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.
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.
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
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