Credit & loans - Dealing with debt
Why won't lender let me pay my debt?
Helen Loveless, Mail on Sunday
7 October 2007
© 2007 Associated Northcliffe Digital Ltd
Tom Rose is up to his eyes in debt. But unlike some in the same nightmare situation, he wants to pay back every penny.
The problem is, he cannot afford to do that unless he enters into an agreement to freeze the debt, but his lenders will not let him. He now faces the real possibility of bankruptcy.
Retailer Tom (not his real name) owes more than £55,000 in loans and credit card debts. His problems began when a change of job led to a big pay cut. At first he borrowed more money with the intention of consolidating his debt. But then, like so many people slipping into the red, he could not afford more than the minimum repayments. His debt continued to grow.
After taking advice from an insolvency practitioner, Tom applied to enter into an individual voluntary arrangement. Under the terms of an IVA, those owing more than £15,000 agree to pay back a percentage, or all, of the money owed, typically over five years.
The practitioner's role is to negotiate with lenders to freeze interest payments so the debt does not keep growing. Despite offering to pay back 100% of his debt in return for a freezing of his interest payments, Tom was knocked back by one of his largest creditors, Marks & Spencer Money. It refused to agree to the IVA - as is its right.
This is a similar situation to what can happen if one tries to set up a payment plan through a CCCS here in the U.S.; the creditor need not accept the plan, and as a result, the plan can fall through.
Tom, who lives in Surrey, is not alone in seeking the refuge of an IVA. In the first quarter of this year, 11,300 people entered into such arrangements - an increase of nearly 50% on 2006.
But experts say that banks and credit card companies that used to accept IVAs if borrowers agreed to repay as little as 25% of the sum owed, are increasingly taking a hard line, leaving those with severe debt problems to flounder.
HSBC bank now accepts IVAs only if at least 40p in every pound is repaid, while Student Loans Company insists on at least 80p in the pound.
Crisis-hit Northern Rock rejects most IVA applications, say insolvency practitioners. Abbey, Barclays and credit card giant MBNA reject proposed IVAs from customers on benefits. Some refuse IVAs where borrowers are thought to be too old. Ronan Duffy of national insolvency practitioner McCambridge Duffy says: 'Lenders are increasingly rejecting IVAs even for people who genuinely want to repay their debts.
'We have had cases when there is an offer to pay 45p in the pound, only for the banks to then sell on the debt for less than 10p in the pound.'
This clampdown is creating big problems for some customers, says David Rankin of insolvency practitioner One Advice in Sale, Manchester. 'The tough line that providers are taking means many people will either be forced into bankruptcy or informal debt management plans where interest payments are not frozen. For some, it will take up to 40 years to clear their debts,' he says.
Which is actually what the "hard-liners" want! The truth is the principal on any loan is really is intended to act as a "loss-leader" does in the supermarket: Get the bodies in the door. The real profit is in the interest and fees over time.
Fees and interest the lender wants to come in for as long as possible, a guaranteed income stream.
Adrian Nicholas runs Debt Mediation Services, set up this year to fight for those turned down for an IVA. He has already taken on more than 150 cases. He believes that lenders are pushing debtors into expensive debt management plans purely for accounting reasons.
'Under accounting rules, IVAs must be registered as a bad debt on a lender's balance sheet, even though some, or all, of the debt will be repaid,' he says. 'But there is no requirement to count informal debt management plans as a bad debt, even though it could take up to 40 years for creditors to get back their money, if at all.'
Aha...here's the sticking point: Just as in CH13 bankruptcy here in the U.S., the lenders have to write the debt off as a bad debt, which makes the "bottom line" look not so good. However, if the plan is an informal one--more along the lines of the CCCS (Consumer Credit Counseling Service) or a FDIC Rule 5000 rehabilitation plan, the creditor in the U.K. need not write off the debt at all.
(This is unlike the U.S.; Rule 5000 would force a write-off (absent rehabilitation of the account) within 180 days of the triggering event, usually a contract default.)
Tom's creditors include American Express, M&S Money, Barclaycard and Co-operative Bank. All agreed to accept his IVA application except M&S Money, with whom he has a £22,000 loan. In an email to Tom, M&S Money said it was rejecting his 100% repayment offer because he would be 'incurring additional fees' and 'more debt than is necessary'.
Bullocks, M&S Money! How would someone who is working out a debt--and getting the opportunity to pay off what is owed interest-free on the balance as of the date the plan is approved--end in "in more debt than is necessary' and incur additional fees, especially when fees are not allowed to be charged? Oh, I get it...it's because YOU are not allowed to get the fees...the insolvency practitioner does. Nice of you to be so "concerned", but the fee for that service would be far lower than the default interest rates you would charge...just because these fees are not going to come to YOU...!
M&S Money refuses to comment on individual cases, but says: 'We have seen no increase in the number of IVAs rejected, but we believe it is crucial that people in financial difficulties have access to independent advice, for example, from a charity.'
An insolvency practitioner is an accountant, an expert with money management. I would think a creditor would rather deal with one of those than the courts in BK or some fancy clerk. This excuse--needs access to independent advice--smells of an attempt to force the "informal" plan that will bring in the interest and fees forever to creditors like them...along the lines of the American CCCS a.k.a "The Bill Collector That Dare Not Speak That Name".
Like this business:
Debt Mediation Services has taken on Tom's case, but his debts are mounting by the day.
Tom says: 'I want to repay everything I owe, but I am being prevented. The banks promote the easy lending culture, but then turn their backs when people have problems.'
Or, as the owner of Debtorboards--Flyingifr--might say, when the consumer's back is to the wall, the creditors will nail the consumer to it...
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Thanks to Debtorboards and this DB thread for the lead.
For more information about IVAs and the Insolvency Practitioner, see here.
Why won't lender let me pay my debt? Helen Loveless, Mail on Sunday 7 October 2007
© 2007 Associated Northcliffe Digital Ltd; Available here.
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