It’s #debtawarenessweek – if you’re struggling, know that you are never alone.
The first thing to do is take all shame out of this and approach yourself like you would a friend – how would you help someone in your position? Well, you’d probably advise them to really focus on any priority debts first – I’m talking about rent, mortgage repayments, energy bills and council tax because the consequences for falling behind on these can be serious and really affect your quality of life.
Also if you’re struggling with your energy bills, British Gas, EDF and E.On offer grants for customers of any energy company – I suspect demand for those will be very high this year so if you miss out, some energy companies do offer grants for their own customers. Find out if your provider is one of them.
Always speak to your creditors rather than ignore the problem. They are obliged to help you come up with an affordable repayment plan. However, if your debts have become so big that this won’t be possible to do on your own, speak to a debt charity or free local debt organisation.
They’ll be bombarded by sponsored adverts that look like a dream come true. “Reduce your debts by 85% a month!” “Here’s a secret the debt collectors don’t want YOU to know about” and so on. Social media is littered with promoted posts promising to wipe out debts at knock-down prices. Eye-catching celebrity memes and targeting of vulnerable demographics, like single mums, are commonplace.
This marketing comes from debt packager firms, which look like qualified debt advisers, but are in fact glorified lead generators. They earn most or all their income by referring borrowers to a debt management company or a firm offering individual voluntary arrangements (IVA) – in Scotland, the equivalent is a protected trust deed (PTD).
Debt packagers typically get paid £930 and £1340 for every client they channel towards an IVA or PTD respectively. But they get nothing for recommending a debt relief order (DRO) costing £90 or in Scotland, a minimal asset process (MAP) costing £50. No prizes for guessing which options get recommended more often.
I went onto talk about why these solutions can be so toxic for borrowers:
Some people shouldn’t even be looking at full-blown insolvency when they may qualify for breathing space. This is where debt costs and collection proceedings are frozen to give the borrower time to work out a plan (the Scottish version of this is a Statutory Moratorium).
Mis-sold IVAs and PTDs can make your life hell. If you don’t keep up with the payments, you’re whacked with backdated interest and charges: you could still end up bankrupt. Over a quarter of IVAs fail in three years, making little impact on the debt.
The Financial Conduct Authority has just wrapped up a consultation on outlawing referral fees for debt packager firms. It seems likely a ban will be introduced in the coming months.
The changes, if properly enforced, would mean most debt packagers going out of business. Good riddance.