Debt Management Plans and IVAs – and Fee or Free Debt Advice
Andrew Smith looks at fee charging and creditor funded debt resolution companies – and asks “Is free advice always good advice?”
Is a “free” debt management plan always better than paid debt help from a fee-charging company?
I’d like to start by saying ClearDebt Group is a fee charging debt resolution company, proud of what we do and how we help people. Our brand ClearDebt does IVAs and Abacus provides fee-charging debt management plans.
I’ve written before about the assumption many make that free debt advice is always good advice (something I don’t agree with). You’ll find links to those blogs at the bottom of this one.
But, in this blog, I want to concentrate on the question of whether a debt management plan from a fee-free advisor, is automatically better value than a debt management plan or an Individual Voluntary Arrangement (IVA) from a fee-charging debt resolution company like ClearDebt.
I touched on this in another recent blog (IVAs – A Question of Perspective) which looks at some of the key differences between IVAs and DMPs – and critiques leading creditor-funded provider, CCCS’, perspective on this.
Today’s blog has been prompted by two recent blogs from Payplan (a creditor-funded company), the first dealing with a client’s experience of a debt management plan and the second comparing IVAs and DMPs.
In both cases I have commented on the articles and, in both cases, my comments have (at the time of writing, either failed to be published or have been censored. So, I decided to put my thoughts here instead.
A Payplan Client’s Experience
Dawn’s Story:It’s a really good news story about a client (Dawn) who has managed to repay most of her £28,000 debt in four years (and will probably succeed in paying off the lot in 52 months, or thereabouts). But, it raise issues with me because the client said “I have 4 payments left (depending on interest/charges etc) and it feels so good.”
Great – but the fact that she seemed not to be sure about interest and charges niggled me.
The issue of transparency when it comes to freezing interest charges
Yes, some creditors freeze interest and some don’t, but a fee-charging debt resolution company is obliged to ensure the client knows what’s what. The fact that this Payplan client didn’t seem to know brought to mind this article from the Guardian published a couple of weeks ago – from which it appears that Payplan was paying a client’s creditors late (debt management companies are supposed, usually, to pay creditors within five working days of getting funds from the client) and, possibly, causing additional charges – Payplan seems to have thought the client owed £143, in fact, there was £4,086 left to pay.
Cases where an IVA is more suitable than a Debt Management Plan
In Dawn’s case, the description of her case led me to think that an IVA (where interest and charges would be frozen for certain, and the possibility of debt forgiveness existed) might have been a better choice for Dawn – so I commented: “It’s great that Dawn has got this far. I wonder, how long has this taken? Also I note that she says “I have 4 payments left (depending on interest/charges etc) and it feels so good”: so presumably her interest and charges were not frozen as they would be in an IVA. Why wasn’t a five year IVA possible in this case?”
PayPlan published this and responded. So did Dawn (thank you – it takes a lot to talk publicly about your debt situation). But i wanted to know more and I left the following: “Dawn, I think that’s brilliant: So you must have been paying what, about £540/month (assuming 52 months and most interest and charges frozen?”
Payplan published: “Dawn, I think that’s brilliant.”
I am not implying Payplan did the wrong thing with this client. There’s no such thing, really as a typical debtor: every case different. And I also understand Dawn might want to protect her privacy. But that should have been said. I really think this case is worth exploring to help others understand when a DMP is the right choice over an IVA (If an IVA is possible, a DMP will rarely be the most appropriate advice).
The same issues are explored in this thread from IVA.co.uk (CCCS – Indifference), which seems to indicate that this creditor funded organisation takes relatively little interest in whether it’s clients are still paying interest.
IVA vs DMP
Which brings me to Payplan’s second blog, a simple DMP vs IVA comparison. It’s pretty good. But it lacked one important point. So I commented:
“How about adding: “all interest and charges are frozen when your IVA passes creditor’s meeting”, as this often means a debtor pays thousands less than they would in a debt management plan.”
This is still, as I write, awaiting moderation. It’s fact. It makes a huge difference to many debtors. I don’t even want credit for it, I’d just like to see it in the list. It’s something people should know. Payplan does make the point that “Any debt remaining after your IVA is completed is written off.”, but it doesn’t attempt to quantify this. Probably wise; all cases are different – but it seems rather underplayed as an advantage because – again, This can make a huge difference to the debtor. IVA and DMP contributions are usually similar (though DMP contributions are often larger because creditors won’t accept that people in DMPs have financial emergencies whilst they are in their plan) But the typical IVA lasts half the time (five years) of the typical DMP.
Payplan should add one other point to their list of IVA bullets (I’d comment – but what’s the point?): Houses aren’t under threat in an IVA (but could be if you failed to complete the IVA and went bankrupt), but debtors with equity will be asked to make a contribution from that toward the end of their IVA – this is sometimes a pragmatic reason for choosing a DMP instead.
We welcome all comments on this blog and will publish all, unedited, unless they are scurrilous, libellous, pornographic or scatological.
Fee vs Free debt Advice – older blogs:
Great blog, I have come across an example from an IVA Company (Not ClearDebt) who put a couple into debt solutions: one in a DMP and one in an IVA, but their paperwork was completely wrong and here is why…
Firstly Mr’s DMP paperwork stated his actual income and his wifes correctly and all of his debts as it was just his DMP. But the income stated for his wife did not match the income that was in the Mrs’s IVA paperwork…. both were different. Secondly, in the Mrs’s paperwork the IVA Company had included the Mr’s debts and listed them as the Mrs’s debts…
By now you are probably thinking ‘ What that does not make sense’? Well your correct it doesn’t make sense and it is perfectly clear that the IVA paperwork was made up to make it look better to creditors so that a higher pence in the pound could be paid to creditors.
This paperwork on the consent of the client has been passed to the OFT and Financial Ombudsman as well as the Insolvency Practitioners Association and R3. The latter the IVA Company are members of.
The point above being made is about clarity and why these types of companies should be clear and follow the correct proceedure. If they don’t then it will come back to haunt them, and the likes of the OFT are getting more and more annoyed about this and more and more informed about malpractice
Darren, I absolutely agree.
It’s worth pointing out that pretty much every insolvency practitioner is an R3 member. Also probably worth you saying whether your complaint has been upheld?
I’m hoping that the three day on site inspections that the Insolvency Practitioner’s Association does for DRF members will help to nail this sort of thing – with training, inspection and independent complaints procedures, both DRF and DEMSA are providing a lot of consumer reassurance these days.
The value debate is one we need to have too – i think there are more or more instances where a protocol complaint IVA or even a fee-charging DMP where interest IS frozen (not everyone i admit) does provide more value to the client than a free product.
irrespective of the relative merits of a DMP versus an IVA for any particular case – and you make a cogent case in the cited example – it is most odd that your contributions @andrew_f_smith:twitter to the PayPlan blog are taken out of context by being published in a redacted form. Maybe @gemma_payplan:twitter can clarify?
Given the recent interest from Andrew in Payplan blogs, clients and tweets I thought it worth commenting on this blog. Although, for reasons of client confidentiality, I can’t go into the detail of Dawn’s case I can make general comment on the two main issues raised.
Interest in DMP
It is the case that creditors are entitled to charge interest to clients in a DMP. Many don’t and those that do will generally charge interest at a lower than contractual rate but it is important for anyone entering a DMP to be aware that this is a possibility. Indeed we have a calculator we use when advising new clients that allows us to “guesstimate” how much interest they will be charged if their creditors maintain their current charging policies. It is impossible to know for sure because policies can and do change over time and the odd missed payment might trigger a change in charges. In general we have to rely upon our clients telling us how much interest they are actually being charged since creditors don’t give us regular updates.
As far as I am aware, and I’m sure Andrew will tell me if he knows different, creditors apply blanket interest charging policies to all DMP clients, regardless of provider, regardless of fee or free.
Anticipated or actual interest charging behaviour can, and does, impact on our clients decision to choose a particular solution.
Cases where an IVA is more suitable than a DMP
As mentioned above, I’m not going to comment in detail on Dawn’s case but some general observations might usefully add to the debate:
If a client is pretty confident that they can maintain payments for five years then the prospect of being debt free in this timeframe is generally appealing. Some clients though are put off by potential downsides:
· IVAs are more formal solutions which creditors vote on individually and modify to deal with issues like individual items of expenditure they are unhappy with, the amount of financial contribution other members of the household should make and extensions to the term in certain situations. We can be fairly sure in advance of proposing the arrangement what modifications are likely to be made and will discuss this with our clients as part of their decision making process.
· Where IVAs fail (and as an industry average I believe nearly a quarter do) interest is not frozen and the fees charged by the provider mean that the debt may not have reduced at all despite several months of repayments being made
· Where circumstances significantly improve then the client may find they end up paying more than the original debt (fees and interest will be added if contributions from income and assets are high enough).
I want to be clear that Payplan think IVAs are great solutions for a lot of our clients. Indeed we are currently the largest single provider of IVAs in the country. We just don’t think they are great for everyone.
Thanks Andrew.
I keep track of examples like in my previous post constantly. It’s a shame this happens to debtors but i’m seeing it occur more and more now and on a weekly basis.
John, thanks for your really useful contribution to this and your very helpful comments above.
I agree with much of what you say, and I think you have provided helpful balance to my original post.
I think one key point that comes across is that we are both organisations that believe debtors are individuals and treat them as such. There really isn’t a one size fits all solution.
We agree, IVAs aren’t great for everyone – but we are evangelists for them. Where an IVA is possible, we think they are almost always the best solution – and we think soem organisations (not yours) advise other solutions when an IVA would be better for the debtor,
Thanks again
I commented on another Payplan IVA blog this morning, because, again, I thought it did not tell the whole story:
Their blog is here:
http://www.payplan.com/debt-news/2011/10/28/13745/
This is what I said (and Payplan failed to publish):
“Remember the Insolvency Service’s figures show IVAs are achieving 65% write offs and 50% is pretty typical. Most IVAs are 60 months – 72 months does happen but generally only when there are issues relating to equity. So would not apply to non homeowners o5 homeowners with equity.
Yes, an IVA is an insolvency procedure, but it’s affect on your ability to obtain a mortgage is less than one might think. People do remortgage inside IVAs and the certificate of completion at the end of an IVA and lenders increasing understanding that successful completion of an IVA shows you have learnt to manage your money means that an IVA is probably the most rehabilitative procedure available.
Assets are rarely at risk in an IVA – and less often than one might think in bankruptcy”.
Again, I’d just like to reiterate that all comments are welcome on our blog and the only ones’s we won’t publish are those that are offensive.
I’m afraid an IVA history is usually the kiss of death to any High St mortgage or remortgage application. Even amongst sub-prime lenders like I- Group ( GE Money ), the loan-to-value on offer will be very low and the interest rate correspondingly high. IVAs do have hidden costs like these which customers should be aware may well cost them dear for years whether the IVA itself succeeds or not.
As noted by Payplan and confirmed by the Insolvency Service, it’s commonly accepted that 1 in 3 to 1 in 4 IVAs fail – taking the customer back to square one after wasting potentially thousands in fees. The risk will be even greater amongst IVAs agreed on the basis of low monthly payments. Put another way, would you buy a car with a 1 in 3 chance of blowing up anytime in the next 5 years ? They are not statutory debt management plans. They are an alternative to bankruptcy and should only be recommended in that context.
Scrimping, saving and living within a tight budget to repay your debts
is not easy. It is bad enough facing this for 5 years in an IVA,
however, if your are looking down the 10 year path of a Debt Management
Plan, many are just unable to comprehend it. This prospect just does not
offer any light at the end of the tunnel. And with human nature being
what it is, if we can not see progress, we are all too likely to give
up. This is why that majority of Debt Management plans fail after their 1st year.
I was in debt for over 6 months and was living from one payday loan to another. I couldn’t take it anymore. I learned about consolidating my loans but was hesitant because i know there are a lot of scams going on. Luckily one day i got a voice mail from Be Free Financial, they left a number and i called them. It was heaven sent for me. I called them and spoke to Summer, she was very helpful and helped me understand what i was getting into. I signed up with their program and look at me know, after 4 months I’m TOTALLY DEBT FREE like what Summer promised. They took care of everything for me. If you are in the same situation as i have been call them at 209-217-0373, they will find a program that would be perfect for you. http://www.payday-loan-consolidation.org/
Phone Number: 209-217-0373