The pitfalls of debt management agencies

ARE YOUR DEBTS stressing you out? Are you falling behind in your credit card or loan payments and fed up with the constant calls coming in from hard-edged debt collectors demanding instant payment? Would you like those calls to just go away? Would you like all interest repayments to be frozen and your debts halved? Would you like to save thousands?

Of course you would, who wouldn’t? Maybe a debt management company is the answer? After all thousands of cash-strapped Irish consumers have flocked to these slick companies in recent years and can they all be wrong?

Yes, yes they can.

There is big money to be made in the business. While pricing structures vary from company to company, the fees are universally high and when people are already drowning in a sea of debt, up-front fees of as much as €750 and a monthly fee of 15 per cent of any agreed repayment seem particularly outlandish. But still people contact these companies because they are scared and vulnerable and looking for help.

Although the fees debt management companies charge are high they are not the biggest problem. Despite the fact that these companies handle millions of euro belonging to often very distressed and vulnerable consumers every month, the State has not enacted any legislation to protect consumers.

The debt management business in Ireland is like a less exciting version of the Wild West and there are no rules governing the dozens of companies which have set up in recent years offering to help people scale the personal debt mountains they have created through a combination of reckless borrowing and reckless lending.

The absence of legislation has led to the quite ridiculous situation where you could set up a debt management company before lunch today and start handling people’s cash. All you need is a snazzy name for your business – something that people will remember, a flash looking website with an address that is similarly easy to recall and a whole lot of neck and away you go.

Until the middle of last week one such business, Dunne Maxwell trading under the name yourmoney.ie, had been big in the money space. It had been paying the bills for thousands of people for over seven years. According to its very flash website, people who put their trust in the company and allowed it to manage their money had "nothing to loose" (sic). It promised to reduce people's debt by 50 per cent and save them thousands. So far so good.

Except it turns out that people did have something to “loose”. Their money. Last week the Central Bank wrote to hundreds of customers of the Dublin-based debt management company and strongly recommended they suspend all payments to it immediately. The remarkably forthright letter said people should “consider contacting the Garda” if bills to be paid on their behalf by the company were not up to date.

The bank said that “in the public interest and as part of a general review of the debt management sector”, it had inspected the company and had “reasons to be concerned about the nature of the company’s operations and its handling of customers’ money”. Overnight the company disappeared. First its phones were disconnected and then its website went down. By Tuesday of last week its offices, listed as being on Clarendon Street in Dublin, were vacant, save for a few officials from the Central Bank sifting through files.

The company’s overnight disappearance left hundreds of its customers climbing the walls, terrified that they might be left owing thousands of euro to creditors. While the Central Bank said it could not say how much money belonging to clients might be owed to creditors and which are due to be paid this month, sources told Pricewatch that the amounts could be significant.

The bank has been commendably proactive and in addition to writing to customers of the debt management company, it also said it had contacted the creditors involved and has asked that customers whose bills have not been paid by Dunne Maxwell be treated “sympathetically”.

While the Central Bank has no regulatory power over debt-management companies, and cannot force them to comply with its orders, it has been carrying out inspections across the bill-payment and debt-management industry to see if any of the firms were carrying out activities which it could regulate.

The first phase of this review has concluded and the bank has contacted a number of companies notifying them that some of their activities are subject to regulation. The bank said that companies whose activities, at least in part, fell under its remit must immediately take steps to provide more protection to client funds.

The Central Bank said recommendations of the Law Reform Commission, that the debt management and debt advice services of all firms in the sector be subject to regulation, should be implemented as soon as possible.

It can join the club. Both the National Consumer Agency (NCA) and all the not-for-profit organisations who help Irish consumers manage debt are increasingly concerned at the proliferation of such companies and they all urge caution when it comes to such services. Neither the Money Advice and Budgeting Service (Mabs) or the Free Legal Advice Centres (Flac) have anything positive to say about the companies. And both urge struggling consumers to make contact with them first before giving money to such a business.

The exasperation in the voice of the National Consumer Agency’s chief executive Ann Fitzgerald when the Dunne Maxwell story broke in this newspaper was evident. Her annoyance is hardly surprising. She has been warning about debt management companies for a very long time and repeatedly calling for legislation to protect “vulnerable consumers” yet nothing has been done.

Speaking to Pricewatch last summer she said it was “not acceptable to have to wait until next year” for legislation. “We have to get it done in the autumn. It is not complex and much of the framework is already in place.” She was ignored. Speaking to Pricewatch last week she repeated her call for legislation and warned that unless it happened soon, more vulnerable people would be caught out.

The Law Reform Commission has all the work done on legislation, a fact acknowledged by the Central Bank last week. Even Fianna Fáil, which, a cynic might say, dragged its heels on the issue for all the years it was in government, was able to pull together a pretty solid bill governing debt management companies last year.

The Government is failing to protect the public from rogue companies offering debt management services, according to Fianna Fáil senator Thomas Byrne. While Fianna Fáil could be expected to have a go at the Government at every opportunity, on this occasion at least, the party is on the money.

Last summer it published a bill which would have regulated the sector yet nothing has happened.

“We wrote to the Minister for Finance Michael Noonan and the government chief whip last summer asking that time be made available in the September-December session to debate and pass this legislation in the Dáil and Seanad to protect the public. We’re still waiting,” Byrne says.

Under the Fianna Fáil bill any business which claims to be a debt management advisor would be subject to regulation by the Central Bank and be required to have an authorisation. They would be required to set out all fees at the point of engagement and be prohibited from handling client monies themselves.

There is growing levels of concern about these companies and some financial institutions have gone as far as refusing to deal with debt management companies at all over concerns that their fees will eat into the money the banks are owed. Another issue is that many of the companies operate off a percentage of the repayment amount agreed and, the higher the repayment a client agrees to, the more money they make.

“We cannot allow a situation to continue where people continue to be preyed on by rogue operators and the Government sits mute,” Byrne says. “The Government should immediately bring forward a debate on the new rules for businesses involved in providing debt advice, debt management and household budgeting services.”

Questions to ask

For people trying to juggle the demands of several creditors, taking on a debt management company can seem a hassle-free – albeit expensive – option. Before committing to any company, ask the following questions:

* What are the fees for the service and when do I have to pay the fee?

* Is the fee paid upfront?

* If the fee relates to the size of the debt, what percentage of the total debt is payable?

* What exactly will I get for that fee?

* Will you work on and resolve all of my debts?

* Will I pay a fee even if you cannot assist me to get the solution I want, or a solution that works for me?

* Are you connected to any other organisation that sells financial products?

* What training or skills do your debt advisors have?

Source: itsyourmoney.ie