Debt advice organisations - their operations

This page will provide you with an insight to how debt advice organisations operate along with some warnings about bad practice.

Dangers

There are certain dangers that exist to you as someone who is seeking debt advice, which could lead to greater problems. I will briefly describe these first as I feel that it is important for you to recognise them.

Relying on the advice of one organisation. Perhaps the biggest danger is that you are relying on the advice of someone that you do not know on a subject (debt) that you do not know. This may leave you vulnerable to bad debt advice.

False promises. Some organisations are quick to promise the world, such as guaranteeing that interest and charges are frozen whilst you are in a debt management plan.

Length of your plan is understated/mis-calculated. Yes it happens! Some people are shocked when they find out that it is going to take them 20 years to repay all their debt under their current plan.

Budget manipulation. Every adviser should assess your income and expenditure before recommending a debt solution to you. The higher your income and the lower your expenditure the more you will have available to contribute to your debt solution. The problem exists when either you or your debt adviser changes these figures to make your budget look better to your creditors so that they are more likely to accept your plan.

At first this may seem like a good idea. However it is not. Your debt adviser may do it so that they get paid more. The budget should reflect your real income and expenditure. Otherwise you will be in danger of not being able to afford your priority bills such as a mortgage. This may make your situation much worse, for example putting your house at risk of repossession.

New organisations with little operational experience. Owing to the recent credit crunch and recession there has been an explosion of new debt advice companies into the marketplace. The problem here is inexperience. As such you may not receive the best advice.

Rogue companies and cowboy firms!Yes they exist in the debt industry. Over the last couple of years a number of companies have been wound up by the high court in public interest. Some have also gone bust having not paid your creditors once you have made repayments, meaning that you still owe the money!

Examples of the bad practice include:

• Sending out letters to clients in an IVA stating that they have been mis-sold and persuading them to go bankrupt, charging a hefty fee to help them.
• Not holding client money in a separate account and not paying the creditors.
• Persuading you to release equity in your property before going bankrupt and then keeping it.

Creditors not getting paid. You have to be aware that it is possible that your creditors may not be getting paid. You should make sure that this does not happen by getting monthly statements from both your creditors and your debt adviser. Do not settle for anything less than monthly.

Not issuing statements. Some organisations will be flippant when it comes to issuing statements. If you are not receiving them get in contact with your debt adviser and ask them why not. If you are not receiving the service that you expect to then it is time to seek a second opinion.

Their survival

Every debt advice organisation, regardless of who they are, has to make money to exist. This includes the charities. The way in which these organisations make their money important so I will explain below.

An organisation can earn money by arranging a debt solution for you. The money will either come from you or your creditors. If they are arranging the solution free of charge then your creditors will be paying them. If you are paying a fee then they will be getting their money from you.

Ideally you need an organisation that will advise you with your interests at heart, offering you the correct solution first time round. However, this does not always happen. It is important to understand where the risks lie.

The organisations that are paid by your creditors clearly have a potential conflict of interest. For example, if they are paid on the basis of the amount that they collect from you through a debt management plan then they may be more inclined to put you into a debt management plan in order to generate revenues from you. The problem is a debt management plan may not be the best solution for you. This is similar to an employee making more money by selling you red widgets than they would by selling you blue widgets. Clearly the temptation exists to persuade you to buy the red widgets so they can earn more commission.

Equally, there is also a risk of the organisations you pay encouraging you to enter the most profitable solution for them. Some organisations will place you into a debt management plan first, followed by an individual voluntary arrangement which is then followed by bankruptcy. They may do this to make as much money as they can, at your expense. If you feel that the organisation advising you is not doing so correctly then seek a second opinion.

Sources of enquiry

Debt advice organisations generate their enquiries in a number of different ways.

• Advertising through online and traditional mediums such as the internet, newspapers and T.V.
• Professional referrals from financial advisers, solicitors and accountants Client referrals
• Tele broadcasting, which are the automated messages you receive through the telephone
• Lead companies, who often buy data such as rejected loan applications
• Data companies that sell data such as rejected loan applications

Sales tactics

Debt management organisations sell in different ways. Some will focus on providing a very good service and making the most suitable recommendation for your circumstances. Others will focus on their profit margins, perhaps even encouraging you into a particular solution that is most profitable for them, selling based on fear.

Most organisations will try and sell the fact that they offer the best service. The charities are no different. They will tell you not to pay for advice or for a debt solution. Others will tell you to pay for expert advice. Please see my page on free or fee.