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Clare Francis: The threat of a recession seems to loom larger every day with data pointing to a worsening economic situation.
James Dean, who is from debtmatters, a financial solutions company, is with me today to explain what all this means for consumers, and what you can do if you are in financial difficulty.
Q1: So James, we're reading a lot about the escalating debt crisis which people struggle to manage every month - just how bad is it?
James Dean: It's an increasing problem. Certainly through the early part of 2007 there was quite rapid growth in debt management and IVA's. As we have started to come out of the credit crunch from November forwards that really has grown very significantly and I think that that is a result of certain people really starting to feel the bite of both inflation and the lack of access to other solutions to their debts.
Q2: And what can people do about it, what options are there available to people who are struggling?
James Dean: I think very much the first port of call is to try and self manage it, to make a list of your debts, to understand what your outgoings are and to ascertain whether you can service that debt within your existing income, and be brutally honest with yourself. Maybe knock out the unnecessary things, for example a foreign holiday, perhaps look at taking a holiday in the UK. If you're at the less extreme end of the debt problems that may well be a better fix. And to manage your budget, to make contact with your creditors, potentially try and reduce your payments yourself.
If it becomes clear that it really is a problem, for example that you look at your outgoings, and you look at your repayments to your creditors, and the answer is that you are £200 short every month, then I think you need to take advice, and I think you need to perhaps speak to a couple of different organisations, and obviously we are a commercial organisation, we provide advice and we provide solutions to debt.
But I would like to think that people, when they are dealing with such a serious problem, they go into it with there eyes open. Research on the internet is extremely useful as well. Having done that speak to someone who understands the problems and who understands the solutions and is prepared to give you access to the larger range of solutions that are available to people. In some cases it's just cut up your credit cards, batter down the hatches, start shopping at say Netto instead of Waitrose, probably an extreme example. In other cases it maybe a debt management plan which will manage your debts over a period of time, perhaps while you wait for a change in job or a change in circumstances. If it's more serious then an Individual Voluntary Arrangement certainly may help to resolve the situation over a period of perhaps 5 years.
And finally if there are no other solutions available then people need to consider bankruptcy. There is no point in spending 5 years struggling and scrapping and having really not a very nice standard of living, if the alternative is to try and bundle that into a 2-year period, which is to make yourself bankrupt and come out the other end of it, albeit that you may well struggle to get credit for the next 10 years or so.
Q3: And can you just explain, in a little bit more detail, the difference between a debt management plan and an Individual Voluntary Arrangement?
James Dean: Yes absolutely. In a debt management plan you use a company like ourselves to right to your creditors, to explain your circumstance and to lower the level of monthly repayments. After a period of time the creditors may choose to freeze interest and freeze charges. And indeed in the majority of cases they do, there are one or two exceptions, but that means that although you are paying a fee to a company like ourselves the chances are that your debt will be reducing over a period of time. The issue is if you have got a lot of debt, it could be 10 or in some case 15 years before you fully repay that debt.
In an IVA you use an insolvency practitioner, again we are a firm of insolvency practitioners, to put a formal proposal to your creditors which makes the payments that you can afford over a period of 5 years.
The agreement runs for 5 years and at the end of that period, presuming that you have got no assets (for example, equity in your property) to put into the arrangements, then the balance of your debts are written off and you generally walk away from the agreement debt free. But again it's a serious undertaking and it wants thinking about carefully and considering. But for a significant proportion of people who have large debts - I'm thinking really over £20,000 - then it's a genuine solution.
Q4: There are obviously a number of debt management firms like yourselves out there, but it is very difficult for consumers to compare them because their not regulated (necessarily), the charges aren't transparent. Could you just explain what you would typically expect to pay if you did come to a company like debtmatters for a debt management plan or IVA?
James Dean: First point, yes debt management companies are largely unregulated. We are an insolvency practice as well so we do have regulatory bodies looking in on us.
With regards to charges, I think for most companies they will be upfront about where they are in terms of fees and certainly the Office of Fair Trading make sure that the information you receive from a debt management company will cover off the cost of the plan as a total number against your debt, the monthly cost of operating the plan and the number of years that you would be on the plan. So you should see that from any company operating with a consumer credit licence within this sphere. There may be ones that don't and I wouldn't recommend that you use them at all.
Fees range from nothing in the case of the Citizens Advise Bureau to about 20% depending on the organisation -
Q5: Is that 20% of your debt?
James Dean: That's 20% of the monthly payment that you make. In our case we charge a flat fee of 15%, and I believe we are at the bottom end of the fee charging debt management companies.
Q6: You mentioned the CAB, the Citizens Advice Bureau, there is also the CCCS, the Consumer Credit Counselling Service, which both offer free debt help and advice. Why would somebody come to you and have to pay for a service that they can get for free elsewhere?
James Dean: I think that is a very fair question, it's very much like anything else in life. The Citizens Advice Bureau are really very, very busy at the moment and they offer a fairly basic service, which is to have a quick review of your debt, to provide you with some template letters that you might use to write to your creditors and then ask you to do it yourself. Which is a perfectly reasonable approach and perhaps if you got one or two creditors that might be a better solution, albeit that you may struggle to deal with some companies debt collections department, because they can be a little bit difficult.
In the case of the Consumer Credit Counselling Service, it's an excellent service but I would bear in mind that it is funded by the banks, by the creditors, and similarly I think it is worth talking to them.
In our case our business survives and falls on the quality of the service that we provide to the individual people who have got the financial difficulties. If we are charging a fee, we need to earn that fee, and I think we do that by our speed of response, by the quality of our staff, again we are a business that earns money. We are particularly focused on making sure that we have got the best people, who understand the problems and who will treat you with respect. I think that is very important, if you are facing a really difficult problem in your life, in some cases people can be quite ashamed about these things, then you need to have someone who will look after you and ensure that things work in the best way.
I think the final part is that we earn our fees over the life of the debt management plan or indeed of the Individual Voluntary Arrangement. So it is important for us to work with people to talk to them about their budget. If we see that there is a problem with making payments then we will understand that and we will perhaps phone up and see if we can break them down into weekly payments or if we need to go back to the creditors and say there has been a change of circumstances. So our interests are making sure that people resolve their debt problem.
Clare Francis: Thanks very much for that James, hopefully there is some good advice there for people.
James Dean: Thanks.
