ClearDebt’s Andrew Smith responds to comments made by ITN’s Chris Choi on “Britain’s Growing Debt Burden” and gives his thoughts on why the fee vs free debt advice debate isn’t black and white.

There has been a lot of coverage, in the last day or so of a report on payday loans and debt management by a committee of MPs (the House of Commons Select Committee on Business Innovation and Skills). ITN’s Consumer Editor, Chris Choi, was one of the journalists that wrote a blog on this.

Possibly unfairly, I’ve singled him out because I think the MPs’ report has already been overtaken by events and because I believe the media’s usual conclusion that free advice on debt is good advice is often not the case – and that the fee-charging debt industry is not as high risk as we are portrayed. At least, in parts (which I know is an issue that must be addressed) The OFT is on the case, supported by the debt management trade associations like DRF, and their members.

I thought a comment on Chris’s blog would give me an opportunity to put the case for fee-charging debt management but, as I write, the comment (supplied yesterday) is still in moderation – so I reproduce it here:

It’s rather more complicated, as regards debt management, than portrayed above.

First, the MPs report (I was a witness) skates over a lot of issues and does not join up the dots.

The Money Advice Service, who are now the ringmasters for consumer debt advice in the UK, say that roughly 2 million people in the UK need debt advice. Last year the free advice agencies, like Citizen’s Advice, who provide face to face debt advice, managed 100,000 interviews. So, 5% of what’s required . This year they are being challenged by Money Advice Service to do 150,000 cases. On the same funding. Pips will squeak.

Then, there’s this assumption that free advice is always good advice. Most plans from agencies like CA do not involve distributing the money you can afford to your creditors. And, MAS is advocating much more “self help” in the future. For people who often can’t help themselves? Recent research from the Royal College of Psychiatrists shows that 50% of those people who need debt advice are exhibiting symptoms of mental illness. So, one in two of all the people with debt issues, not just the most vulnerable, are unlikely to cope with self-help debt advice.

Whilst I’d be the first to agree that the fee-charging debt resolution industry has had low standards and poor behaviour . Take members of the Debt Resolution Forum (DRF): They have a code of practice that is higher than that required by the Office of Fair Trading, a 210 hour, three exam, academically accredited qualification for advisors and administrators, annual on-site inspection by a government trusted independent monitor and an independent complaints committee, with a majority of members from outside the industry.

Things will continue to change. The new guidance from the OFT, the work being done by the Insolvency Service on protocol or regulated debt management plans and the huge changes planned by MAS between now and autumn 2013 will all change the landscape hugely. But, I think that a mixed economy of free and fee-based debt advice is the only way to meet Britain’s need for educated, capable consumers who know how to manage their money.”

We often give creditors a hard time for some of the things they do to customers. Rightly so in our view; so it’s only fair that, when we see a bank bending over backwards to help over-indebted customers, that we should be fulsome in our praise. So, take a bow Co-op:

Co-operative Bank current account customers will have interest on agreed overdrafts frozen for three months in order to provide a helping hand to those struggling with post-Christmas debts.

The Co-op, which has 1.5 million current account customers, says someone using a £2,000 agreed overdraft would save £75 in fees in the three-month offer period, while a customer with a debt of £500 could save more than £18.

Click to enlarge © Copyright Co-operative Banking Group

Of course Co-op aren’t being entirely altruistic. We are sure they see good marketing sense in this. They are a mutual, after all (owned by their customers) and this initiative will certainly help people believe that they care for the people who have accounts with them. But, this tiny pinch of salt apart, this has to be a helpful thing to do.

It’s important to note this applies to arranged overdrafts only – take an un-arranged overdraft from Co-op and you’ll still be in the doo-doo.

We often recommend Co-op to our customers if they need to change bank accounts (too late to do this? – you could look at our pre-paid card, ClearCash: commercial over!). And we also applaud them because (along with Barclays) they are the only bank to offer a basic current account to undischarged bankrupts.

We wonder if other banks will join Co-op in taking the post-Christmas pressure off?

We asked their trade association British Bankers’ Association via Twitter:

@Andrew_F_Smith @Gemma_Payplan Nothing! Trade associations cannot have any involvement in their members’ pricing strategies

— Brian Mairs (@BritishBankers) January 4, 2012

Well, we are going to ask the other banks through their social networking identities and we’ll report any response we get here.

Meanwhile, credit where credit is due. Here is all the coverage we could find of Co-op’s initiative:

We are going to email all our customers who we know have Co-op accounts to draw attention to this good news.

Happy New Year everyone.

Oh, and, if you want to know more about creditors activities we’ve discovered in the past, then take a look at these links:

• ClearDebt Community thread – no contact from debt collectors then suddenly a threat of court action
• ClearDebt Community thread – problems with Unicom debts
• ClearDebt Community thread – can my creditors force me to set up a direct debit to pay my debts?
• ClearDebt blog – Lloyds TSB: letters to people in debt management plans

There is lots of coverage around today about just how horrid payday loans are.

They can be. But it’s not the whole story. They can also be a useful tool for overcoming the horrendous costs associated with bank current account un-arranged overdraft fees and charges. Providing you stay in control.

The BBC published this story, which I thought was suprisingly partial. I added a comment, (it’s not published it yet) and thought I would share it here too:

This story is, I think, a little simplistic.

Payday loans and high cost credit does contribute to unmanageable debt. But there are a number of important “buts”.

First, payday loans and other sources of high cost credit are often the only sources of credit available to people at the bottom of the financial heap. Mainstream banks won’t lend to them at mainstream rates. It’s not uncommon for 30% of the loans in these categories to fail – so it’s not surprising the interest rates are high. Organisations like Joseph Rowntree Foundation have done research that shows non-commercial organisations (like credit unions) would not be able to charge less.

Then, the Radio 4 “Today” report on this spoke to a person who’d got into trouble with payday loans. Why? because she could get ONLY payday loans because she had a bad credit history: I wonder whether Tim Harford would perceive a causal relationship in this?

The R3 research, I think, overlooks something rather obvious: That a payday loan, despite the outrageous interest rates, can be far, far cheaper than an un-arranged overdraft from a bank. If one avoids the other, then that can be a huge benefit to budgeting.

Of course if you are one of the relatively few who “shop until you drop” payday lending can feed the habit and make it horrendously expensive. And, if you are a zombie debtor, who is unable to deal with more than interest payments, then payday loans are a form of life-support you don’t need: You should be dealing with your debt instead.

The latest personal insolvency figures for England and Wales, released today, 4 November 2011, show that around a third of bankrupts are now being forced to make sizeable payments towards their debts every month, for up to three years.

Bankruptcy – harsher for longer?

Earlier in the year we commented on the stealthy rise in the number of bankrupts that are being required to make payments under an Income Payments Order or Agreement (IPO/IPA).

Well, the rise is not so stealthy now. In the last three months, the proportion of bankrupts with an IPO or IPA has shot up from 19% to 33%.

Back in 2001, and for several years following, only one in ten bankrupts had to find a contribution for their creditors every month – now it’s a third; It may well be that the government has decided bankruptcy should be a less attractive option, and that efforts have to be made to ensure a better return for creditors.

Creditors becoming more aggressive?

The proportion of bankruptcies that are started by creditors has shot up too, by 13% in the last quarter. So, more bankrupts are finding themselves pushed into the procedure, rather than choosing it as the best way to resolve their debts. Colleagues I’ve talked to have advanced a number of reasons why:

It could be that the rise in self-employed debtors is partly to blame (about one in five bankrupts are sole traders), but as this has been a slow rise, it can’t tell the full story.

Colleagues feel they’ve seen more petitions started by HMRC (which would indicate self-employed debtors) and by local councils seeking Council Tax arrears – that could be anybody’s problem.

Others think that creditors are seeing bankruptcy as a productive solution to recovering their debt, especially if the debtor has a house with substantial equity (rare these days, but it does happen).

Whatever the reason, it’s increasingly likely that for a small minority of debtors, if you fail to repay what you owe, you could find a creditor’s threat to make you bankrupt becomes reality.

Bankruptcy has always been the toughest debt solution. But some have seen it as a way of walking away from their debts and putting it all behind them. For many, that is no longer true.

Is a “free” debt management plan always better than paid debt help from a fee-charging company?

I’d like to start by saying ClearDebt Group is a fee charging debt resolution company, proud of what we do and how we help people. Our brand ClearDebt does IVAs and Abacus provides fee-charging debt management plans.

I’ve written before about the assumption many make that free debt advice is always good advice (something I don’t agree with). You’ll find links to those blogs at the bottom of this one.

But, in this blog, I want to concentrate on the question of whether a debt management plan from a fee-free advisor, is automatically better value than a debt management plan or an Individual Voluntary Arrangement (IVA) from a fee-charging debt resolution company like ClearDebt.

I touched on this in another recent blog (IVAs – A Question of Perspective) which looks at some of the key differences between IVAs and DMPs – and critiques leading creditor-funded provider, CCCS’, perspective on this.

Today’s blog has been prompted by two recent blogs from Payplan (a creditor-funded company), the first dealing with a client’s experience of a debt management plan and the second comparing IVAs and DMPs.

In both cases I have commented on the articles and, in both cases, my comments have (at the time of writing, either failed to be published or have been censored. So, I decided to put my thoughts here instead.

A Payplan Client’s Experience

Dawn’s Story:It’s a really good news story about a client (Dawn) who has managed to repay most of her £28,000 debt in four years (and will probably succeed in paying off the lot in 52 months, or thereabouts). But, it raise issues with me because the client said “I have 4 payments left (depending on interest/charges etc) and it feels so good.”

Great – but the fact that she seemed not to be sure about interest and charges niggled me.

The issue of transparency when it comes to freezing interest charges

Yes, some creditors freeze interest and some don’t, but a fee-charging debt resolution company is obliged to ensure the client knows what’s what. The fact that this Payplan client didn’t seem to know brought to mind this article from the Guardian published a couple of weeks ago – from which it appears that Payplan was paying a client’s creditors late (debt management companies are supposed, usually, to pay creditors within five working days of getting funds from the client) and, possibly, causing additional charges – Payplan seems to have thought the client owed £143, in fact, there was £4,086 left to pay.

Cases where an IVA is more suitable than a Debt Management Plan

In Dawn’s case, the description of her case led me to think that an IVA (where interest and charges would be frozen for certain, and the possibility of debt forgiveness existed) might have been a better choice for Dawn – so I commented: “It’s great that Dawn has got this far. I wonder, how long has this taken? Also I note that she says “I have 4 payments left (depending on interest/charges etc) and it feels so good”: so presumably her interest and charges were not frozen as they would be in an IVA. Why wasn’t a five year IVA possible in this case?”

PayPlan published this and responded. So did Dawn (thank you – it takes a lot to talk publicly about your debt situation). But i wanted to know more and I left the following: “Dawn, I think that’s brilliant: So you must have been paying what, about £540/month (assuming 52 months and most interest and charges frozen?”

Payplan published: “Dawn, I think that’s brilliant.”

I am not implying Payplan did the wrong thing with this client. There’s no such thing, really as a typical debtor: every case different. And I also understand Dawn might want to protect her privacy. But that should have been said. I really think this case is worth exploring to help others understand when a DMP is the right choice over an IVA (If an IVA is possible, a DMP will rarely be the most appropriate advice).

The same issues are explored in this thread from IVA.co.uk (CCCS – Indifference), which seems to indicate that this creditor funded organisation takes relatively little interest in whether it’s clients are still paying interest.

IVA vs DMP

Which brings me to Payplan’s second blog, a simple DMP vs IVA comparison. It’s pretty good. But it lacked one important point. So I commented:

“How about adding: “all interest and charges are frozen when your IVA passes creditor’s meeting”, as this often means a debtor pays thousands less than they would in a debt management plan.”

This is still, as I write, awaiting moderation. It’s fact. It makes a huge difference to many debtors. I don’t even want credit for it, I’d just like to see it in the list. It’s something people should know. Payplan does make the point that “Any debt remaining after your IVA is completed is written off.”, but it doesn’t attempt to quantify this. Probably wise; all cases are different – but it seems rather underplayed as an advantage because – again, This can make a huge difference to the debtor. IVA and DMP contributions are usually similar (though DMP contributions are often larger because creditors won’t accept that people in DMPs have financial emergencies whilst they are in their plan) But the typical IVA lasts half the time (five years) of the typical DMP.

Payplan should add one other point to their list of IVA bullets (I’d comment – but what’s the point?): Houses aren’t under threat in an IVA (but could be if you failed to complete the IVA and went bankrupt), but debtors with equity will be asked to make a contribution from that toward the end of their IVA – this is sometimes a pragmatic reason for choosing a DMP instead.

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