not monitor payments properly.

However, it has emerged that other companies have adopted the same tactic of accepting money from people in debt and not passing it on to creditors.

OFT action

A debtor taking out a DMP with a company using this tactic runs a real risk that the company might fail while the funds are in its account.

David Fisher from the Office of Fair Trading is promising action. “We regard the practice as unacceptable,” he warns. “Where we have evidence we will remove a company’s consumer credit licence, which means it cannot operate.

“We will also next month (i.e. June 2011) be issuing stronger rules for the entire sector, which explain what we expect of them.”

That is welcome news but sadly it is already too late for those debtors who are already dealing, or will soon be dealing, with a repossession order for their home.

Conclusion: take impartial advice

I conclude by saying what I always say: before making any important financial decision – including taking out a Debt Management Plan with a commercial company – take advantage of the free and impartial debt advice which is available these days. I stress the word “impartial”, because some advice is advertised as free but is not impartial, i.e. the organisation has a commercial motive for advising a certain course of action.

The advice you’ll get from the three major national charities working in this field – Citizens Advice, National Debtline and Consumer Credit Counselling Services – is indeed both free and impartial.

There are also many similar (i.e. “not-for-profit”) organisations that operate at a local level but check out carefully that they indeed “not-for-profit” before taking their advice. You can also refer to the Resources section of my book “Back to the Black: how to become debt-free and stay that way”; there you’ll find contact details for about 50 advice organisations.

 

WANT TO KNOW MORE?

The full BBC story is at: http://www.bbc.co.uk/news/business-13568152#story_continues_2

My book “Back to the Black: how to become debt-free and stay that way”, is available on the following retail sites:

Kindle Store: http://www.amazon.com/dp/B004PLMAQM

Smashwords store for other e-formats, including .pdf: http://www.smashwords.com/books/view/22886

 

ANALYSING YOUR FINANCIAL SITUATION

A few years ago, when severely in debt, I avoided opening letters from banks and credit card companies. So I couldn’t begin the process of getting out of debt, because I didn’t have a clear picture of my situation.

However, I found that when I bit the bullet and analysed my situation in detail, I felt better! Knowing the facts, no matter how bad, is better than living with a “sword of Damocles” hanging overhead.

If you too have been ignoring those letters, please start opening them now.

Sorting that paperwork

1.       Bank statements. Overdraft? How much?

2.       Credit card / store card statements

3.       Invoices from other creditors

4.       Tax correspondence (if self-employed)

5.       “Informal” liabilities, e.g. loans from friends / family

When you’ve totalled the debts in categories 1-5, now list the positive side of your “personal balance sheet”, i.e.

6.       Estimates of the value of your assets: property; car; cash at bank (if your account’s in the black); shares; insurance policies; money owed to you, including refunds; occupational pension funds [if you’re old enough to consider cashing them in]; anything that could be turned into cash if necessary.

Now prioritise your debts, as follows:

  • Priority: “roof-over-your-head” and essential utilities, for example:
    • mortgage or rent arrears (you could lose your home)
    • other debts secured on your home (same result)
    • Council Tax (they can send in the bailiffs)
    • gas & electricity (they can cut you off)
    • water (though they cannot).
  • Non-priority: all other services you need, e.g. car loan; home or mobile phone; credit cards; all other creditors.

Income and expenditure

Now you’ve assessed your liabilities and your assets, you need to evaluate your income and expenditure. It’s a “profit and loss statement” for your life, based on your current spending pattern. Then do another, based on your “survival budget”.

You’ll need a table or spreadsheet: money advisers at your local CAB (Citizens Advice) can provide a form.

Putting it in perspective: “key ratios”

Now analyse your total debt relative to your income; also to your assets. What multiple of your net monthly income is your total debt? What percentage of your net worth? These are what I call your personal “key ratios”.

Now you are in a better position to develop your options and choose the solution that works for you.

Discretionary income

A final question: what’s your discretionary income? What’s left after tax and essential expenditure? (Not after your usual expenditure: the answer to that question might be zero, as it was for me)

Whether you think you can repay debts in full or make a partial offer, you’ll need to maximise this “discretionary income”. That’ll involve tough decisions about “needs versus wants”: between what’s essential to your life and what you see as essential to your lifestyle.

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The above is an extract from Chapter 5 of my book “Back to the Black: how to become debt-free and stay that way”

Want to know more?

“Back to the Black: how to become debt-free and stay that way”, is now available as a multi-format eBook, to sample (first 20% free) or buy, at Smashwords: http://www.smashwords.com/books/view/22886

It is also in the Kindle store but only the first 10% is free (sorry: Amazon’s rules, not mine). http://www.amazon.com/dp/B004PLMAQM

IS THERE LIFE AFTER BANKRUPTCY?

The good people at “Moneywise” magazine have recently published (Jan 2011 edition) a story about bankruptcy, which contains a useful summary of the danger signs that debts might be running out of control.

  1. You use your credit card to buy groceries or to pay bills, not knowing when you’ll be able to clear the balance.
  2. Applying for a new credit card, loan or extension on your overdraft is the only way that you can get ready cash for daily expenditure or to service existing debts.
  3. Your debt is mushrooming because you either only make minimum payments each month or are unable to pay off any money owed.
  4. If you have started to miss monthly repayments on your credit card or, worse still, you are in arrears on your mortgage, you need to seek immediate help. Contact creditors to see if you can make reduced payments or have a mortgage break while you sort out your finances.
  5. If you are not opening bills and are screening calls from creditors, seek advice. Ignoring payments will not make them go away and the problem will only get worse.

The article contains some interesting case studies, of three people who had to file for bankruptcy: 32-year old Emma Smith from Milton Keynes; 54-year-old Terry Donaldson from Huddersfield and 27-year-old Michelle Cheston from Newcastle.

I noticed one unusual silver lining to these three clouds. There are costs associated with going bankrupt (typically about £600) but, as the article mentions, Michelle had served in the RAF. Not for long, because she could only have been 24 when she left the service. However, her adviser at Citizens Advice told her she could apply for help to the Royal British Legion. She did; and they paid all her fees. As I mention in my book “Back to the Black”, the Legion’s support is a benefit that is open to anyone who’s served in the UK armed forces, even for a relatively short time.

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Want to know more?

  1. Want a copy of the full Moneywise article? Go to http://www.moneywise.co.uk/node/7896
  2. Want to view, free of charge, the first 20% of my multi-format eBook “Back to the Black: how to become debt-free and stay that way?” Go to:  http://www.smashwords.com/books/view/22886

IS IT SAFE TO PAY YOUR RENT OR MORTGAGE WITH A CREDIT CARD?

 

A recent news item (Channel 4 News, I think) flagged up a potentially alarming problem that’s been caused by the recession. (Yes, that’ll be the recession that the experts say is now officially over. Try telling that to someone who has lost their job.)

 

What’s the problem? According to a report by the charity Shelter, there’s been a large increase – possibly 50% in a year – in the number of people using credit cards to pay their mortgage or rent.

 

Does this affect owner-occupiers? Or tenants? Or both?

 

According to the BBC website, the Council of Mortgage Lenders (CML) suggests that the problem has been sensationalised by the media. That may be true. It would not be the first time. I should point out the obvious, however: the CML’s concern is only for mortgages. What Shelter describes may well be more of a problem for tenants than for homeowners. Mortgage rates are exceptionally low at present, so it’s less likely that an owner-occupier will have difficulty meeting housing costs, other things being equal. Also mortgage payments are normally taken on a direct debit, the CML says.

 

The reduction in housing costs caused by low mortgage rates has not yet been mirrored in reduced rents (why not?? Logic tells me it should be). Therefore, other things again being equal (which they never are) a tenant is more likely to be tempted to solve a short-term cash-flow problem by paying the rent with a credit card.

 

Is the story true?

 

“In the current climate”, I would not be surprised if there has been an increase in the number using cards. But has the increase really been 50% in a year? That’s massive. What they say, if you read the various reports, is that it’s gone from 4% to 6% and that is indeed an increase of 50%.

 

Firstly, you’d have to ask how big was the sample; obviously they didn’t interview everyone in the country (well, they didn’t ask me, anyway). And secondly, here’s a bit of a giveaway. Last year’s survey calculated the number of households, rather than individuals, that fell into this category. However, “the figure for households has not been calculated this year”, according to the report. So are we comparing apples with oranges, to make a point?

 

So is it safe to pay with a credit card?

 

Back to the question at the top of this post; is it safe to use a credit card to pay your rent or (less likely) your mortgage? The answer is a cautious yes, but only under certain circumstances. Credit cards do not have the astronomically high interest rates of payday loans, but the principle is the same. IF there is no alternative, and IF you are 100% sure you can pay off the card in full before the interest kicks in (you have 4-6 weeks to do that) then fine. If not, then as I have said many times before … get help from one of the debt advice agencies (for example Citizens Advice, or Consumer Credit Counselling Services, or National Debtline) and put together a plan. If you don’t, you could find yourself on a slippery slope.

 

I’ll be following up this story. “Watch this space”, as the saying goes.

 

 

 

WANT TO KNOW MORE?

 

Here’s a piece on the website of Shelter, who produced the original report:

 

http://england.shelter.org.uk/news/january_2011/2m_pay_for_home_on_cards

 

And here’s an item about the story on the BBC website:

 

http://www.bbc.co.uk/news/business-12120937

 

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My book “Back to the Black: how to become debt-free and stay that way” is now available to sample or buy, as a multi-format e-book, at: http://www.smashwords.com/books/view/22886

 

OCCUPATIONAL PENSIONS IN BANKRUPTCY

In my book “Back to the Black: how to become debt-free and stay that way”, I tell the story of my own brush with bankruptcy in 1999. At that time, my then accountant recommended that I should file for voluntary bankruptcy.

Why I didn’t go bankrupt

In the event, I did not take the bankruptcy route, for a variety of reasons. One of those reasons was that I had some occupational pensions (of the “money purchase” type, not final salary) accumulated over the years. If I had become bankrupt those pensions might well have been vulnerable.

How the law has changed to the benefit of debtors

However, the law has changed: pensions are now to a great extent protected in a bankruptcy.

According to HM Government’s Insolvency Service, any private pension fund you have built up cannot generally be claimed as an “asset” if the bankruptcy petition was presented on or after 29 May 2000, as long as the scheme was approved by HM Revenue & Customs.

What to do

If you are considering bankruptcy, first read Chapters 8, 9 and 10 of my book, in order to review the pros and cons of the alternative routes “back to the black”. Chapter 9 deals with bankruptcy and IVAs (Individual Voluntary Arrangements) . Then, if you still plan to consider bankruptcy, take professional advice: either from one of the non-profit advice services (for example Citizens Advice, Consumer Credit Counselling Service or National Debtline) or from an insolvency practitioner. There is a checklist in Chapter 9 of my book about how to go about selecting the right insolvency practitioner for your particular situation.

Want to know more?

My book “Back to the Black: how to become debt-free and stay that way” is available on the Smashwords site. To sample (first 20% free) or to buy at only $3.99, go to http://www.smashwords.com/books/view/22886

HM Government’s Insolvency Service’s publications can be found at http://www.insolvency.gov.uk/guidanceleaflets/guides.htm

PAYDAY LOANS: FRIENDS IN NEED OR WOLVES IN SHEEP’S CLOTHING?

Earlier this year, during an interview on Heart FM, I was asked about payday loans: would I advise anyone who was especially cash-strapped (for example as a result of Christmas), to take out one of these loans? This is a tricky matter: anyone considering any such loan must have exhausted all other possibilities.

Payday loans, usually for sums up to £1,000 ($1,500), are known to carry very high interest rates. Those rates could be affordable if it’s the only game in town AND if the loan really is repaid quickly, i.e. on payday, but if it’s rolled over then the problem starts. However, they are marketed as being instantly available, which of course is very attractive when things are tight.

Advantages

So the attractions are:

• Instant availability, even if you have a poor credit record
• Lack of bureaucracy, with a simple application method
• The fact that it’s cash: a cheque is less useful if you have to pay it in to a bank account with a maxed-out overdraft, though of course cheque / cash converter shops have foreseen that problem.
• The fact that it’s local, with a collector who probably lives near you.

If there is no alternative, and if the sum borrowed is repaid at the next payday, then paying that interest (high rate but small sum) is better than having to default on the mortgage or a credit card bill.

Disadvantages

The problem arises, of course, if the sum isn’t paid quickly. Then, of course, it will become more and more difficult to repay, because of that very high interest rate. I could publish a table showing how the sum owing would build up at those very high interest rates: but that would be very depressing for you and for me.

Should you do it?

In the radio interview I said that if anyone was in a situation where they saw no alternative solution, then they should take the loan, provided they immediately got help from one of the debt advice charities, for example the CAB (Citizens Advice), or CCCS (Consumer Credit Counselling Services), or National Debtline, or one of the many local “not-for-profit” debt advisory services, and put together a plan. Step one of that plan must be to repay the payday loan as a first priority.

I still stand by that advice.

Those interest rates, by the way

In order to check my facts after that interview, I found a website that lists the top 5 payday loan providers (the “top 5” ranking is by “rough estimate of lender’s approval rates”). I found the APRs of these lenders varied from over 990% to over 2300%. Eye-watering stuff, if you can’t repay quickly.

For extra info see the MoneySavingExpert website, for example this post:
http://www.moneysavingexpert.com/news/loans/2010/01/loan-sharks-leaving-victims-in-debt-all-year . That article talked about interest rates (APR) “up to 1500%”. As you can see above, I found some rates to be even higher.

Credit Unions: an alternative

Credit unions are an alternative and much cheaper source of short-term finance that people in this situation could look at: an alternative, in fact, to high-street lenders as well as to payday loans.

The local one here in Bristol, for example, is at http://www.bristolcreditunion.org/; they offer loans from £100 to £7,500 ($150 to $11,250). Their website says: “By law credit unions cannot charge any more than 2% per month on the reducing balance of a loan. This represents a maximum interest rate of 26.8% APR (Annual Percentage Rate), and that is the most you will ever pay on your loan.”

Worth checking out? 26.8% sounds better than those payday loans.

Taking advice

If you are in debt, and whether or not you are considering a payday loan, I always bang on about the need to get help as soon as possible. That should preferably come from an independent, impartial (i.e. not-for-profit) advice service such as the local CAB (that’s the Citizens Advice Bureau, for the benefit of any readers of this blog who are not in the UK) or CCCS (Consumer Credit Counselling Service) or National Debtline. Then you need to formulate a plan with the help of that advice, and inform the creditors that is what you’re doing and ask them to freeze interest while that’s happening.

Many creditors will agree to that, but if you don’t ask you don’t get. Many debtors spend too long in denial and they don’t communicate with their creditors, which makes the situation worse. I know: I was one of those.

In fact my book’s subtitle could even be “Learn from my mistakes”.

Christmas is coming!

At the top of this post I mentioned Christmas. This is a good time to say that one way of avoiding payday loans is to cut down spending. Don’t cut down on the fun but do cut down on the presents!

As I say in my book: “Christmas is not an emergency.” (it comes every year)

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“Back to the Black: how to become debt-free and stay that way”, is now available as a multi-format eBook at Smashwords to sample (view or download the first 20% free) or to buy at only $3.99. Go to: http://www.smashwords.com/books/view/22886

Website: www.back-to-the-black.com

Blog: http://backtotheblackblog.wordpress.com

DEBT COLLECTION: OFFICIAL GUIDELINES IGNORED

An interesting article by Jenny Little (“Moneywise”, Nov 2010) reminds me of a problem that can cause great misery for personal debtors. The Office of Fair Trading (OFT) has a ruling that prohibits harassment of debtors. Moreover the OFT clarifies what constitutes harassment by publishing guidelines; however, many lenders ignore them.

According to the article, in some cases lenders have even claimed to be unaware of the guidelines, though it’s the OFT that issues those same lenders with their consumer credit licences.

To see the article, go to: http://www.moneywise.co.uk/cards-loans/credit-cards/article/2010/10/25/credit-card-demons-revealed

Little says that “growing numbers of people struggling with credit card payments complain of creditors bullying them with menacing letters, doorstep visits and threats of court action or repossession.

“In public, credit card and debt collection firms pay lip service to official guidelines protecting consumers, but staff are given financial incentives to recover debt, provoking the sort of harassment that makes millions of debtors’ lives a misery.”

Official guidelines

OFT guidelines require lenders to negotiate with third parties, e.g. debt management companies, and say that debt collectors must give advance notice of visits. Debtors can also request not to be contacted at work.

Debt collection firms pretending to be bailiffs, or falsely threatening criminal proceedings, also risk being fined or having their credit licence revoked.

The guidelines in full:

Physical/psychological harassment: putting pressure on debtors or third parties is considered to be oppressive. Examples of unfair practices are as follows:

• contacting debtors at unreasonable times and at unreasonable intervals
• pressurising debtors to sell property, to raise funds by further borrowing or to extend their borrowing
• using more than one debt collection business at the same time resulting in repetitive and/or frequent contact by different parties
• not ensuring that an adequate history of the debt is passed on as appropriate resulting in repetitive and/or frequent contact by different parties
• not informing the debtor when their case has been passed on to a different debt collector
• pressurising debtors to pay in full, in unreasonably large instalments, or to increase payments when they are unable to do so
• making threatening statements or gestures or taking actions which suggest harm to debtors
• ignoring and/or disregarding claims that debts have been settled or are disputed and continuing to make unjustified demands for payment
• disclosing or threatening to disclose debt details to third parties unless legally entitled to do so
• acting in a way likely to be publicly embarrassing to the debtor either deliberately or through lack of care, for example, by not putting correspondence in a sealed envelope and putting it through a letterbox, thereby running the risk that it could be read by third parties.

Source: Office of Fair Trading, “Debt collection guidance: final guidance on unfair business practices.”

Lenders ignoring guidelines

But it seems the guidelines carry little weight with the lenders, according to Little. Heather Keates, chief executive of Community Money Advice, says: “Card firms are jittery and increasing interest rates. Creditors now go in hard from the outset.”

Citizens Advice (CAB) gives the example of one client’s recent experience. A 42-year-old single mother, she was struggling to keep up with a £7,000 credit card debt on her £589 take-home pay. She made the minimum payments but, when she defaulted, her bank began to phone her up to six times a day, even at work.
When the CAB intervened, the bank’s representative claimed to know nothing of the OFT guidelines and blamed the repeated calls on an automated system.

Automated dialling systems

Little has found that the use of automated dialling systems is commonplace and can result in customers receiving multiple calls every day. Some people resort to buying an extra pay-as-you-go mobile just to avoid harassment.

Alex MacDermott of Citizens Advice said: “It’s always better to talk to the card provider; otherwise your number will stay in the automated dialler, which will keep ringing. But the tone of some calls can be very threatening.”

Mention of telephone harassment and automated dialling reminds me of my own experience when I was in debt. That’s why I say: “try to avoid talking to creditors by phone. Don’t ignore them; respond to the messages … but in writing. Let all your incoming calls go to voicemail, if you are single-minded enough to do so.”

While some providers employ in-house debt collection, others ‘sell on’ debt to a third party. The Consumer Credit Act requires that they first issue a default notice to customers who have skipped payments to inform them which company has taken on the debt but in my experience this rarely happens.

The OFT has criticised debt collection agencies for “making frequent phone calls, threatening court action and not describing the process correctly”, and has also concluded that many default charges are unlawful. It says that £12 is the maximum that anyone should be penalised for missing a payment.
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What to do

As I say again and again in my book: get help, especially if you are being harassed. Apart from the three major national debt advice charities Citizens Advice (CAB), Consumer Credit Counselling Service (CCCS) and National Debtline, there are also Community Money Advice and Debtors Anonymous, as well as Consumer Action Group, which is an online support network. All of these are easily located online. There are also local advice centres, too numerous to mention.

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“Back to the Black: how to become debt-free and stay that way” is now available to sample or buy, as a multi-format e-book, at: http://www.smashwords.com/books/view/22886

DEBT ADVICE BACKLOGS IN THE UK


When I was doing that second radio interview with Heart FM earlier this week, an instructive fact about the state of our economy cropped up.

I was talking to Heart’s Rob Mayor about the necessity for Brits with debt problems to get tailored and impartial advice, preferably from one of our excellent independent advice organisations within the charity / voluntary sector. The best-known examples at the national level are probably CAB (Citizens Advice), CCCS (Consumer Credit Counselling Service) and National Debtline. I also said that a face-to-face interview was better than a phone helpline, especially for anyone starting to get to grips with the problem for the first time.

However, just before we started to record the interview, I had a call from Citizens Advice in response to an earlier enquiry of mine. As Rob and I had just been talking about the recession, I asked my CAB contact what was their current waiting time for a face-to-face debt advice interview. The answer was 3 – 4 weeks; longer than usual and a sign that the effects of the recession will be with us for quite a while yet. Phone help is, of course, available a lot more quickly.

"BACK TO THE BLACK" UPDATE

Yesterday I was working with Jenny Layton, who’s giving me fantastic help with the text-editing of Edition 2 of “Back To The Black”, i.e. the complete content as an e-book. I am still hoping we’ll get the file uploaded by the end of February.

After that the next project will be a podcast and an audio version of the complete book.

This morning I did another interview with Heart FM, this time with Rob Mayor. This came about because Heart felt that the issue of “Payday Loans” needed exploring further. We talked about why people are tempted by such loans, the benefits on which they are sold, and the well-known disadvantages of the astronomical interest rates. Those rates could be affordable if it’s the only game in town AND if the loan really is repaid really quickly, i.e. on payday, but if it’s rolled over then the problem starts.

We talked about credit unions as an alternative to high-street lenders or to payday loans.

I also stressed the need to take advice, preferably from an independent, impartial (i.e. not-for-profit) advice service such as the local CAB (Citizens Advice Bureau, for the benefit of any readers of this blog who are not in the UK) or CCCS (Consumer Credit Counselling Service) or National Debtline. Then the need to formulate a plan with the aid of that advice, and to inform the creditors that is what you’re doing and ask them to freeze interest while that’s happening. If you don’t ask you don’t get, but many debtors spend too long in denial (and I was one) and don’t communicate, which makes the situation worse.

All this is the kind of advice that most people have read lots of times; however, my hope is that when the complete book is published, people will view the advice in a different light because of what I say about where I went wrong. In fact the book’s subtitle could even be “Learn from my mistakes”.