Debt Consolidation Scams

May 28th, 2011

An investigation by the BBC has found that some debt management companies have been holding on to clients’ cash rather than paying it to creditors. The practice has left heavily-indebted families thousands of pounds worse off.

The Office of Fair Trading (OFT) has condemned the practice as “totally unacceptable” and promised a crackdown.

One senior figure in the debt management industry says 10,000 people could be in danger from the practice. If a firm goes out of business and client funds are not kept in a protected account, some or all of the money is likely to be lost.

Vulnerable debtors have told the BBC that they had to put their house on the market and could face repossession after responding to a cold-call from a debt company. One firm, based in Bolton, offered to arrange a repayment plan for £40,000 of credit card debt and loans.

But after making payments for several months the unknowing customers found that the money was not being handed over to creditors who promptly took them to court resulting in County Court Judgements and possible house repossession.

Private debt management companies have 375,000 clients on repayment plans and take £250m in fees, so it is a lucrative business. The company in one BBC investigation, Global Debt Solutions, later known as 3 Step Finance, has been shut down by the Insolvency Service, which found that it did not monitor payments properly.

But now it has emerged that other companies have adopted the same tactic of accepting money from people in debt and not passing it on to creditors. Analysts believe that there are as many as four other companies still using the same tactic and that up to 10,000 customers could be in danger.

The companies keep the money back as a ploy to try to negotiate a lower settlement with creditors. But the customer runs a real risk that a company might fail while the funds are in its account.

The OFT is promising action, although it remains unclear as to how these practices are allowed in the first place. For the future, the OFT says that where they have evidence they will remove a company’s consumer credit licence, which means it cannot operate.

Anyone struggling with debt should first turn to any of the free advice services offered by Citizens Advice, Payplan, National Debtline and other organisations. If you do decide you want to use a debt consolidation company then do some research and shop around. Never accept a cold call offer from a salesman.

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Write off credit card debt

May 25th, 2011

The recent case of of a man being let off a credit card debt after being ‘tortured’ by his creditor has highlighted an important issue for borrowers and lenders. Some courts are siding with people in debt if their lenders, such as credit card companies, have failed to abide by the strict requirements of the consumer credit laws.

Typically these borrowers have not denied running up debts on their cards. But they have challenged their lenders to prove they have jumped through all the hoops necessary to get their money back.

Section 78 of the Consumer Credit Act demands a credit card lender supplies what is known as a “true copy” of its original loan agreement if the borrower asks for one. This must show all the original terms and conditions (T&Cs), including information such as the rate of interest.

A number of recent cases have shown providing a satisfactory copy can be difficult if a lender has lost, thrown away or poorly archived some of its original documentation.
And that can mean the lender fails to get its money.

The courts normally accept a lender’s word, as issuing the T&Cs and obtaining a signed application form is standard commercial practice, required by law.

A ruling in 2009 by Judge Waksman at the High Court in Manchester established it was not necessary for a lender to provide the original credit agreement, or even a direct copy, such as a fax or scan. He ruled it was perfectly acceptable to provide a copy of the agreement reconstituted from other bank sources, so long as it accurately and honestly told the borrower the original terms and conditions, and any subsequent changes.

On the face of it, providing a reconstituted copy should not be too difficult for a well organised bank or credit card firm. However analysts say that this is in fact becoming a significant problem for them.

Lenders are coming forward with what they say are likely to be the terms that would have been sent at the time. In reconstituting, sometimes they simply can’t find the original agreements. Sometimes they can, but they can’t find the all requisite terms.

The trade association for lenders and debt purchasers, the Credit Services Association (CSA), says there are no statistics on how often lenders failed to enforce their debts because of defective paperwork. But it is uncommon.

A few years ago, lenders were being plagued by cases, often instigated by claims management companies, in which it was argued that failure to supply an exact copy of an original loan agreement meant the debt was permanently unenforceable. However, the Waksman ruling squashed that erroneous interpretation of the law.

The problem with section 78 cases is that the debt is only unenforceable while the error persists. If the lenders find the right information and supply it to the debtor they can proceed to collect their debt as before.

The banks have lots of money to sue people, unless there is something really wrong, the debtors may still have problems.

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House repossessions rising slowly

May 14th, 2011

An expected but certainly troubling piece of news emerged this week as it was revealed that 9,100 homes were repossessed in the UK in the first three months of 2011, up 15% on the previous quarter.

The figure was 10% lower than the same period the previous year and in line with the quarterly average of 2010, the Council of Mortgage Lenders (CML) said.

The number of householders getting behind on mortgage payments has fallen slightly since December.

The CML has warned that households would be financially stretched for some time. The group has predicted that a total of 40,000 people will lose their homes this year, up from 36,300 in 2010.

Repossessions were at a relatively low level at the end of 2010, but the latest quarterly figures show the first three-month on three-month rise since the third quarter of 2009. But while more homes were repossessed, arrears levels fell during the same period.

Looking ahead, the financial position of many households is likely to be stretched for some time.

At the end of March, the number of mortgages with arrears equivalent to 2.5% or more of the outstanding balance stood at 166,900, which was 1.47% of all loans. This was less than the 170,000, or 1.5%, of loans in arrears at the end of December 2010, and 11% lower than the 187,300 home loans in arrears, 1.65% of loans, a year earlier.

Lenders are giving householders the chance to get back on track with mortgage payments, rather than repossessing homes quickly. However, a squeeze on incomes could make things more difficult for homeowners.

The regulator of the mortgage market has alerted lenders to the fact that being too generous with borrowers getting behind on payments could cause problems, as could repossessing homes quickly without giving householders the chance to overcome difficulties.

Commentators have this week been debating if and when the Bank rate might rise from its record low of 0.5%. This would have an impact on the costs of mortgages. However, a rate rise of a quarter percentage point, taking the Bank rate to 0.75%, would not push a host of homebuyers into arrears.

Despite this, falling house prices and inactivity in the market could cause problems for some families facing financial difficulties. The continued decline of house prices since March 2010 means that there is an ever-increasing stock of houses appearing on a stagnant housing market.

For individuals in debt and with arrears, selling their property quickly is far from certain.

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