To consumers in desperate financial situations, the promises made by debt management firms must appear to be the ideal solution to their hardship woes. But are they?
What are Debt Management Firms?
Debt management firms – or debt repair companies – promise to help consumers in financial hardship or with listings of payment defaults on their credit reports by:
- ‘cleaning’, ‘fixing’ ‘repairing’, ‘removing’ or ‘washing’ away default listings on credit reports
- developing and managing budgets
- negotiating with creditors, including lenders, telecommunications companies , utilities companies or debt collectors
- advising and arranging formal debt agreements under Part IX of the Bankruptcy Act, 1966.
The debt management industry is growing and so is the wave of concern over the activity of these firms. There are low or non–existent entry barriers to starting up a debt repair company and they are not subject to any regulatory framework for such companies. Add to the pot vulnerable customers, questionable practices and hazy cost schedules and it’s easy to see why paying to get out of debt can lead to further financial misery.
The promise is always more prominent than the price and when consumers go to debt repair companies, it is important they understand what they are getting and how much it will cost, so they can decide if it’s worth it. It may be worth your while considering financial counselling services which are offered for free. You can read up on the comparison between the two here.
ASIC has just released a research report (‘Paying to get out of debt or clear your record: The promise of debt management firms‘) that aims to better understand the debt management industry in Australia and the consumer experience in using debt management firms. It concluded it was hard to find information about fees and that they tended to be high, front loaded, and not refunded if the promise was not delivered. ASIC found the potential for harm posed by these companies was highlighted by the provision of unsuitable services, high pressure sales tactics, acting in ways not in the best interests of clients, or at worst, engaging in predatory conduct leaving the consumer worse off.
A combination of these factors led to many consumers having an unhappy experience with the debt repair process.
Debt repair companies are highly visible through mainstream advertising which seems to overshadow a lack of awareness by consumers of alternatives that may be free of charge, such as financial counselling services.
The Financial Ombudsman Service (FOS) Australia is concerned that, despite its dispute resolution service being free for consumers, an increase in the use of paid agents may undermine the service already being provided.
According to FOS, the debt management industry continues to grow even though consumers can freely access:
- their credit report and challenge an incorrect listing at no cost;
- help from financial counsellors or community legal services;
- independent ombudsman schemes to help resolve disputes with lenders, telcos and utilities providers.
The Financial Ombudsman also cites a growing number of debt management companies now representing consumers at external dispute resolution (EDR). These relate almost exclusively to arguments about the removal of default listings on consumer credit reports (despite the breadth of other issues that can arise for indebted consumers). What stands out is that the increasing number of consumers being represented at EDR by debt management firms, is not leading to more credit reporting related disputes being found in favour of consumers.
Tips For Consumers in Financial Hardship
- Talk to your lender, telecommunications or utility providers first about your financial hardship or credit listing.
- Talk to a free ombudsman scheme for help before you pay a fee to a debt management firm.
- Talk to a free and independent financial counsellor or community legal services for help.
- ASIC has information and guidance for consumers about trouble with debt and credit repair on its MoneySmart website.