Struggling borrowers targeted

allofadither

Thought folk might find this article from the thisismoney.co.uk website interesting.

Struggling borrowers targeted
Liz Phillips, Daily Mail
11 May 2007

Debt management firms are aggressively targeting borrowers struggling under a mountain of debt by paying large commissions to lenders to pass on their details.

They are prepared to pay up to £1,500 for the names of likely candidates for an Individual Voluntary Arrangement (IVA), according to Nick Pearson of AdviceUK, a group of free, independent advice centres. IVAs allow those owing at least £15,000 to come to a deal with their creditors to repay a portion of their debts over five years. Typically they pay back 30p-50p for every £1 they owe, but the majority of creditors must agree to the arrangement first.

Debt management firms manage the IVA once it has been agreed. On average, these firms rake in £7,000 in fees over five years. They can charge as much as £2,500 in set-up fees plus a management fee of 10% plus VAT.
Record numbers of borrowers are signing up to IVAs, according to the Insolvency Service - the figures have nearly doubled in the past year, to more than 48,000.

Industry experts suspect there is mis-selling on an unprecedented scale.
Philip Long, insolvency practitioner with accountants PKF, says: 'Loan companies are farming out customers who can't afford to take on more debt by selling them on to IVA firms. This flies in the face of the industry's ethical guide.'

He adds: 'Most people who entered into an IVA last year would have been better off being declared bankrupt rather than struggling and, ultimately, failing to make payments to their creditors. But there are huge fees to be earned from an IVA, whereas there's no money to be made from bankruptcy. Some might have been better off with a debt management plan, but again the fees are much lower than for IVAs.'

Debt advice charity the Consumer Credit Counselling Service (CCCS) says only 3% of its clients are suitable for IVAs. Most are put on debt management plans. It started running IVAs on a notfor-profit basis last month.

Frances Walker of the CCCS says: 'It's difficult to believe that mis-selling is not taking place.' The firms arranging IVAs get their set-up fees paid first before the creditors receive anything.

This has led to the banks, alarmed at the increase in personal insolvencies, cracking down on the numbers they will accept, Mr Pearson says. 'The IVA companies don't get a penny until they've got the agreement of the creditors. So they're having to get more leads in the hope of getting them through the creditors' meeting,' he says.

Members of AdviceUK provide free debt advice. Those who would be best with an IVA are passed to PayPlan to manage. The advice centres are paid £500 for each one. It says this fee covers assessing client's needs.

wherediditallgo

Interesting article. What a lot of these DMP companies don't tell people is that a lot of IVAs fail within the first 12-18 months, because either the debtor's circumstances change & the creditors won't accept reduced payments or the creditors want the payments increased anyway. I'm convinced that some people enter into IVAs because of the stigma that going BR has - so many people think going BR is running away from your debt, taking the easy way out, getting away with not paying your debts etc. So they rush into an IVA that seems great now but has a stranglehold around them for years.

If they read up more about both, they'd realise that a large proportion of those going BR pay towards their debts through an IPA for 3 years (so they haven't 'got away with' anything), & the IVA might be secured on property that you might lose it if you don't stick to the agreement. Also, having an IVA means a creditor can still petition for your bankruptcy at a later date, & if you've paid fees to have an IVA set up & it's then refused you lose whatever you've paid upfront & are then worse off than when you started.

fermi

Interesting, yes. Surprising, no.