Debt Relief Orders: A good Idea On Paper

March 29th, 2009

Debt Relief Orders, the Governments new way to help people on low-incomes clear their debts, have this week been criticised by a leading creditor organisation.

For those who have not heard of them, the Debt Relief Orders are available to people who do not own a home, have less than £300 in assets and an income of no more than £50 a month. The government says the orders will offer hope to people in debt and keep them from using loan sharks.

However, the Civil Court Users Association says the help for debtors is at the expense of creditors.

Debt Relief Orders can be applied for after the 6th April if the debts owed are no more than £15,000 and there is no foreseeable way the money can be repaid. Instead of going through a court, debtors apply to the Insolvency Service through an intermediary like Citizens Advice.

A Debt Relief Order costs £90, which can be paid in instalments rather than the hundreds of pounds it costs to go bankrupt. Citizens Advice estimates around a third of clients they advise on debts each year could be eligible, around 50,000 people.

If the order is granted, the debts are discharged after a year.

A statement from Citizens Advice has welcomed their introduction. “[The Debt Relief Orders] offer people on very low incomes, who cannot pay their debts off within their lifetime, light at the end of the tunnel.”

So far so good you may be thinking. However, some creditors are worried that the Debt Relief Orders are too cheap and too easy to apply for, considering the serious situation many people with debts find themselves in.

The Vice-President of the Civil Court Users Association has stated that there is concern that the government is continually assisting debtors at the expense of creditors.

The Insolvency Service said that intermediaries will be expected to make basic checks and anyone found to be dishonest can have their order revoked.

Pat McFadden, the government minister responsible for the Insolvency Service, believes that there are sufficient measures to safeguard creditors’ interests and the orders are needed to stop people in debt resorting to desperate means.

This is an interesting situation. Regular readers of this blog will know that I have very little tolerance for large companies extorting their customers rather than providing standard goods and services at a reasonable price.

This scheme, however, seems to have gone too far in the other direction and I find myself agreeing with the VP of the Civil Court Users Association. People who get themselves into debt need help but do not deserve charity. If it is made too easy for those in debt to escape after a single year that will have the effect of driving more people into debt rather than keeping them from Loan sharks.

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Close the stable door, I think the horse has bolted

March 22nd, 2009

In a sensible and well thought out move that is, however, about ten years too late, the government is planning a crackdown on the credit card industry to curb the temptation to get into debt.

Legislation will be introduced to stop card firms from raising the credit limit of a customer when this has not been requested. Ministers also want to ban firms from sending out unsolicited credit card cheques to consumers.

As a point of interest, the outstanding balance owed on credit cards in Britain currently stands at £53bn.

The UK payments association, Apacs, immediately leapt in to condemn this suggestion and said that its members did not raise the credit limits of borrowers with financial problems. It did not point out that the only reason this is true is that they are concerned they would lose the money.

The Consumer Affairs Minister, Gareth Thomas, has said, “We are concerned that people may be tempted to borrow irresponsibly if credit card companies increase borrowing limits without this being requested by customers, or send out unsolicited credit card cheques.”

Credit card cheques are quite simply a marketing gimmick. They are usually sent, unsolicited, to customers who are then invited to use them for purchases or payments, and who then settle the amount on their next credit card bill.

Simple enough perhaps, but they commonly carry more expensive charges than the cards, and items bought with them do not enjoy the same protection against goods being faulty.

Back in 2006, the credit card industry came under pressure from the Office of Fair Trading (OFT) and the government to rein in the practice of mass-mailing blank credit card cheques to customers.

As a result of this pressure, a new code of practice was agreed by the banking industry in December 2006. The card companies agreed to “assess a customer’s suitability before sending credit card cheques”, as well as giving clear information on the cost of using them.

The informative Moneynet.co.uk has said they find that people under financial pressure often see a credit card cheque as a way of buying some breathing space. It also saves them having to admit to their money problems or speak to anyone about it, and because of that, they are prepared to pay the high costs associated with this type of borrowing.

Unfortunately the reality is that they are just delaying the inevitable and they will eventually run out of credit, but will be faced with a far larger pile of debt.

The industry defends the cheques as an alternative way of drawing on a card account where the card itself it not accepted, for instance by a tradesman.

Apacs says only 7% of the cheques sent out are actually used, and points out that they draw on a customer’s existing credit limit, rather than increasing it.

There are now two lobbies vying for the government’s attention as it draws up the regulations. The loony left backbenchers in Parliament want interference in the market and excessive regulation while Apacs and its members want to remain free to rip off every mug they can. The role for the government now is to find a path towards discipline in the credit card industry but without excessive interference in the market.

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Recession hits the previously affluent

March 22nd, 2009

The Consumer Credit Counselling Service (CCCS) has announced that greater numbers of affluent people are seeking help for debt problems as the recession bites. It would seem that they mean previously affluent people but it is an interesting point.

According to the charity, unemployment and a housing market slump has caused a “fundamental shift” in the nature of UK debt.

That shift has been entirely upwards, consumers in the UK have total debts approaching £1.5 trillion.

But it is not just a simple upward trend. The CCCS, which is the UK’s biggest debt management charity, has said that debt problems are becoming more complex, harder to resolve and affect a wider cross-section of society than in recent years.

Although people seeking help for debt are, on average, actually better off and owe less money than previously, they are finding it more difficult to pay off debts.

“When unemployment triggers a debt problem, the fall in income can leave the borrower struggling to service both mortgage and unsecured debts, while the fall in house prices, and growth in negative equity, takes away the option of selling to clear the mortgage,” said the chairman of the CCCS.

“As over-indebtedness becomes a problem for the more affluent, people who come to us are more likely to have mortgages and to lead complex financial lives. As a result, our task in providing best advice is bound to be more difficult and time consuming.”

Homeowners owe 83% more on average than people who rented their homes. Almost half of those seeking help from the CCCS are homeowners.

As the recession deepens, the CCCS expects the complexity of clients’ debts to intensify. These trends seem likely to continue for the foreseeable future; the perfect storm may have arrived but we have yet to reach its epicentre.

Only 35% of people are able to commit to a debt management plan, under which a set amount is repaid each month, which is down from 42% in 2007 and 46% in 2006.

The charity said 90% of its clients owe money on credit cards and personal loans, having run up an average debt of £14,000 on these products.

A regional breakdown shows that the highest levels of debt are generally in the south of England, at an average of £29,000, but the over 60s in Wales had one of the highest debt levels in the UK at £25,947.

Scots seeking help from the CCCS had the highest levels of debt in the UK relative to their income. Those in Northern Ireland were least able to repay debts.

An interesting aspect of this report is that the trend of more affluent earners getting into trouble was not seen during previous recessions. There is little doubt that it is the result of a society where people do borrow freely.
Homeowners, in particular, have had a very optimistic outlook about their house values and find it easy and cheap to remortgage. They are encouraged to borrow more and these previously affluent people are the casualties of that.

Many cannot now remortgage to deal with their debts. Many of these people will have to swallow their pride and engage in some basic budgeting. It is also worth noting that free and impartial debt advice could ease many people’s problems.

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