Beware debt-management plans that only make things worse

Debt-MANAGEMENT firms have been accused of exploiting struggling Scots after new evidence emerged of people being overcharged for services that leave them in an even worse position.

There has been a significant rise in the number of Scots going to debt management companies (DMCs) for help only to spiral deeper into financial difficulties, according to a report published today by Citizens Advice Scotland (CAS).

It calls for the UK and Scottish governments to do more to make free debt advice accessible to those who need it.

The proportion of CAS clients who have used DMCs to repay creditors has more than doubled since 2003, the charity has revealed, with many left in deeper debts by poor advice and hefty management charges.

The report comes as the Office of Fair Trading (OFT) closes its consultation on a proposed crackdown aimed at giving consumers more protection against unscrupulous debt management firms.

An investigation by the OFT uncovered evidence of widespread mis-selling and misleading advertising.

A separate investigation, by the BBC, found that some DMCs have failed to pass on debtors’ cash to creditors, leaving people worse off and, in some cases, facing repossession.

Dozens of firms have been shut down by the OFT in the past year and more are set to follow, with those found guilty of misleading advertising facing enforcement action including possible closure.

But experts fear that the action is too late for many Scots who have been talked into unsuitable debt repayment arrangements.

More than one in three people in a debt management plan claim other options for dealing with their debts had not been explored, while one in ten said they had not been told they would be charged for their plan until after it had started, according to research by R3.

John Hall, Scottish council member of the insolvency trade body, said that while debt management plans (DMPs) can help people who are able to pay back their debts within a “reasonable timescale”, there are worrying practices within the system.

“The sheer length of some plans indicates that the amount of debt these individuals have is too large for a DMP. By entering into these inappropriately lengthy plans people become slaves to their debts,” he said.

One in three people who are currently bankrupt or in another insolvency arrangement used to be in a debt management plan, according to Hall.

“The volume of those who go from DMPs into a formal insolvency procedure suggests that, in some cases, DMPs prolong distress when another procedure would have been more appropriate to start with.”

The CAS report out today reinforces the issues raised by R3. It said: “Whilst many companies offer support to those in financial difficulty, others can take advantage of people who are at their most vulnerable. Scottish Citizens Advice bureaux have seen significant numbers of clients who have sought advice after experiencing problems with a debt management company.”

Its clients have reported firms misleading them about what they offer, including some deliberately implying that they were government agencies or charities. Other DMCs failed to tell debtors how much they would be charged, while misleading claims about the services provided are rife, the CAS report suggests.

Some debtors have been charged up to £1,000 even before receiving any advice, while others have been hit with upfront fees only for the DMC to decide it didn’t want to take the case – and then failing to refund the payment. In some instances CAS clients have paid hefty monthly fees only to find later that little of the money went towards repaying creditors.

One CAS client in the east of Scotland paid £100 to a DMC that then disappeared without getting in touch with any creditors. In a similar case, a south of Scotland woman made monthly payments of £184 for five months before discovering that only £2 had been taken off her starting balance.

Another Scottish debtor has fallen behind on her mortgage repayments after being advised by a DMC to repay her non-priority debts first.

Yet DMCs are likely to continue raking in fresh business, believes Anne Buchanan, corporate recovery partner with accountants and business advisers, PKF.

“Often debtors feel pressurised by their creditors to act quickly to resolve a situation that may have been rumbling on for years. But debtors need to act in their best interests not in the best interests of their creditors.

“Rushing into arrangements is rarely a good idea so seek as many options as possible and find a provider who understands your specific requirements and makes it clear how much any services cost and the timescale involved in providing this service,” she said.

The other occasional drawback of using voluntary free agencies is that some lenders want debtors to offer repayment plans presented by specific companies.

Buchanan and Hall both say there is a role for DMCs – provided consumers are made aware of the charging structure and understand the options available to them.

They would also be a more plausible option if they were regulated, Buchanan added, with more transparency around what they do and the fees they charge.

“Debt management companies are not regulated so there are no guarantees that you are getting the right expert advice for your particular situation,” she said.

DMCs should be held to the same standards as insolvency practitioners, said Hall, rather than left to the less stringent supervision of the OFT.

“Until the new regulatory landscape becomes clear, any individual exploring if a DMP might be the right solution for them should ensure the firm they are dealing with is a member of the Debt Resolution Forum, a trade body whose members are subject to a strict code of conduct encompassing the provision of appropriate advice and which has an active monitoring system to ensure its members comply fully with best practice.”

Lucy McTernan, chief executive of CAS, urged anyone in debt to explore their options as soon as possible. “I know many people find it difficult to ask for help, particularly if you have never been in this situation so before.

“But there really is no shame in feeling under pressure at the moment – it’s happening to every- one. Our professional advisers will not criticise you – they’ll just sit down with you and go through your finances in a calm, constructive way, advising you how to maximise your income, and helping you to plan and budget effectively,” she said.