Hard-up people struggling to stay afloat during the cost of living crisis could could save thousands of pounds in fees under new rules in the pipeline.
Money regulator the Financial Conduct Authority (FCA) is proposing that debt solution providers are banned from receiving referral fees after customers were given poor debt advice and charged unfair fees by firms offering Individual Voluntary Agreements (IVAs).
An IVA is an alternative to bankruptcy. If you can get the companies and people you owe money to to agree, you set up an agreement to pay back over a set period of time, usually five years, and at the end of this time, debts are frozen and any amount not repaid is written off.
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IVA firms will also add a fee onto your debt for their service, adding potentially thousands of pounds to the amount you end up repaying, but there are concerns that people who are in debt can often agree on a repayment plan directly with their lender without taking out this type of agreement, according to The Sun.
Currently, these companies can take a referral fee for passing on a customer in debt to another debt solutions provider, but the FCA first consulted on a ban in November 2021 after discovering some firms were manipulating customers' details to boost their own rewards - while potentially costing hard-up Brits thousands. It's now launched an additional consultation to gather more evidence.
The firms are often paid more if they refer customers to an Insolvency Practitioner for an IVA or Protected Trust Deed (PTD), than a Government scheme such as a debt relief order, the FCA said, adding that going into an IVA unnecessarily could cost people almost £5,000 and an extra five years to become debt-free.
Around 54,000 people sought advice from a debt packager in the year to March 2020, according to estimates, and since the FCA first raised concerns in July 2021, firms representing two-thirds of the market have either left or suspended their activities.
Sheldon Mills at the FCA told The Sun: “Unsuitable or poor advice can really harm people’s financial lives. "We want to stop this harm by removing the conflict of interest between firms giving advice in the customer’s best interest and recommending an option that makes firms more money.”
Richard Lane, director of external affairs and operating subsidiaries at debt support charity StepChange, added: “With the cost of living crisis leaving so many people vulnerable to problem debt, the FCA’s move to stamp out poor debt advice practices is extremely welcome. In particular, with proposals for the ban on fees to go ahead after a short implementation period, we can expect to see swift, much-needed action that will benefit thousands of consumers."
If you're concerned about debt, don't bury your head in the sand. If you have the money, try and pay off more than the minimum on credit cards each month, and pay your most expensive credit card first.
But if you've got more debt than you can pay, it's important to prioritise your rent or mortgage, council tax and energy, as these are the ones that have serious consequences if you don't pay. There's a Government scheme called Breathing Space, which gives you the right to legal protection from creditors for up to 60 days while you get your plan together.
Groups like Citizens Advice, StepChange and National Debtline can help you manage your debt and negotiate with your creditors free and you should always explore these options before you turn to a private firm for support. The MoneyHelper website or by telephone on 0800 138 7777 can also give free and impartial advice.
As well as IVAs, the options to deal with debt include:
Debt relief order: For many people, a debt relief order (DRO) will be the best way of managing debt. A DRO can be used for debts of up to £30,000 in total. A DRO means you don't have to repay debts for an agreed period of time, usually a year, and creditors can't take action against you. It will stay on your credit record for six years, however, and this could make it more difficult to get credit in the future.
Bankruptcy: If you’re in severe financial difficulty you can consider going bankrupt, which will clear your debts. You can apply for bankruptcy, or a company or person you owe money to may petition on your behalf (if you owe them at least £5,000). You'll need to pay £680 if you decide to apply for bankruptcy, which can be paid in installments, but you'll need to pay the whole amount before you submit your bankruptcy application. Your bank account may be frozen immediately and any items of value that you own, such as a house or car, may be taken away from you. A person called an Official Receiver or Trustee is put in charge of your assets and you will have to ask them before you spend money and you will only be given basic living expenses during the period of bankruptcy. You are usually discharged from bankruptcy after 12 months.
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