Posted by: Tom J on: June 23, 2009
Many people consolidate their debts by using a debt consolidation loan. Often, the amount of interest you pay is on your loan is a lot less than the cumulative interest you pay each month on all your debts and more often than not the amount you pay each month to your loan is less than the amount you pay toward all your debts. In theory therefore, debt consolidation loans are a great way of clearing debts. However, as I will explain in this post, debt consolidation loans are also a massive cause of peoples debt problems becoming even greater.
In my time working in insolvency one of my jobs was working as an IVA drafter. As part of any IVA proposal you must include a history of how the debtor has come to be in the financial situation they have found themselves in. The vast majority of IVA cases entailed a person pr persons spending money on credit cards taking out a consolidation loan, spending on the cards again and then taking out another debt consolidation loan and becoming trapped in a cycle of debt. The most interesting aspect of this was that for those people who had been forced each consolidation loan to borrow at a higher rate of interest due to there credit rating being harmed by defaults and missed payments caused by the ever increasing amounts of outgoing expenditure on unsecured debts.
Many people would take up to four consolidation loans and it was the these third and fourth generation consolidation loans that are the cause of so many peoples financial woes. Take for example a company like Welcome finance. Welcome finance will lend to anybody no matter what there financial situation (they even advertise this). This policy on lending to anyone comes at a price. Interest rates. I have seen credit agreements from Welcome where the level of APR has been as high as 49%. On secured loans people can charged almost three times what the borrow in interest. Although scandalous, the likes of Welcome finance flourish on peoples desperation to pay off their debts which in turn simply prolongs the agony of those suffering with debt problems.
Debt consolidation loans are best used in the first generation when, if you have a good credit rating you will be able to a consolidation loan that is at a reasonable rate of interest. The key however, is to not spend again which for many is easier said than done. I would recommend therefore, only keeping one card for emergencies. So many people simply wait only a matter of weeks to begin spending on cards again and the cycle of debt continues.
Due to the credit crunch debt consolidation loans have become harder to get hold off. Many lenders have changed their policies in regards to how they lend. Therefore, those who have missed payments (not defaulted) may even struggle to find a lender willing to provide them with a debt consolidation loan. If you can find a lender don’t simply take the loan because it is being offered. How much are you going to pay in interest? Is it more or less what you are paying at the moment? How long is the loan going to take to pay back? Sit down and work it out. In short don’t make rash decisions. Take you time and try get as many quotes as possible.
Posted by: Tom J on: June 1, 2009
About five years ago a term began circulating in the insolvency industry that became a by word for greed, un-professionalism, exploitation and idiocy. The term ‘IVA Factory’ was coined for companies who’s primary business model was built around providing IVA’s. The word ‘factory’ in itself provokes images of mass production, fuelling the idea that IVA’s had become an easily sellable commodity that devalued IVA’s as a legitimate form of clearing debt.
Three companies in particular became targets for the brunt of criticism levelled from not only from within the insolvency industry but also from the mainstream media and major financial organisations. Accuma, Debt Free Direct and Debt Matters had all manor of accusations levelled at them including miss-selling, poor customer service, corporate greed and a wide spread disregard for up holding the integrity of the debt solutions industry. Why these three in particular? Well, statisically they were in the top five IVA providers. However, I feel the reason is far more simplistic. All advertised heavily on television, radio and print and all were PLC’s who published their accounts. Creditors, naturally have an issue with companies that make money from people in debt other than themselves. Seeing this published is bound to annoy, why should creditors write off so much only for other companies to make huge profits? That itself is another argument for another day, however, the simple fact was these companies were making A LOT of money.
Accuma, Debt Free Direct and Debt Matters became the unwitting poster boys for everything bad about the insolvency industry. During my time working in the insolvency I worked for a company who processed in excess of 300 IVA’s a month. Oddly enough the company was never considered an ‘IVA Factory’, nor was it ever part of any negative press about the IVA industry. Likewise, other high volume companies were never mentioned even through there output was on a par with the supposed ‘factories’. Why? The answer was the industry had its villains. Many who had avoided the ‘factory’ label simply got there heads done and got on with what they were doing allowing the evil three to cop the flak for being large volume providers. Smaller insolvency firms also had a new marketing tactic. They could position themselves as being the friendly, personal IVA firms that cared about you, not the big evil corporations that were there to steal your money.
After leaving the large provider I work for I went to work for a smaller company in the belief the focus would be on quality, not quantity. How wrong I was. The company in question charged more in fees (clearly to make up for the lack of quantity) and provided a level of service on par with the company I had come from. The insolvency practitioner who ran the firm was every bit as obsessed with putting the most amount of ceases through as the other company yet was deluded they were ‘better’ on the basis they were smaller. Rubbish. Smaller IVA insolvency firms exist to make money too and more often than not owned privately making A LOT of money on a smaller scale for the owners.
Smaller IVA firms have to fight hard for debt leads to generate new business. Without the funds to advertise on television, print and radio these firms present themselves as the friendly alternative to the faceless corporations. This is still advertising, which in itself is a form of manipulation. Take the site for Debt Divas, a genius idea at aiming debt solutions at women. The site is bright and breezy in appearance and is a great counter to other sites showing distressed couples looking worried at bills. It’s selling point is the idea of ‘all the girls together’ and its laid back approach (note the debt divas coffee cups on show) and handy tips on holidaying on a budget give an aurora of calm and dare I say ‘fun’. But lets look at it from another perspective. Is this not as every bit as exploitive as any other advertising by large insolvency firms? Should consumer debt be presented with such unassuming niceness? The site is aimed at a niche market, the very fact it is displayed in the paid searches on Google indicates it is generating money, otherwise it wouldn’t be there.
Accuma were heavily criticised for an advertisement they ran on radio which was a parody of ‘Who wants to be a Millionaire’. Many within the insolvency industry actively spoke out against the advert claiming it was misleading and showed the industry in a bad light. Is Debt Divas any better as an advertisement for the debt industry? I would argue not. However, Debt Divas is not run by a large company, its run by a smaller firm who are simply trying to get leads under the guise of being ‘nice and personal’. Don’t get me wrong, the forum aspect and the guides on the site are really useful and well meaning but its purpose is still to generate more leads and more revenue for the company who own it. The notion of ‘small is better’ is also evident on sites like IVA.co.uk. Several insolvency practitioners post on the forums helping people with their queries. The advice they give is brilliant, yet they find time to make comments about other companies they know nothing about. Why? Because they are positioning themselves as the a more acceptable other to the larger firms. Undeniably, their advice helps, but also undeniably the site generates more leads for them hence the reason they do it.
Another, altogether more darker side of the whole ‘IVA Factory’ debate was a sub industry that sprung up offering to help the ‘victims’ of these companies. The most notable example of these was The IVA Council, a supposed consumer action group who were going to help ‘victims’. Helping ‘victims’ meant helping them go bankrupt at a massive expense whilst making out the company who sold them the IVA did so under false pretences. I was amazed at the amount of people on IVA’s who suddenly began claiming the were the victims of mis-selling and criticising the firms they were with. This is a quote from a consumer forum in 2007 where people were discussing ‘IVA Factories’:
‘My husband and I never read our IVA proposal before signing it but I certainly wish we had, we are paying over three thousand pounds in fees and have to remortgage our house in the fourth year. We were told everything would be ok and now we just feel cheated and lied to’
The reply:
‘It sounds like you have been well and truly conned. We are in a similar position, we only found out after our proposal was accepted we had to pay half our overtime to our IVA company’
Okay, lets look at the first quote. The figure for fees quoted is not excessive in anyway whatsoever. Indeed, for a joint IVA this is totally acceptable. The biggest and most incredible line however is the fact they NEVER read the proposal. How can they have grounds to complain about the terms of their IVA if they never read the proposal? The reply is also equally idiotic. The overtime rule applies to most IVA’s and the money goes to creditors, not the IVA firm. Both these complaints were levelled at one of the evil three and it could be argued that the firm in question should have explained these points more carefully. Yet all the points they are making could have been addressed if they had read their proposals. My experience suggests that in times of great stress (as debt causes) people will only listen to the parts that they want too, like how much debt is being written off and that they will be debt free in five years.
Firms like the IVA Council exploited these types of fears and misunderstandings to damage the insolvency industry to further there own gains. In a way the insolvency industry itself helped create this by being so vocal about high volume providers purely because they processed a lot of IVA’s. I question how the most vocal critics of the ‘factories’ had such intimate knowledge of their business practices. Or was it more of a case of jumping on a bandwagon for there own gains? Thankfully, an insolvency practitioner called David Mond put an end to the IVA Council yet it is sadly not the only company of its kind that is in existence who continue to exploit those on IVA’s.
For the record, I have never worked for Accuma, Debt Free Direct or Debt Matters. I know nothing about how they operate internally or how they treat their clients. You can see from IVA.com what people think of them and I don’t mean this article to be an endorsement of these companies in anyway. Moreover, these companies became archetypal in nature and prime candidates as targets for a backlash that had been brewing for many years. I question the role the insolvency industry itself has played in tarnishing its own reputation. I have seen first hand an insolvency practitioner encouraging a major creditor to take action against a fellow insolvency firm by way of baseless accusations about business practices they could never have had any knowledge of. Likewise at an insolvency seminar an insolvency practitioner from a more ‘respectable’ firm answered a question put to the audience by the guest speaker. After answering the questions he turned around and smugly quipped to a colleague that he betted that ‘no IP from the factories could have answered that’. Really? I thought all IP’s studied the same courses and took the same exams regardless of who they worked for?
Creditors have not helped the situation either by exploiting fears and misconceptions about IVA miss-selling and quoting non existent statistics to promote themselves as the unfortunate victims of ambulance chasing companies who are coming between them and their clients. Then there are those on IVA’s. The vast majority of people I have helped in the past have been a genuine pleasure to deal with. There are some however who refuse to take reasonability for their situation. Who portray themselves as victims of there creditors and later on of the IVA company who is making them pay money back. It is these people who are the most vocal in criticising publicly, who complain despite never reading their proposals who unjustly bring into question all the IVA firms who help thousands of people each year sleep soundly for the first time in months.
The fact of the matter some companies are good and some are not so good. From what I know about IVA firms I would much rather find a smaller firm to help that are going to value my custom. Just please don’t make it out you are better or of higher moral standing than larger firms just because your small and friendly.
The views expressed in this post are mine and mine only. Feel free to tear me to shreds.
Posted by: Tom J on: May 29, 2009
I once work for a debt management company who bought leads from other companies that did not offer IVA’s. The company is question was without doubt one of the worst debt management companies I have ever known, but even more questionable were the companies who provided them with leads.
In order for a company to propose an IVA it must have an insolvency practitioner. Many only offer debt management and will pass possible IVA leads over to companies that do, who in return will pay them a referral fee normally in the region of about one thousand pounds. This is an extremely grey area and is one that in my opinion needs urgent regulation in order to stop the unethical treatment of people in financial difficulties.
One example I came across whilst working at this company was a couple that had paid £900 (their disposable income) to a debt management company. The company had then forwarded their details to our company (who had an IP) and received a further payment of £1,000 as a referral fee and had in total received £1,900. Before the clients IVA was proposed our company operated a policy of taking an initial payment that was not used towards the clients IVA. As such the client had paid a total of £1,800 in the space six weeks of which none would be used to pay anything towards their debts.
The couple in question had called the first debt management company who had taken their details and ascertained they were eligible for an IVA. They had told them they needed to make a payment (which was calculated on their disposable income meaning that other people could be charged a substantially lower amount for exactly the same service) in order to proceed to the ‘next stage’. This ‘next stage’ consisted of giving their details to our company, who would propose the IVA. A good debt advisor will be able to identify that you are eligible for an IVA in minutes which begs the question how can these companies charge so much? The simple answer is that they are exploiting naïve people into paying for something that they don’t need to.
Companies that do this counter my argument by saying they are helping people get on the right track. However, there is also a darker side to this which I have seen in action also. Some debt management companies will ask clients to go on a debt management plan to ‘prove’ they can manage their funds after which they will be refereed for an IVA. In effect the company can take a first payment (which goes straight into the companies pocket) six months worth of management fees and then another last payment to be referred for an IVA. After which they can take another fee from the company they refer the case onto. Easy money.
When the couple who had paid the £900 to be referred to our company told me that had two young children and they had to forgo Christmas that year I felt ill. They were resigned to the fact they had been conned and told me that it was just one of those things and they would get on with it and move on. I could not get on with it and felt compelled to ask my manager if she thought it was ethical. ‘No’ came her response, ‘make sure you get their standing order back as we are down on fees this month’. For the record, the director of the company I worked for had a private number plate on his car, the last four digits of which were ‘IVA5’.
In order to avoid thieves like this make sure you doing the following:
Contact an insolvency firm directly (check IVA.com for a good list), don’t use a middle man, they will just screw you.
Ask if your first payment is going to be used toward your IVA payments. It is common to make a payment before you IVA is proposed as there is a lot of work involved in getting your IVA together. (for more information please check the next post which will be about first payments)
Don’t pay anything on your first phone call.
By bearing these in mind you might just save yourself some money and avoid the referral fee rip offs!
www.ausdebtsolutions.net
www.ausdebtadvice.net
Posted by: Tom J on: May 29, 2009
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