To Credit Repair or Not? Time for Regulation!
A Report commissioned and released by ASIC’s Consumer Advisory Panel (“CAP”) in January 2016 titled “Paying to get out of debt or clear your record: the promise of debt management firms” makes a number of key findings/observations.
Specifically, the Report labels firms that promise to help consumers (or individuals) in financial hardship or with listings of payment defaults on their credit reports as “debt management firms”. Typically these firms promise to help individuals by:
– developing & maintaining budgets;
– negotiating with creditors or debt collectors;
– advising and arranging formal debt agreements under Part IV of the Bankruptcy Act 1966 [known as debt agreements] and
– cleaning, fixing or repairing default listings or other issues on credit reports.
From my understanding many debt management firms operate as “one-stop” shops offering a combination of many of the above services. The promise of these firms to individuals who are “between a rock and a hard place” is alluring and quite often leads to heightened expectations as to what may be achievable. There is also the risk of individuals that are in significant financial hardship and in need of specialist advice from a qualified professional not actually getting the right advice.
One could potentially say that some debt management firms are to individuals what pre-insolvency advisors are to directors of family businesses. That being, both types of firms operate both in an unregulated (i.e. not required to be licensed) space and may also offer advice on asset structuring or enter negotiations with creditors that later turns out to cause more issues than they are trying to solve.
A key finding from the qualitative research undertaken by CAP was that fees and costs were opaque, making it difficult for consumers, often in significant financial hardship, to assess the cost of the services relative to the issue trying to be resolved.
Clearly the growth in debt management firms is linked to both the increasing use of credit by individuals/households and also the ongoing changes to credit laws. It is difficult to see the use of credit card usage slowing and the way that Generation X & Y (and future generations) will utilise credit is indeed both interesting and potentially scary without properly understanding the risks.
Importantly the Report indicated that recent research showed that a staggering 31.8% of households in Australia are financially distressed. Yes, almost one-third and all during a time of a relatively benign interest rate environment. One wonders what will happen if interest rates eventually increase [Yes please say those self-funded retirees!].
Leading indicators of financial distress include those individuals/households who:
i. are in mortgage stress;
ii. are behind with loan payments;
iii. have been declined some form of credit; and
iv. consistently borrow again to repay an existing loan.
Importantly, the Report highlights via research undertaken by the World Bank that there is growing evidence showing that financial stress can adversely impact an individual’s effective cognitive capacity.
Relevantly the relationship between cognitive and financial stress may potentially see the services offered by some debt management firms more attractive to individuals in some form of financial hardship.
As a Registered Liquidator and Registered Bankruptcy Trustee (and therefore subject to Federal Regulation) I have seen first-hand individuals who are for example eligible for a “debt agreement” be given the wrong advice. Not only were they told a debt agreement was not an act of bankruptcy and that it would not be recorded on the National Personal Insolvency Index [BOTH COMMENTS ARE INCORRECT] but the debt agreement was proposed to go for a period of 5 years. In such circumstance the individual would have been better off considering their position from many angles, for example by entering into voluntary bankruptcy. It was clear that seductive internet based advertising was the carrot backed up by the wrong advice.
The Report perhaps not so surprisingly highlights that internet advertising appeared to represent the largest source of referrals for debt management firms.
I believe that we are at a point where with the continued and increasing use of credit, coupled with businesses being much more savvy about how to use the internet to advertise that debt management firms need to be regulated or subject to some form of licensing. It will not cure every instance but when was the last time you went to the doctor to discuss an important issue without being sure that they were appropriately qualified?
As an Insolvency Practitioner it is plainly evident that the individual in financial difficulty is under enormous pressure mentally and physically. It is critical for them and their creditors that they seek out and obtain the right advice on how to deal with their financial position so that all parties can move forward.
