Debt schemes that prey on those in need of help

These firms promise the end to your debt worries. In reality all they offer is an easy way to lose your money.

In our work as debt advisors we come across various repayment schemes run by disreputable fee-charging companies. The latest piece of sharp practice we’ve come across is a surprisingly simple idea, which, unsurprisingly, doesn’t make any financial sense.

In the past we’ve seen cases where people were being led towards bankruptcy without their knowledge and being charged a fee for the privilege. They’d been told to fail perfectly good IVAs with the promise that their debts could be written off, when clearly they couldn’t.

We’ve also come across cases where people have been told they’re on an individual voluntary arrangement (IVA) when they weren’t.

The easy way to lose your money

Recently we’ve found a number of companies who offer ‘debt settlement plans’. These plans involve the indebted client paying money to a firm who distribute some of the money to the client’s creditors. The rest of the money is ‘saved’ by the firm with a view to creating a lump sum for the client, to be offered to creditors as a ‘full and final payment’ in the future.

These companies offer to negotiate with creditors to ‘freeze interest and charges’ while the ‘lump sum’ is built. In essence it’s another example of the strident "your debts written off" type of advertising.

Firstly, these companies cannot guarantee that creditors will suspend interest and charges. Nobody can; only the creditors themselves decide when to suspend interest and charges. And we can only wonder what creditors must think of companies that purposely hold back money that could be used to pay off the debt, on the hope of a reduced payment in the future.

The real danger

As convoluted and wrongheaded as these schemes sound, there really is a genuine danger that this cash will not be protected at all, and could suddenly disappear.

If you deposit money with a bank, your money is protected; if you pay money into an IVA your money is protected by insurance before it is dispersed to creditors; and any money paid by debt management plan clients to us is disbursed within the month, and is protected.

People in dire straits and desperate to be rid of their debts are allowing a (sometimes unlicensed) firm to save large amounts of cash for them in the hope of a full and final settlement materialising in the future. This money is rarely protected.

OFT guidance states that client money should be ring fenced, and in these cases, it often isn’t. The guidance also states that if a company is withholding funds from creditors it must contact the creditor and explain why – this is where this debt settlement plan falls apart, and why companies acting in this way have been closed down by the OFT.

Too good to be true

If a debt settlement plan sounds too good to be true it usually is. We know from many thousands of phone calls from the general public that it’s easy for those with problem debt to fall for sharp practices that claim to be an easy end to their financial woes. These schemes could make their situation far worse.

If you’re looking for an answer to your debt problems it’s best to choose free and impartial advice from a charity. If you’re struggling you can try our online debt advice tool Debt Remedy. It could change your life for the better.

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