The cost of bankruptcy rises again

June 5th, 2011

The cost of going bankrupt increased by £75 to £525 at the beginning of June leading debt experts and other analysts to suggest that the cost could discourage people with debt or other financial problems from seeking help.

If you include the court fee necessary to complete the process, going bankrupt now incurs an upfront cost of £700. The Insolvency Service said the increase was needed to cover the cost of administration and the charges, including court fees, have gone up by 37% since March last year.

However, insolvency practitioners have warned that the increase will put extra pressure on individuals who were likely to be under stress or depressed.

The £525 charge is a deposit to cover the cost of managing a bankruptcy, which allows the bankrupt person to throw off the burden of debt and make a fresh start. The Insolvency Service recovers a full administration fee of £1,715, less the deposit, from the bankrupt’s assets or surplus income at a later stage. This sum is not being increased.

The overall fee is staying the same but they are increasing the proportion of it paid upfront when the bankruptcy process is begun. The Insolvency Service has seen its income squeezed because of the falling value of homes and other assets which are recovered from bankrupts.

Currently, the £1,715 fee is never fully paid in half of bankruptcies.

There has been some criticism of the rising cost, with National Debtline that there are some people for whom bankruptcy would be the best solution to their debt problem, but for the fact they cannot afford the associated fees.

There is now a cheaper and easier alternative, the Debt Relief Order (DRO), which costs £90.
An increasing number of people who are in financial trouble and looking to escape their debts have been avoiding bankruptcy and taking this lower cost route.

In the first quarter of this year there were 6,788 DROs, a 20% rise on the previous year.
However, people can only ask for a DRO if their debts are less than £15,000 and savings and assets are less than £300.

This leaves the glaring question of what to do if you have £16,000 of debt or more. You are faced with a barrier of hundreds of pounds before you can opt for bankruptcy to resolve your difficulties.

Responding to the criticism, the Insolvency Service pointed out that it is obliged by Parliament to break even, a task which has become increasingly difficult but will be made more realistic if they can recover more of their costs at the beginning of an often long and expensive process.

It is right that bankrupts pay something towards their debts and the Insolvency Service exists to strike a balance between giving bankrupts debt relief and a fresh start, and the need to provide some return to creditors.

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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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